Syndication has closed on the $1.37 billion financing for American National Power (ANP), the US subsidiary of Britain's International Power, through the ANP Funding I vehicle. The deal is an important way for ANP to make itself known as a merchant power credit in North America, although it was one of the hardest sells seen in the market this year. Indeed, several participant banks had pronounced the deal as ?dead in the water? as recently as April.

That the deal went through is ascribed by the arrangers to International Power's strong relationship pull. The ANP deal is the first solid demonstration of the developer's new strategy of distancing itself from the riskier markets of the world, and to concentrate on the more developed parts of the world. The Middle East, Australia and Europe are all in the process of restructuring and tempting targets for new independent power plants (IPPs), but the mother of all markets is the United States.

International Power was demerged from National Power (now known as Innogy) last year since the latter's business in UK-centred distribution was an awkward fit with the international generation arm. The plants covered by the financing have been long-standing projects of National Power, and have now come to a (temporary) rest in this non-recourse funding vehicle. And the financing has been structured to push them out into the bond market as quickly as possible.

The financing covers a portfolio of five plants located in Massachusetts and Texas. These plants are Blackstone, Bellingham and Milford in Massachusetts, and Midlothian I&II and Hays in Texas. Of a total capacity of 4000MW in the portfolio, 1500 MW is now on-line, and the remainder, according to International Power, is in start-up testing or advanced construction. It adds that the entire portfolio will be in commercial service by the end of the first quarter of 2002.

The ANP deal has been criticised for a concentration of facilities in two regions widely viewed as the nearest to suffering from an overbuild situation in the country. Texas, and it's grid the Electricity Reliability Council of Texas (ERCOT), has been one of the leaders in attracting merchant plants. Ever since the November 1999 Guadelupe financing for Panda and PSEG's Texas Independent Energy, developers have come to love the ease of siting which marks the state where President Bush established his ?environmental' credentials.

One issue for sponsors to consider is that ERCOT has an almost pathological aversion to interconnection with the rest of the country ? with the arrival of other sponsors such as Tractebel the goldfish bowl is almost certain to heat up further. Certainly the conditions in the power pool were extensively analysed by market consultants Pace, but sponsors could become the victims of Texas' success as much as they were victims of California's failure.

Massachusetts presents a slightly more complex picture, since a slightly higher level of interconnection and the ever-present threat of Hydro-Quebec and its Canadian peers flooding the market with cheap hydroelectric capacity complicate its situation. It is also not the beneficiary of dynamic population growth of the sort experienced by Texas. Nevertheless, bankers and the ratings agencies have worked with the most pessimistic price forecasts possible.

The second cause of concern for ANP is its decision to go ahead with the use of Alstom's GT24 turbines, which have experienced teething troubles in a number of locations, including the Enfield plant in the UK. Some banks are less than happy with adding further exposure to their books, and the financing has had to incorporate a number of additional guarantees to assuage lenders' concerns. This takes the form of a longer than expected performance recovery period that allows Alstom to work on the turbines' operating efficiency, as well as high liquidated damages.

The financing also includes an unusually harsh cash-sweep mechanism, which ensures that at low availability levels the banks benefit from most of the cash generated by the project as soon as operations start. The mechanism can convert to a cash trap, and then be released, according to performance levels. Not since Rolls-Royce's Heartlands project has technology risk been placed so much to the forefront in a power plant financing. Coverage levels are at typically robust merchant levels, in the 3x region.

Arrangers on the deal were SG, Citibank, ING, Deutsche Bank and ABN Amro, with syndicate support coming from Abbey National, KFW, ANZ, National Australia Bank, Fortis Bank, Royal Bank of Canada, Bank of Scotland, Sumitomo Mitsui, Arab Banking Corporation and IKB. Rumours were doing the rounds in the market that the arrangers were looking into putting together an institutional tranche. Sources close to the arrangers confirm that one commitment was received, but that the traditional concerns about prepayment clauses and higher pricing rendered this impractical.

It is an open secret that the pricing on the deal was tweaked heftily upwards to bring banks on board, and the arrangers are adamant that there were few structural adjustments required for the deal to sell. It would be fair to say, however, that the deal arrived in the market at a very unsettled moment, with portfolio deals far from popular at the co-arranger level. In the end a solid core of names familiar with the credit, and supporters of International Power's other projects (including a bridge loan taken out at the time of the demerger) were prominent.

The financing breaks down into a five-year, $1.259 billion floating rate construction and term loan facility, a $120 million working capital facility of five years, and a $40 million debt service reserve of the same tenor. The funds will be used to finish construction and to repay equity commitments from International Power to the projects. The deal is priced off of a ratings grid ? at the BBB-/Baa3 level (the current rating) 162.5bp over libor years 1 ? 3, and 187.5bp years 4 & 5. A future capital markets take-out is a near certainty.