For those who thought Bulgaria's domestic banking sector beyond the scope of long term project debt, the deal backing Maritza East III ? the first successful private power deal to date in the Balkans ? has proved them wrong. Despite years of suspect political and contractual wrangling, the landmark Eu348 million transaction, aside from being Bulgaria's first project financing in the power sector, marks the first time local financiers have mustered long term money ? 12 years of it.

Lead arranged by Credit Agricole Indosuez and Societe Generale, with vital support from the European Bank of Reconstruction and Development and the Multilateral Investment Guarantee Association, the deal is in fact the largest financing of a commercial project in Bulgaria's history. And all this without a sovereign guarantee.

The package goes towards rehabilitating, and beefing up the environmental performance of, the 840MW lignite-fired power plant, located near the southern city of Stara Zagora, helping it comply with EU standards. Rehabilitation of existing capacity is seen as the best model for the country's power sector, strained from a lack of investment in recent years.

Italian state utility Enel recently announced its 60% purchase of Entergy's 73% interest in the project, a joint venture with Bulgarian state power company NEK.

With foreign bankers keen to highlight the local content of the deal, and with strong multilateral support, the financing sets a very visible benchmark in the arranging of multiple sources of debt for project financings in the Balkans.

?Local bank participation really was the key achievement,? says Alexandra Boleslawski, global head of power at Credit Agricole Indosuez. Despite its ultimate relevance, however, local funding was not part of the original structure of the deal, and was first mooted during discussion of the syndication strategy. But it worked, bringing to the mix an extra piece of liquidity and, as importantly, local expertise.

?Typically you can't get interbank lending beyond seven years in Bulgaria,? points out Constantine Koutzaroff, director at Credit Agricole Indosuez's project and structured finance department. Notwithstanding ? or perhaps because of ? the historically distressed banking sector, local involvement became something of an end in itself: ?We realized the utility of the approach, we had the time to do it and it also made sense for the domestic sector,? Koutzaroff adds.

The EBRD is lending Eu112.1 million to the project, while mandated lead arrangers CAI and SG, lead arranger Banca Mediocredito (Unicredito Italiano Group) and arranger Bank Austria Creditanstalt AG are providing Eu140.7 million. The EBRD's direct loan pricing starts at 300bp and steps up to 360bp.

The Multilateral Investment Guarantee Agency (MIGA) is providing all-important political risk insurance to the $140.7 million in commercial debt, priced at 150bp and stepping up to 200bp.

The four Bulgarian banks ? Bulbank (part owned by Banca Mediocredito), UBB , Biochim (part owned by Bank Austria) and SG Expressbank ? are providing a total of Eu75 million .

The Black Sea Trade and Development Bank (BSTDB), the nascent regional multilateral, is lending Eu20 million to the project. This follows swiftly from the bank's involvement in another Bulgarian energy deal ? the Galata gas project ? last December. BSTDB, which effectively took up a slice of the EBRD portion, is stepping up its role in providing long- term cover for projects throughout the Black Sea region.

Enel came to the table late in the day, when financiers were already relatively advanced in the structuring and documentation. But their involvement is widely seen as a bonus: ?Enel's purchase is clearly helpful since they're committed to the region long-term, and this was hugely important to the banks,? says Anthony Marsh, director of the EBRD's power and energy utilities team.

It is also Enel's first significant foreign acquisition since Paolo Scaroni took over as chief executive last year. The option remains for the Italian utility to progressively buy out Entergy's remaining stake. Bulgaria accounts for roughly 45% of energy exported to the Balkans ? the hope is that this will cement its status as regional energy hub.

Previously, Entergy ? the US power company ? had been working on the deal for a number of years, seeing it through various iterations and government reviews since coming to the country in 1997. But the company, like many of its peers, is now generally on the retreat from emerging markets, selling off assets as part of a broader restructuring effort.

The deal is supported by an 18-year PPA with NEK, the state-owned transmission company created from the unbundled husk of a vertically integrated utility. The PPA, which is unique in that it anticipates the liberalization of the sector, proved politically contentious, and the sponsors finally agreed to lower power purchase prices to below $0.03/kWh. Nonetheless, points out Marsh, ?the fact that NEK is involved is very important: it has become a creditworthy, low cost entity.? A fuel supply agreement guarantees lignite from an adjacent mine facility.

Construction will take just under three years. DSD Dillinger, Stahlbau GmbH and RWE Industrie-Losu are project contractors. An important component of refurbishment is installation of flue gas desulphirisation (FGD), which will considerably improve environmental performance.

The question remains, though, whether ? and where ? the deal might be replicated. Prospects for a private power market in the Balkans remain dim. ?Romania needs a lot of investment in thermal generation, and there are prospects in Serbia and Montenegro,? says Marsh.

But a more likely near-term prospect is Bulgaria itself. EBRD is now focussing on an upgrade of the neighbouring Maritza I plant: an $850 million 670MW coal-fired BOT project, sponsored ? for the time being ? by embattled American utility AES. Financing may come solely from EBRD, OPIC and KfW, with no commercial lending.

Seven Bulgarian electric power distributors are in line to be privatised, starting this year. Up to 67% of ownership in each will be sold to the private sector to attract strategic investors, to improve service quality and to prepare the distribution companies for the liberalization of the market.

Maritza East III

Status: Financial close, February 27; syndication launched, April 1

Location: Bulgaria

Sponsor: Enel/Entergy, NEK

Description: Eu348 million debt financing

Debt/equity split: 80:20

Lead Arrangers: Credit Agricole Indosuez (mandated), Societe Generale (mandated), Banco Mediocredito

Multilaterals: EBRD, MIGA, BSTDB

Legal advisers to sponsor:

Skadden Arps, Norton Rose

Legal adviser to lenders: Linklaters