It is the largest private equity deal in Spain. It is the country's largest ever non-recourse financing. And it is the first project financing of a transmission asset anywhere in Europe. But for Spain, it is a one-off. It also represents what might be regarded as a politically imposed renegotiation of what started out as a straightforward public to private buy-out.

Inalta, the Eu843.4 million deal in question ? closed by mandated lead arranger Deutsche Bank and joint lead arranger BBVA in April ? is financing a CVC Capital Partners (CVC)/ Red Electrica de Espana (REE)-sponsored buyout of Iberdrola's (IBE) transmission grid assets: the first time an entire transmission grid has been sold.

But the deal, as stands, is not what was first intended. ?It certainly was one which raised some political concerns,? says Juan I Gonzalez, partner at Uria & Menendez. The Inalta assets, at 4,700km, represent 15% of the Spanish electricity high-tension backbone, a grid which the Spanish government has been trying to make the exclusive domain of REE, which currently owns 60% of the network. Although a listed company, REE is 28% owned by the Spanish government.

?REE is like the holy ghost,? says one source close to the transaction. ?They're like three in one: the system operator, the technical manager for the transmission network, and the largest transmission company in Spain.?

IBE set up a competitive tender to divest its transmission assets, for which several interested parties bid. It was won, hands down, by all accounts, by CVC, the independent multinational buyout firm with a strong European presence, which was acting as sole sponsor. ?It fit well into their [CVC's] general strategy. They are typically long-term players. These are very stable, strategic assets which produce fairly stable income,? says Gonzalez at Uria.

The initial deal involved CVC buying out 80% of the IBE transmission network through a straight sale and purchase agreement, and a 35-year O&M contract, for Eu600 million.

But after the initial proposal, CNE, the Spanish regulator, issued a scathing report, highly critical of the deal. ?Basically they were arguing that you could not simply buy a transmission asset, but you need to buy a transmission network, which includes rights over the land,? says one participant that dealt with the regulator. One of the features of the original Inalta deal is that property rights were not being transferred: only the substations are owned, not the land through which the networks pass.

?It's difficult to isolate distribution and transmission. But in any case, this sort of argument is not strictly sound,? he adds. Nevertheless, on reviewing the report, the government chose to forestall the deal.

?On the face of it, legally, the deal should have been fairly straightforward. We were complying with all conditions,? continues the participant.

REE was then brought in, with 25% stake, in autumn last year. CVC is understood to have reacted with ?enormous flexibility? to what was effectively an imposed restructuring of their deal; the speed an innovation of their reaction, in particular, attests to this.

The restructuring saw the size of the deal increase to Eu800 million, with financiers scrambling to navigate through the legal hurdles thrown up by the regulators. Among them was the question of what to do with the fibre-optic network, which was part of the purchase. As stands, it will be leased back to IBE for the economic life of the equipment. IBE will also continue to operate the assets under the 35-year O&M contract, though REE has the right to replace it as of the third year of the contract.

The final structure of the deal involves a mini-perm, to accommodate the near certainty of REE buying out CVC's stake ? and it is as yet uncertain when this might happen. ?It became clear that the financing was always going to be taken out either in the corporate capital or securitisation markets. The nature of the asset and the contractual structure also contribute to this sort of loan,? says James Fenner, director of loan syndications at Deutsche Bank.

The deal goes out to 7.25 years, up from 5 years in the earlier deal, with pricing at 150-180bp. Debt is split between an Eu706 million term loan, a Eu122.5 million VAT facility and a Eu15 million revolver. Margins on the VAT facility are between 60-90bp over Euribor over the facility's 14-month tenor.

Banesto, Caja Madrid, Credit Agricole, Natexis and RBS joined the funding as co-arrangers. Ultimately the deal proved supremely successful in syndication, bringing in a spread that includes both project and leveraged finance shops. The lowest ticket on offer is Eu6 million, to encourage participation from the domestic regional bank market.

?The reality is this is the first ever non-recourse project financing of transmission lines in Europe,? say Fenner. ?It's innovative in that it's really a sponsor-driven transaction. The debt/equity structure is more akin to a power/infrastructure crossover.?

The more relevant, unspoken hurdle, however, was getting government approval, which was finally achieved by bringing REE on board. ?Some people might say it was all a set up by the government to get it the way they wanted. And like in any good deal, they did get what they wanted,? says a source familiar with the deal.

Interestingly, REE had initially bid for these assets as well, but its offer was much less aggressive than CVC's, and it failed.

?Despite talk of liberalization of the market, it is a highly regulated market in which the government still has many things to say, and the opportunity to block cases which they see as risks,? says Gonzalez.

Two other important consequences of the deal should not go unnoticed: first, the transaction served as the trigger for two other REE deals. The company acquired the transmission networks of both Endesa and Union Fenosa in March this year. Those deals were modelled in large part on the Inalta deal, in that they involved the purchase of assets, not property, and land rights only insofar as they affected the transmission business.

Second, it has also led to changes in the law granting REE a mandatory pre-emption right on any future sales of electricity transmission assets in Spain ? thus de facto restricting this deal from being replicated in the power transmission business.

Infraestructuras de Alta

Tension S.A.

Status: Closed

Size: Eu843.4 million

Location: Spain

Description: buy-out of Iberdrola's high-voltage transmission network

Sponsors: CVC Capital Partners, Red Electrica de Espana

Debt: Eu800 million

Lead arrangers: BBVA, Deutsche Bank

Tenor: 7.5 years

Margin: 150-180bp over Euribor

Lawyers to the borrower:

Uria & Menendez (Spanish and EU law), Slaughter & May (English), Garrigues (tax)

Lawyers to Iberdrola: Allen & Overy