Market appetite for European independent power is not what it was. And AES is not the credit it once was. So it is a bitter-sweet irony for AES that as it retreats from the UK - the Drax plant and the sale of its Medway stake - the 1200 MW CCGT AES Cartagena plant in Spain goes into second stage syndication.

Like most US power developers, AES has been perceived as a wobbly credit in the last two years. But the company has seen a notable upturn this year and "the fact that Cartagena closed successfully demonstrates that negative perceptions surrounding the future viability of AES have subsided," claims Peter Conway, director in the energy team for project and sectoral finance at SG.

Subsided - yes. Gone - no. What the project neatly illustrates is that IPP projects can still be financed on their own merits, even for troubled sponsors like AES, if there is a strong offtaker, minimal structural risk and the deal is sweetly priced.

Cartagena is both the largest independent power project to close in Europe this year and only the second and largest IPP to close in Spain: ESB's Bizakaia Energia CCGT in Bilbao was the first (see Project Finance, May 2003). Although syndication of the Eu665 million (Eu782 million) project financing finally came in oversubscribed in August, the deal struggled in its first attempts at syndication earlier in the year. The debt-equity split stood at 90/10 when first put out to market and syndication did not take-off.

Given that the banking market is more cautious than it was when AES began structuring finance, and that lending capacity has reduced, the project team realised that the leverage was too aggressive and reduced to a safer 80/20 debt to equity ratio. This tactic boosted interest but meant that the deal closed four months later than expected.

Lenders could also take comfort from the project being fully contracted for up to 24 years under the terms of a long-term tolling agreement with Gaz de France, signed in July last year. Failure to secure such contracts is a prime reason why many other US developers have abandoned their planned CCGT plants in Spain. Gaz de France also has an option to take some equity in the project in the future.

The fact that the project is being built in Spain also lends investors comfort. The market was successfully liberalised in 1998, there are no economic or political risks and there is a high demand for electricity in Spain - demand is expected to increase by 3.75% a year until 2011, which will lead to a capacity gap in the short to medium term.

The plant is now in the construction phase and is expected to be onstream by 2006. Initec Energia, a Dragados unit, and Mitsubishi Corp were appointed as EPC contractors in July 2000 and the technology is tried and tested.

ABN Amro, Crédit Agricole Indosuez and SG arranged the Eu665 million of project debt - comprising a Eu493 million mini-perm and Eu172 million in ancillary facilities, including a VAT tranche, working capital tranche, cost overrun tranche, letters of credit and three performance bonds.

Spanish development bank, Instituto de Credito Oficial (ICO), was granted mandated lead arranger status as a result of its substantial commitment to the project, while ANZ, ING, WestLB and BBVA have come in as senior lead arrangers and CIC as arranger. Citibank joined the banking group as manager post signing. Mandated lead arrangers were offered tickets of Eu80 million minimum, senior leads, Eu75 million with a target hold of Eu65 million and leads, Eu60 million with a target hold of Eu50 million.

Pricing on the deal stands at 140bp during construction and 130bp - 180bp during operation - 130bp to140bp within the eight-year loan period and 170bp to 180bp if the deal is not refinanced within this period. In the event that the deal is not refinanced within the eight-year period, a cash sweep will run until payout.

Following a successful first phase, general syndication has now been launched. "Early indications point to us reaching our sell-down targets. The market is in transition and should react positively to this deal as structured," points out Alexandra Boleslawski, global head of power, project and structured finance at Crédit Agricole Indosuez.

Although common in the US, the mini-perm structure is still rarely used in the EMEA power project finance market. "While the structure provides the incentive to refinance and is attractive to sponsors by merit of enhancing early project internal rate of returns, it can also be attractive to those lenders interested in booking shorter-term assets," points out Boleslawski.

Land for the project has been concessioned out to AES for 23 years by the Spanish ports authority. The concession was signed in 1998 and runs until November 2021. If the concession is extended to 2028 - which looks likely - and Gaz de France comes in as an equity holder, AES's refinancing prospects should be significantly improved.

Although Cartagena is the second IPP to close in Spain, it was for much of the way the frontrunner. Consequently Cartagena faced all the same documentation hurdles as Bizkaia in Spain's very recently liberalised gas and electricity markets. "The development of a structure that will support project financing amidst a changing regulatory environment is always a challenge as one has to work out which party bears the risk of change," notes Simon Currie, energy partner at Norton Rose.

Cartagena is unlikely to be a benchmark. Most Spanish CCGT projects are now being developed by cash rich incumbents and are not expected to be project financed. But Cartagena is an example of structuring and pricing a project in a very adverse market for a struggling sponsor. Could it have been done without Gaz de France? Probably not. But the fact that it was has prompted AES to look at a number of other possible projects that give it the opportunity to leverage off of Cartagena.

Energia Cartagena

Status: Closed 8 August 2003

Description: Non-recourse facility for Spanish independent power project

Sponsor: AES Corp

Debt: Eu665 million

Mandated lead arrangers: SG, ABN Amro, Credit Agricole Indosuez, ICO

Senior lead arrangers:

ANZ, ING, WestLB and BBVA

Arranger: CIC

Manager: Citibank

Fuel supplier: Gaz de France

Legal advisor to the sponsor:

Uria y Menendez (Spanish law) and Norton Rose (English law)

Legal advisor to the lender:

Allen & Overy (London and Madrid)

Legal advisor to the supplier:

Freshfields Bruckhaus Deringer

EPC contractors:

Initec Energia; Mitsubishi Corp