The 176 MW IVPC2000 wind project is a market test case for Italy's new green certificates regime. The Eu170 million club deal backing the development signed 12 December 2003 with six banks taking a piece as mandated lead arrangers: Royal Bank of Scotland with Eu35 million; BNL, Dexia Crediop, MCC and San Paolo IMI at Eu30 million each; and Banca Verde with Eu15 million.

The project funds development of five wind farm sites. The sponsor, Italian Vento Power Corporation, is already well known in the market for a number of wind deals closed under the old CIP6 regime: the 163 MW IVPC1 in 1998 in the Campania and Puglia regions, jointly developed with Tomen of Japan, and the 283 MW IVPC4 in 2000, in the Campania, Puglia, Basilicate and Sardinia regions, jointly developed with Edison Mission Energy.

The driver behind IVPC is US wind developer UPC through its UPC International Partnership CV II, a Netherlands Antilles limited partnership through which both previous IVPC project companies are owned. UPC has not yet brought in a co-sponsor on IVPC2000 but is in discussions with a number of potential candidates.

The key issue in the deal is how the green certificates regime will perform. The green certificates scheme is not unlike the UK ROC system. Renewables generators receive the pool price for their power and then receive a premium by selling certificates matching that amount of power to utilities that lack the renewable capacity to meet their government targets - currently 2% of output rising to 12% over time.

At the moment the Italian grid operator GRTN is price arbiter because there is not enough renewable capacity to meet the current 2% requirement: GRTN is issuing certificates against a portion of the old CIP6 renewable contracts transferred to it as offtaker from ENEL. To date GRTN has issued small amounts to keep the green certificate price on a par with the level of financial support under CIP6 and artificially meet the 2% requirement.

However, predictions are that by 2005 there will be enough new green capacity around for GRTN to stop propping up the 2% requirement. That also therefore means there is the potential for green certificate supply to exceed demand with a knock on effect on certificate pricing.

To counteract a price drop the likelihood is that the Italian government will keep upping the renewable ratio ahead of certificate oversupply until it reaches the 12% output mark - which given current performance will not be for some time.

The renewable certificates also only run for eight years, which leaves a potential overhang of two years on the non-mezzanine part of the deal, which will rely on the pool price alone.

But lenders can take comfort from a cash sweep that kicks in if the price of electricity falls below predicted levels. And although IVPC2000 has no offtake agreement, renewables have priority despatch into the Italian national grid.

Initial talks on IVPC2000 began in 2002 with the appointment of Energy Finance Advisors (EFA). And in March 2003 feelers were put out to test market appetite for a club deal.

The configuration of the deal changed after wind results and a number of permitting issues. In the end the deal comprises funding for five sites with four operating companies - IVPC Sardegna (Sardinia) and IVPC Sicilia 2, Sicilia, 4 and Sicilia 5 (Sicily). Vestas' Italian subsidiary, Italian Wind Technology, is supplying the sites with V52 turbines.

It is unclear whether IVPC has paid a premium for being first in this new market. The Eu170 million project comprises five tranches with 50bp commitment fees: a 10-year plus construction (approximately one year) Eu43.9 million senior loan priced at 130bp rising to 150bp with the passing of time; a 10-year + 1 Eu19.5 million true up facility; a 10-year + 1 Eu32.5 million subsidiary facility; a 10-year + 1 Eu11.3 million contingency facility; and an 8-year plus construction Eu45 million mezzanine/on investing tranche priced at 170bp-200bp over libor. The mezzanine is shared pro rata between the banks. The remainder of the debt is a Eu17.7 million VAT facility priced at 50bp with commitment fees of 25bp.

The debt/equity split is 75/25. Post-construction, the Eu19.5 million true-up facility kicks in and pays off part of the mezzanine reducing leverage to 60/40 excluding the remaining on-investing portion. The mezzanine is not quasi-equity in the normal sense - at least not for the borrower. It is there to enable the project to qualify for a system of grants in Italy available to small industrial companies that invest in new projects - Law 488 grants.

To qualify for these grants the project is split into four separate operating companies with minimum equity capitalisations. The IVPC2000 holding company acts as a conduit for the mezzanine and injects it into each company. The operating companies then become the borrowers of that debt which is cross-guaranteed by all of them. Consequently the Eu45 million debt borrowed by the holding company is not secured against the project assets and is thus subordinated/mezzanine.

It is an expensive means of borrowing but clearly the grant benefits outweigh the cost.

And the true-up mechanism only works under certain conditions that respect the 488 grant criteria. These criteria are designed to ensure that projects are not left half-built and project progress is supervised for one year after which the true-up bites.

The extent to which this deal is a benchmark for the future will soon be known. Dexia is sole arranger on another 70MW farm - Andretta - which is expected to close in March. nIVPC2000

Status: closed 12 December 2003

Description: First wind farm financing under Italy's green certificate regime

Sponsor: Italian Vento Power Corporation (a UPC subsidiary)

Arrangers: Royal Bank of Scotland; BNL; Dexia Crediop; MCC; San Paolo IMI;

Banca Verde (a Monte dei Paschi subsidiary)

Legal counsel to lenders: Allen & Overy

Legal counsel to Sponsor: Clifford Chance

Financial advisor to sponsor: EFA