De-regulation of Italy's energy sector has promised big US-style acquisition financings. Leading the way is a Eu1.6 billion finance backing acquisition of state incumbent Enel's first spin off, Elettrogen. The consortium, comprising Endesa (45%), BSCH (40%) and Italian regional utility ASM-Brescia (15%), paid Eu2.63 billion for the 5400MW genco in July. Shares have now transferred to an intermediary holding company, Endesa Italia, although debt is being held in the operating company.

DrKW are sole lead arranger on the transaction, which was launched to a one-stage syndication in September. A spokesperson stated that they are quite pleased with the response and expect it to be wrapped up by the end of next week, adding that it is already oversubscribed.

Debt being raised is non-recourse to the project's shareholders, although insiders describe the deal as having a ?corporate flavour'. This refers to the loans' short-term nature and healthy liquidity of Endesa Italia. The latter is an attribute both of Elettrogen's existing revenue stream and a hefty equity injection from sponsors. Gearing stands at 60% and it has been stated that the company has sufficient cash to undertake the pledged investment programme which includes revamping a number of plants to bring them in line with tightening environmental regulations.

Debt breaks down into a one-year Eu200 million revolver, an 18-month Eu700 million term loan, a further 18-month Eu700 million term loan with an 18-month extension option on a fee of 5bp. Eu900 million of the total from the term loans pays off Elettrogen's existing debt. The remainder refinances a portion of the sponsors' acquisition price.

Syndicating banks have come in on four separate levels. A small group was invited to join pro rata across all three tranches. For a commitment of Eu150 million, these banks secure fees of 15bp, 17.5bp and 15bp on the revolver, term A and term B respectively. This group is largely made up of Endesa relationship banks and other Italian banks hoping to form a relationship with Endesa. The remaining banks join pro rata across the two term loans. Lead arrangers commit Eu100 million, co-arrangers Eu50 million and lead managers Eu25 million.

Margins on the deal reflect considerable lender comfort. Elettrogen is seen as being of key strategic value in the landscape of Europe's de-regulating energy markets and Endesa is very experienced in power generation. Starting margins are 40bp or 45bp, depending on whether drawn from operating or holding companies. Once fully merged with Elettrogen, the margin will ratchet according to a grid with a floor of 40bp and a ceiling of 67.5bp over Euribor. The new company is also likely to seek a rating at around this stage, expecting to achieve investment grade.

The short-term nature of the loan suggests a refinancing is inevitable. A source close to the deal states that capital markets are likely to be the preferred route and it is unlikely to raise much more than is needed to take out existing debt. ?The project company does not need additional capital to finance its investment plan. It is possible that leverage will be increased but extra debt is not needed to finance capex.?

It is certainly difficult to foresee a shortage of liquidity once Endesa's spin-offs in Spain are taken into account. In parallel with Enel, the Spanish incumbent is obliged to sell bundled generation to comply with a law implemented in line with an EU directive on de-regulation. October saw Enel named preferred bidder for Viesgo for a price of Eu2.147 billion. Viesgo will be Spain's fifth and smallest utility, boasting a generation capacity of 2365MW. There have been accusations that the Elettrogen and Viesgo deals are merely a direct asset swap between Endesa and Enel. Both camps have dismissed these, claiming both tenders were won strictly on best offer.

In Italy, Enel's second and largest divestment is to be 7008MW Eurogen. 2300MW Interpower is likely to be the last, following Enel's legal victory against the Italian competition regulator. The body ordered Enel to divest a fourth genco of 5500MW as a condition of acquiring telecommunications company Infrostrada earlier this year. The ruling was overturned in a regional court but it is possible that the antitrust body will now appeal in a high court.

Non binding offers for Eurogen are due in by November 5. CSFB, Lehman Brothers and Merril Lynch are acting as financial advisers on the sale. Only after binding offers from shortlisted contestants, will details of how the sale is going to proceed be released. Montedison, recently acquired by Fiat led Italenergia, has stated that it will be submitting an offer together with municipal utilities AEM Milan, AEM Murin and Swiss firm Atel. Rome utility Acea, who failed in a bid for Elettrogen alongside the latter three, has stated that it will not be bidding at all.

Estimated figures for Eurogen sit at around Eu3.5 billion, which is cheaper than Elettrogen given their respective sizes. Explanations centre around the notion that Endesa was willing to pay over the odds in order to get a foot in the door of the Italian market. It could afford to do so given its pending sales at home.

The Italian power market more widely is currently a story of large acquisition financings. Next up after Endesa Italia is a massive Eu6.5 billion debt backing the Fiat-led takeover of Montedison. Eurogen and Interpower may also throw up project financings. But short-term might be the trend. Liberalisation of Italy's energy market is underway but the transition to an open competitive electricity pool is not completed yet. Whilst uncertainties remain, caution will reign. Italian greenfield IPPs are likely to be a rare sight in financing markets over the next year.