Normanglade 4: The price was right

Known as IPM Eagle (the original project name) or Normanglade 4 (the borrowing vehicle) - the $915 million debt facility backing the $2.135 billion acquisition by International Power (IP) and Mitsui of Edison Mission Energy's (EME) international independent power portfolio is unlike any cross-border power financing to date.

The reason, at its simplest, is that while the limited recourse lenders to the borrowing vehicle Normanglade are senior at the obligor/borrower level, they are also structurally subordinate to the original project lenders in the underlying project companies.

The deal, currently in syndication, signed on 6 December 2004 and reached financial close 10 days later. Despite the complexity, it was both opportunistic and structured in a very short time frame with due diligence on all the power projects in weeks rather than months.

The original acquisition plan featured a $950 million bridge loan - committed earlier in 2004 by Morgan Stanley, Lehman Brothers and CSFB - that was to be drawn down on acquisition signing and later replaced with a capital markets refinancing.

It was never to be. ABN Amro, Bank of Tokyo-Mitsubishi (BTM), Calyon, HSBC and Royal Bank of Scotland cold-called IP and Mitsui in mid-2004 with the Normanglade alternative. The selling point was not only greater flexibility than a bridge and bond, but also, because of their knowledge of the assets (all the banks had been involved with EME deals either as lenders or advisors), competitive money.

The deal finances acquisition of the majority, but not all, of EME's portfolio. First Hydro is part of the acquisition but not the financing. CBK, a net capacity 396 MW hydro scheme in the Philippines that was originally part of the acquisition, was pre-empted by IMPSA - EME's partner in the project - exercising right of first refusal under the shareholders agreement for the project. Tri Energy, a net capacity 175 MW gas fired plant in Thailand may go ahead in the future but is not covered by the financing. And Doga, a net capacity 144 MW gas fired plant in Turkey is expected to be finalised in the coming month and has been accorded $68 million from the debt package if it goes ahead.

Nevertheless, the acquisition is very big, with interests in 10 power plants across four continents. All the plants are encumbered with existing project debt (see table), however, 90% of cash flows from the EME portfolio are also already under long term PPAs.

The challenge for the arrangers was to accommodate the expectations of a new set of project lenders (whose debt would be used as equity by the sponsors and be structurally subordinate to the original project debt on the plants at project company level) while coming up with cheaper pricing.

The deal achieves this by monetising the sponsors' equity based on project finance principles - effectively a hybrid of leveraged acquisition financing and traditional project financing.

Normanglade is 70% owned by IP with an investment of $679 million and 30% by Mitsui with $291 million in ordinary equity and $300 million of preferred equity. The remainder of the $2.135 acquisition price is topped up with $915 million multi-currency debt that is in turn split between an $865 million eight-year term loan and a $50 million three-year revolver ranked pari passu.

The new debt is spread across the plants as follows: Derwent $9 million; Doga $68 million; EcoElectrica $147 million; ISAB $77 million; Italian Wind $94 million; Kwinana $23 million; Loy Yang B $170 million; Paiton $220 million; Spanish Hydro $38 million; and Valley Power $19 million.

The Normanglade lenders have first ranking charge on all of the shares or partnership interests ? other than Mitsui preferred equity ? of the various tax efficient companies that make up the Mitsui/IP joint ownership structure at the obligor level, while the existing project lenders remain senior in the underlying project companies.

Although the intrinsic risk with the financing is that distribution restrictions at project level kick in and stop the flow through of cash to Normanglade 4, the strength of the overall cash flow regime can, according to arrangers, withstand the permanent loss of one core asset.

Furthermore, although there is no security below the obligor level for the Normanglade lenders, there is a strong covenant package that ensures dividends are ring-fenced and upstreamed from the project companies to the borrower.

The pricing is also competitive because of the way the debt is structured for a short-term take out.

The term loan features a 50% bullet at maturity and is priced at 325bp over Euribor out of the box with a step up to 395bp on 31 December 2007, rising to 450bp on 31 December 2009 until maturity. The revolver, a working capital facility, is priced at a flat 200bp per year for three years, while commitment fees are 130bp for the term loan and 75bp for the revolver. The combination of pricing and bullet on the term loan mean another refinancing - in or around year three - is a certainty.

Lenders can also take comfort from the repayment structure, which will be semi-annual through a combination of minimum repayment schedule and a cash sweep mechanism.

The schedule is designed to achieve a minimum debt service coverage ratio (DSCR) of 1.75x, while a cash sweep of 32% of available cash flows after base case debt service is intended to ensure that only the 50% bullet is left at maturity. The cash sweep can be adjusted annually to make sure that target is met.

Normanglade 4, although born of opportunism, is a benchmark for competitive project acquisition debt. The structure is innovative, if highly reliant on the asset knowledge of the lenders, and although it was never competing head on with a bond financing, it strengthens the case for project debt over combined bridge and bond financings ? not only in terms of flexibility but also in pricing.

Normanglade 4
Status: Financial close 16 December 2004; syndication launched 13 January 2005
Description: Global power portfolio acquisition financing
Total cost: $2.1 billion
Debt: $915 million
Equity: $1.185 billion
Vendor: Edison Mission Energy
Acquirers: International Power; Mitsui
Lead arrangers: ABN Amro; Bank of Tokyo-Mitsubishi; Calyon; HSBC; Royal Bank of Scotland
Legal counsel to project vehicle: Clifford Chance
Legal counsel to lenders: Shearman & Sterling