Syndication of the 18-month, Eu3.67 billion ($3.569 billion) loan backing Edipower's acquisition of Eurogen has come in oversubscribed. Although no official announcement has been made, it is believed that lead arrangers Barclays, IntesaBci, Credit Agricole, Interbanca, SG, Royal Bank of Scotland and UniCredito Italiano will not proceed to a second stage of sell-down.

Eurogen is the second and largest of three generation companies spun off by Italian incumbent Enel. The Bersani Law (Decreto Bersani), implemented in 1999 in line with the EU directive on electricity liberalisation, decreed that Enel must divest 15000MW worth of generating capacity. Stations were bundled into three gencos and sold one by one through a bidding process. 5500MW Elettrogen went at the end of last year to Spain's Endesa for Eu2.63 billion and still to come before the end of 2002 is Interpower, by far the smallest at 1000 to 2000MW.

Eurogen, with a total of 7000MW comprises five thermal electric plants; Chiavasso (375MW), North Brindisi (1180MW), Piacenza (620MW), Sermide (1208MW), San Filippo del Mela (1206MW) and Turbigo (1653MW) and three hydroelectric Mese (377MW),Tusciano (96MW) and Udine (293MW). Edipower fought off competition from Iberdrola, Electrabel, and the ERG-led Sinergia consortium to take the prize for a price of Eu3.7 billion. Further capex is needed over the next few years to fulfil plans to convert four of the thermal plants into cogeneration facilities.

Edipower is led by Italenergia, formed last year to carry out the hostile takover of Italy's largest private generator, the Montedison/Edison/Flack group. It is currently led by Fiat (with 38.6%), Electricite de France (EdF) (18%), Romain Zaleski's Carol Tassara group (20%). The remaining 23.4% is split between three Italian banks; Banca di Roma, Sanpaolo IMI and IntesaBci.

The takeover was financed with a Eu6.5 billion loan put together by Deutsche, SG, Banca di Roma, IntesaBci and SanPaolo. This matures shortly and will be taken out by a new financing package comprised of a Eu1 billion bank facility, a Eu2 billion capital markets issue and a Eu1 billion subordinated loan. This adds to funds raised though a disposal programme of the Edison group's non-core assets. The official merger will follow restructuring at the end of the year.

Lead sponsor Fiat is also independently addressing its struggling balance sheet. It is transferring Italenergia stakes to the three consortium banks and a further put option to EdF. The move may start some alarm bells ringing in Italy. EdF has had its voting rights in the group frozen to 2% on the grounds that it is itself a state incumbent not participating in European liberalisation.

For lenders looking at Edipower's Eurogen acquisition financing, however, the background activities of shareholders is said to not pose a problem. The general feeling was that the sponsors have all individually behaved the way they have promised. Moreover, the deal itself is well structured.

Italenergia was joined by Milan and Turin AEM energy municipalities as well as UniCredito, Interbanca and Royal Bank of Scotland to make up Edipower. The sponsors have injected roughly Eu800 million in equity to complement debt.

Of the Eu3.7 billion total debt, Eu1.8 billion is non-recourse to Edipower's sponsors. The remaining Eu1.875 billion has recourse and splits into a Eu1.275 billion term loan, a Eu450 million facility and a Eu150 million revolver. The first of these three is in Edipower's name whilst the latter two have been lent to the acquired Eurogen venture. These two levels will merge before the debt matures.

Pricing stands at roughly 100bp over Libor across the whole facility. Tickets in syndication were offered at 45bp for a commitment of Eu200 million, 32.5bp for Eu150 bp and 22.5bp for Eu100 million. They are all in pro rata across the tranches. Banks have not been signed in yet but are understood to include WestLB, HypoVereinsbank and Dexia. Although the loan's popularity is evident from a 30% oversubscription, the final profile is said to be notably thin on Italian banks. This is likely to be due to their concern over Fiat exposure following a word of warning from Bank of Italy over Fiat's debt burden.

Eu1.8 billion probably represents the maximum level of non-recourse debt that Edipower could have raised comfortably. The main lender concern was offtake risk. Although a number of the plants in the genco profile are covered by CIP6 agreements, others have full offtake risk going forward. At the time of debt negotiations with Edipower, lenders were aware that discussions were underway with regard to a tolling agreement with Edison but that this had not been finalised.

The offtake issue was one of the reasons why Edipower followed the lead of Endesa's Elettrogen acquisition in taking out a short-term loan. More generally, Enel did not provide sufficient information during the bid process for any lenders to feel comfortable with putting up long-term project debt of this size.

However, once the dust has settled, new offtake or tolling agreements have been put in place and Edipower's corporate structures have been streamlined, this bridge financing will be taken out by a more long-term solution. Sponsors could opt for a new bank package or, if Eurogen succeeds in obtaining an investment grade rating, then the capital markets could well be an attractive option.

Lenders interested in the Italian power scene will now turn their attention to Interpower, which should be spun off by the end of this year. Sixteen expressions of interest have been submitted. There have also been proposals to force Enel to divest further capacity but no clear order yet. This will probably depend on market enthusiasm for Interpower's sale.