Lead arrangers Citibank and SG have closed syndication on the $2.2 billion TECO/Panda merchant power portfolio deal. The deal has been deliberately pitched to the market as a step back from the ambitious construction revolvers currently mooching around the market. Whilst the deal has an uncontracted (albeit unorthodox) offtake structure the financing was regarded by many, especially the very satisfied ? and crucial ? co-arrangers, as tightly assembled.

Panda Energy has a reputation as a developer of large-scale generating facilities in the more mature markets, and has a good record of bringing in well-capitalised co-sponsors on its more burdensome deals. It formed a joint venture with PSEG Global known as Texas Independent Energy, which brought two innovative merchant deals to the market over late 1999/early 2000. It carried out most of the more arduous permitting work on the two plants covered by the facility before bringing in its partner.

TECO Power Services is the unregulated generation arm of TECO Corporation, also known as Tampa Electric Company. TECO has threatened for some time to follow in the footsetps of its near neighbour, Florida Power & Light, and become a major out-of-state independent power producer. It has made a series of announcements in recent months, whether in the form of acquisitions, greenfield activity or buying in to existing projects, as has happened here. Indeed, TECO is currently examining financing options for the 500MW Frontera purchase (from American Electric Power) and has six turbines awaiting installation at the McAdams and Dell plants in the south east.

The two plants in question here are the Gila River and Union (formerly known as El Dorado) power stations. The Gila River Power Station is located in Gila Bend, Arizona and is natural gas-fuelled. It will be brought online in four phases and, when fully operational, will have a capacity of 2.3GW. The first phase of the 2.2GW Union Power Station is located in Union County, Arkansas, is expected to begin commercial operation in the summer of 2002, with commercial operation of the rest of the facility slated for the following summer.

The two plants can be brought online in phases because, at over 2GW apiece, they are configured as several units and can operate independently of each other. The eight turbines at each plant can be combined so that a number of offtake profiles can be accommodated at each plant simultaneously ? whether as a mix of medium- and short-term contracts or on a fully spot-market-driven basis.

This gives little in the way of upside to the lenders, who have financed the facilities under the assumption that they will be operated without any offtake support at all. In fact, until TECO has had the time to put in place its own trading team, marketing and trading will be outsourced to Aquila Energy (whose majority owner is Utilicorp). Aquila gets a flat fee as well as performance related bonuses. Gas will be procured by the joint venture from Noble Affiliates, which markets output from the Louisiana and Texas coast region.

The financing has been put together with a closed-end portfolio structure, since the joint venture nature of the deals would make the addition of further facilities both cumbersome and unlikely. For roughly the same reasons, and despite the fact that the two facilities would have made excellent candidates, a synthetic leasing structure was not considered. The timing of the deal meant that the extensive due diligence and structuring could not have been completed in time to complete the plants in time for their scheduled start date.

The two plants are cross-collateralized, although the default provisions have been divided into two categories. A list of major default events sets down what can be considered as defaults at both plants ? the more serious ones on the list will lead to a default at both plants whilst a minor event will mean that only one plant is at risk. The cross-collateralization, however, helps the sponsor get up to a more generous leverage level.

This was not the only factor working in favour of the deal. Both plants are located in relatively underdeveloped markets (a Panda speciality), in to the Western power pool and Gila River could dispatch into the currently power-hungry Californian market. Few bankers have heavy exposure here, and few have any difficulties with GE 7F turbine technology. Moreover, several power deals, whether for internal reasons or to avoid current syndication difficulties, have decided to put back their sell-down dates. Panda/Teco encountered a relatively open field. The deal consists of a $1.7 billion term loan and a $500 million equity bridge.

This is not to say that there was not a slight tweak in pricing. The deal, despite conservative debt service coverage ratios (between 2.4x and 3.25x), ended up with pricing of 162.5bp over libor during construction, 175bp in the first year after construction and 200bp in the final two years of the five year facility. The deal is also dependent on maintaining an adequate rating, a burden that the sponsors are happy to shoulder since this deal, in common with many others, is tailored for a capital markets refinancing. There is a cash sweep mechanism but, in the words of a source close to the arrangers ?this may not kick in at all?.

Banks committing to the facility at a co-arranger level are: WestLB, Abbey National, Bank of Tokyo-Mitsubishi, Bayerische Hypon-und Vereinsbank, Nord LB, Royal Bank of Scotland, RBC, TD, CIBC, BNP Paribas, Scotia Capital, UBS, Dexia, Barclays Capital and IBJ/Fuji. Senior Managing Agents are Bank of Scotland, Bank of Montreal, KBC, DG Bank, CDC Finance and Sumitomo, whilst Co-Agents/Managers and Participants are Credit Lyonnais, Arab Banking Corp, Nationwide Mutual, EDC, LB Rheinland and IKB Deutsche Industriebank. Participants on the equity bridge loan (all co-arrangers committed to this facility) were Bank of New York, LB Sachsen, Bank One, Sanwa and Suntrust.