AES Panama has closed the country's largest ever private financing. $275 million of limited recourse funds have been raised by a syndicate of local and international banks to back the expansion of the Bayano plant and construction of Eesti facilities. Both are hydroelectric generating plants. The debt was assigned an investment grade rating of BBB- by Fitch Ratings.

AES Panama was created during privatisation of Panama's power industry in 1998. AES snapped up the 49% stakes on offer in two of the four bundled generation companies, Panama Empresa de Generacion Electrica Chiriqui and Empresa de Generacion Electrica Bayano. The two were then merged into one, AES Panama. Although the Panamanian government has retained a 51% stake in the company, AES has control of operations. The original acquisition was paid for with corporate funds.

Bayano, which currently boasts a 150MW capacity and has a very large associated reservoir, is receiving a 110MW boost through installation of a third turbine. Greenfield Eesti, for which construction also includes dams, channels and tunnels, will be 120MW on completion. The EPC contract is held by a consortium led by Skanska and also including GE Energy Sweden AB, Alstom Power Generation and SwedPower International.

Work on both is in an advanced stage, with the former expected to commence commercial operations within the month and the latter in November 2003. A bridge loan of $130 million, raised in 2000 by Banco Continental and Wall Street Securities (both Panamania institutions), has funded progress to date. This facility, which previously held the record for Panama's largest private financing, has now been fully taken out.

Once these projects are complete, AES Panama will be the largest generator in the country, with in the region of roughly 510MW of installed capacity. In addition to Eesti and Bayano, the company owns the 42MW La Estrella, 48MW Los Balles and 40MW Panama City gas turbines. The financing just raised, although specifically marked for Bayano and Esti, is secured against all five assets.

Both AES Corp and the Panamanian government put up nominal support during construction phase but other than this, the financing is non-recourse. This is a significant milestone for financings in Panama. Despite the country's lack of project financing historically, local banks are described as very capable as well as having considerable liquidity.

Lead arranged by Banco Continental of Panama, Societe Generale and Banco Nacional de Panama, debt sold down well in a single-stage syndication. The finishing line-up is a mixture of local players and international institutions, most of which already have offices in Panama. With a seven-year tenor, the loan is considered medium term. Repayment will be quarterly, with interest only paid during the construction phase.

Participating banks are Banistmo Panama, Banistmo Bond Fund, BBVA, Banco General (Panama), Citibank, Banco Agricola, Lloyds TSB, Towerbank International, Banco Salvadoreno, BankBoston, Bac International Bank, Westrust Bank, Wall Street Securities, BICSA Panama and Bank of China (Panama).

A key reason cited for the deal's success is Panama's dollar-denominated currency base. This meant that international lenders, as well as AES itself, did not have the worry of currency devaluation that exists in many emerging market countries. Moreover, Panama's economy is viewed as particularly stable because it has been using the dollar since 1903, when the currency first came into circulation in the US. This has provided it with a maturity not seen in Latin American economies that have pegged their currency to the dollar relatively recently.

One concern that did arise for the deal's architects, however, related to offtake agreements and has led to ?pricing issues'. 59% stakes in three distribution companies, which together make up 30% of the country's distribution assets, have been sold off in the privatisation process. Two were snapped up by Union Fenosa and one by Panama Distribution Group, backed by Constellation Power. According to new deregulated market rules, all distribution companies must bid for offtake capacity. However, in a trend described as disappointing by one player close to this deal, they have generally avoided long-term agreements, preferring short-term contracts of one to five years.

Eesti is considered lucky in having secured a ten-year power purchase agreements with two of the distribution companies, but this is the exception for generating assets in Panama. All of AES' other assets only have short-term contracts. Until this issue is resolved, it is likely to remain a barrier to any more significant power deals in Panama, despite the enormous hydroelectic potential that developers may be keen to tap. Once up and running, hydroelectric plants produce very low cost electricity.

This loan is not likely to be the end of the road for Bayano and Esti's financing. The tranche will not fully amortise and is likely to be taken out before maturity. Seven years represents the longest tenor that local banks would stretch to but AES would like to see a longer term deal in place. Discussions with IFC and EKN are underway for a deal of roughly 18 years.

The original plan had been to go straight from the bridge loan to this and AES has been talking to the IFC with regard to it since 1998. However, it is said that a number of obstacles arose and it became apparent that the bridge loan would expire before the financing could be put into place. The medium term debt was thus drawn up as a solution.