SG and the International Finance Corporation have completed the syndication of the Rio Bravo 3+4 financing, the largest Mexican IPP to close in 2004, and a sign that the market has put some of the country's uncertainty behind it. Rio Bravo, whose sponsor is Electricite de France (EdF), is a $584 million riposte to those observers that said the syndication market was full on Mexican IPP risk. But it does suggest that such risk will have to be more generously priced. 

Rio Bravo 3+4 are the second and third units to be bid out at the Rio Bravo site - the first is a facility for the Comision Federal de Electricidad (CFE), the state-owned power company. The previous unit two is also an EdF property, and reached financial close in 2001. SG arranged the debt on the unit, the 495MW Central Anahuac plant, as well as financing for the 247MW Saltillo project. EdF used its presence at the site to win the next two units to come up to bid - with prices of $0.029527 per kWh for 3 and $0.029238 for 4.

The plant concession comes in the form of a 25-year power purchase agreement (PPA) with the CFE. The prices were the lowest bid, and below those offered by Mirant and Calpine, among other bidders. The advantages of a unified operation at the site trumped those presented by sitting on a large turbine stockpile.

The bid followed new CFE rules that said that it would no longer take responsibility for fuel risk. Ultimately, EdF decided that, like the sponsors of Naco Nogales and La Rosita, it would look for a US supplier. This avoids the necessity of negotiating a financeable gas supply agreement with Mexico's state gas company, Pemex, which can be frustrating, although it means that sponsors are left to create a gas supply agreement that matches the CFE's offtake requirements.

Indeed, US Ex-Im, which financed Naco Nogales, can attest to the difficulties in working on the back of a US supplier. It provided $92.5 million to a 309MW plant sponsored by Union Fenosa - and supplied by El Paso. Rio Bravo was more fortunate - it had an agreement with Cinergy for one unit, and with El Paso for the other - but required more debt.

According to Pierre Bouvery, principal investment officer at IFC, "the real challenge for the project was to secure a long-term fuel supply contract, which would extend over 15 years. The challenge for the lenders was to become comfortable with fuel risk, given the structure of the PPA and the many changes taking place in the gas market at that time." The alignment achieved in the contracts and the depth of the gas resources in the region ultimately made these risks manageable. As another lender put it, "you're very close to one of the most liquid gas markets in the world."

EdF also owns Gasoducto del Rio, a 56km pipeline with a capacity of 410,000 million Btu/day. And it can pass fuel costs through to the CFE should it be stranded without a supplier at the same price. The plant uses Siemens Westinghouse 501F turbines, but most maintenance functions are within the competency of EdF's Comego subsidiary, which has now built up a solid local track record. EdF also wraps construction, with the result that it hoped to price the deal at 75bp during construction - perhaps inside what the banks hoped was a fair level.

Perhaps more worrying for lenders will be EdF's poorly performing international investments, headed by LIGHT in Brazil and its Argentinean properties. EdF, it is rumoured, might refocus its attention on Europe and leave its other properties to fend for themselves. The best defence for the arrangers is that EdF's Mexican plants have been profitable, and that EdF has other financings outstanding - including one in Laos, Nam Theun 2 .

Nevertheless, this unsettled financing environment provided a good opportunity for IFC to deploy capital in what Bouvery calls "a paced, but catalytic approach". IFC has worked on the Merida III, Saltillo, and Rio Bravo II projects. IFC also provided Rio Bravo 3 + 4 with IFC's first C loans in the Mexican power sector.

According to Bouvery, the C-loan facility, which could share the features of debt and equity, is in this case more akin to a debt instrument. This means the debt is subordinated to the A and B loans extended by the lenders. It provides the project with an extra buffer should the plants run into difficulties.

SG, the perennial advisor and lender to EdF, competed with ANZ and WestLB for the arranger mandate, but the result was not in doubt. ANZ was out of the running by January 2002, while SG formally won in March that year. In a neat piece of symmetry, WestLB picked up the pideregas (public works) El Cajon hydroelectric project, which ultimately entered syndication at the same time.

El Cajon, say syndicated loan bankers, was priced more attractively, mostly because its sponsors were poorly capitalized domestic construction firms. As Project Finance went to press, El Cajon was set to sign. But a second suggestion, that banks are starting to fill up on CFE risk, would be more worrying.

This complaint has been a feature of the market for several years, and has persisted throughout Mexico's ascent into, and through, investment grade. Arrangers will hope that banks currently out of Mexico, but still in the project business, will keep returning. They also hope that Mexican banks will be able to divert some of their dollar holdings to the sector. Bancomex, for instance, was one of 10 participants that came into the deal.

The financing broke down into a $100 million A loan, $295 million B loan, and $40 million C loan. It also had a $16 million VAT facility and $34 million fuel testing facility - both of three years. But the principal tranches had tenors of 15 years for the B loan and 16 for the A loan. Next up in the market should be Mitsui and Calpine's Valladolid deal, and Mitsubishi's Tuxpan 5 financing. Neither Mizuho deal will face Rio Bravo's fuel issues - fuel is again a risk the CFE takes.

Rio Bravo 3+4

Status: closed December 2003

Size: $584 million

Location: the municipality of Valle Hermoso, Tamaulipas, roughly 30km from Matamoros, Mexico

Description: financing for two IPP units of 500MW (online April 2004) and 495MW (ready April 2005)

Sponsor: EdF

Arrangers: SG, IFC

Lawyers to the lenders: White & Case

Lawyers to the sponsor: Clifford Chance

Independent engineer: Mott McDonald