After its first year of operation the Moyle Interconnector ? the only electricity link between Northern Ireland and Scotland ? has been sold and refinanced in an interesting Glas Cymru-type deal that combines project bond debt with a regulated utility structuring.

Built by Viridian, the holding company for Northern Ireland Electricity (NIE), at a cost of £162.3 million ($260 million) including a grant of £53 million from the European Regional Development Fund, the 500MW HVDC Interconnector has been acquired by Moyle Holdings Limited, a not-for-profit entity, with backing from a £135 million index-linked bond issue solely underwritten by Royal Bank of Scotland and triple-A wrapped by monoline FSA.

The original EU funding is a measure of the importance of the deal. The Northern Irish power market is very small with peak demand of only 1,578MW, too little to warrant investment in newbuild power stations. The Interconnector is a cheaper solution, and in the long term is strategically vital to the development of an integrated electricity supply network linking the electricity grids of Northern Ireland, Scotland, England, Wales and the Republic of Ireland, with a further link to France and the European network. In the short term the Interconnector gives Irish consumers access to the competitive power market in the UK ? cheaper power.

Similarly, the regulator ? Ofreg ? has smiled on the deal and agreed to changes to the system of electricity regulation in Northern Ireland to help facilitate the bond issue. Ofreg has also agreed to shoulder the risk of any additional cost on the interconnector.

The deal closed on 14 April as a single-tranche issue with amortising principal and a final maturity of March 2033. The 30-year index-linked bonds were priced at 2.9376% with an 85bp spread over the 2.5% July 2016 gilt. Average life is 14 years and total fees were 1%.

The deal comes with very little risk to the bondholders or the monoline. The issue was given an underlying rating of A by Standard & Poor's and was wrapped simply to improve the economics ? an aspect that Ofreg was particularly keen to maximise.

Moyle's revenues are initially sourced from capacity served to NIE and then from an annual auction of remaining capacity to second tier suppliers. The structure includes a compensation/true-up mechanism should the auction not generate revenue equal to Moyle's permitted revenues in any given year: minimum permitted revenues for Moyle for the life of the concession (minimum 35 years) are sized to provide an average minimum debt service cover ratio (DSCR) of 1.35x.

In such a scenario Moyle can call on NIE to increase its transmission and distribution use of service charges the following year to cover the shortfall. Similarly, in the event of a complete failure of the interconnector, lost revenues are topped up by the mechanism on a monthly basis until the Interconnector is back on line.

Furthermore, to cover liquidity risk there is a debt service reserve account of £4.5 million, a liquidity facility from RBS of £10 million, and an initial cost reserve account of £3.5 million reducing to £2.5 million for damages to the cable.

So even in the event of a complete loss of revenues for one year all debt would continue to be serviced until true-up the following year. And provided that no problems occurred in the following year, all accounts would be restored to the full balance by year?end the following year.

Consequently, the biggest problem any lender on Moyle has is at worst a 12-month wait for their money should problems occur two years in a row. There is the risk of regulatory failure by NIE to pay or collect from consumers ? but such a scenario is unlikely at best and easily fixed with a new licensee at worst.

The strong structuring works equally well for the consumers. With no shareholders to pay dividends to, any surplus in Moyle revenues is not retained for future reserves but returned the following year to customers via rebates and should ultimately end up back with the consumer in the form of cheaper electricity bills.

Technologically Moyle is state of the art, thus giving lenders even more comfort. The interconnector consists of two monopolar submarine cables and is designed to give low losses and a very high availability and reliability combined with low maintenance. The high performance of the convertor stations is reflected in guaranteed losses of less than 1.35% and energy availability of 99.6%

But much of the success of Moyle will rest with its management ? not-for-cost will be as important as not-for-profit. Moyle will be run by a board selected by Team Northern Ireland, a private sector inward investment agency, and Ofreg. Maintenance contracts will be put out to tender every five years. ESBI Engineering has won the first tenure and will also supervise the maintenance obligations of Siemens under the original Siemens Maintenance Agreement ? five years of liability cover on switchgear and the installation.

In legal terms the deal was particularly challenging involving law in three jurisdictions ? Scottish and Northern Irish governed legal contracts and finance under English law.

McGrigor Donald acted for Moyle Interconnector Limited and Moyle Interconnector (Financing) (bond issuer) and for Viridian Group and Northern Ireland Electricity (the vendors). Allen & Overy counselled RBS and FSA.

The deal makes for an interesting alternative to traditional public-private partnership. But will it catch on? According to Michael Watson, head of banking and finance at McGrigor Donald: ?This type of financing is becoming increasingly popular across many sectors including regulated businesses and PPP. We expect the ?non profit distributing? structure to finance regulated assets to become more commonly used as the skills and techniques required develop.?

Moyle Interconnector

Finance

Status: Closed 14 April 2003

Description: Refinancing undersea electricity connector and sale to not-for-profit entity.

Debt: £165 million 30-year index linked bonds

Vendor: Viridian Group

Sponsor: Moyle Holdings

Sole arranger and lead manager: Royal Bank of Scotland

Monoline wrap: FSA

Legal counsel to issuer and vendor: McGrigor Donald

Legal counsel to debt: Allen & Overy