That was the year that was
Europe
Two developments ? the successful adaptation of public private partnerships by European governments and the deregulation of the European power market ? would have made 2000 a good year for dealflow. Both, however, moved along patchily at best, and largely followed trends laid down the year before. It is significant that some of the most interesting deals done were refinancings, Drax, diAx and Arlanda in particular.
The UK power industry, after the series of large acquisition deals at the end of 1999, stopped to take breath. Market sentiment has been that generating assets were likely to reach the same inflated heights of the regional electricity companies, and both TXU and PowerGen, which announced plans to sell, have to date found few takers for their plants. EdF, through London Electricity, bought the Cottam and Sutton Bridge plants but left the price on their balance sheet. The National Power sales, Killingholme and Eggborough, have essentially reached close: Killingholme, a $390 million Bank of America-arranged merchant deal for NRG, signed in July, and Eggborough, $550 million arranged by Barclays Capital for British Energy, is set to sign next year. Indications are that a higher level of gearing may be behind the delay.
The Drax refinancing proved to be the real pace-setter, as AES went beyond its original plan to take out a $200 million subordinated bridge in the high-yield market and brought in Goldman Sachs and Deutsche to co-ordinate a new package using a $400 million senior bond, ranking pari pasu with the debt, and high-yield, to stretch out funding further. The deal marked a number of firsts, as a high-yield project bond financing, a sale of a tax efficient structure to the capital markets, and for the bond/bank senior debt mix. Here the innovation was forced by the size of the capital requirements, whilst ABN Amro led an interesting deal for Rolls Royce, Heartlands, a $115 million loan where pricing was linked to turbine performance milestones. Alstom and others take note.
Refinancing ruled in Italy, where the end of the protracted struggles over the CIP6 tariff grandfathering led to several deals, including the $672 million API Energia (for ABB) and the $260 million Centro Energia (for Foster Wheeler) refinancings, both through BNP Paribas. There are few indications yet of a switch to securitization to exploit CIP6, and most sponsors' attentions are now taken by the Enel genco sell-off, which should go ahead next year. Spain is the most likely market to bring in foreign IPPs, but front runners AES and Enron have yet to announce mandates and are examining gas supply issues.
Transport and infrastructure deals made up the bulk of the rest of the European non-telecoms action. Syndication wrapped on the Warnow crossing in Germany, led by NordLB, an interesting $264 million toll tunnel that will spawn imitators if the German planning process can be streamlined. The Arlanda rail-air link in Sweden received a cheaper financing package arranged by Bank of America, but further deals will depend on a cross-party consensus with regard to public private partnership. Likewise Greece, where the tortuous process of funding the Athens ring road ended.
Portugal remained a promising source of deals, as the Eu750 million Beira Interior syndicated and the Algarve and Costa de Prata road were awarded to Ferrovial and Mota-led consortia, respectively. The first, a Eu232 million package, was led by WestLB, Hypovereinsbank, BSCH and ICO, whilst the second waits on an EIB guarantee. Spanish deals also hit the market, as three sections of the M45 road near Madrid, tendered to three sets of operators, all funded separately.
Noises have been made about the use of the public-private-partnership route in places as diverse as Ireland and Greece (not to mention Japan) for facilities such as schools and government offices, although few tenders have yet been awarded. In the UK, however, projects coming to market increased substantially as the private finance initiative finally became the indisputable creation of the labour government, three years into its term.
Several strides have been made towards contract standardisation, and some of the more intractable projects have neared close, the Birmingham Northern Relief Road in particular. The road's £685 million debt, arranged by Abbey National and Bank of America, is presently in syndication. The A130 in Essex, a £104 million loan led by Barclays, Dresdner, and Dai-Ichi Kangyo syndicated after the removal of protesters, and the £110 million A13 bond led by Greenwich NatWest (now Royal Bank of Scotland) went out with a high spread despite an MBIA wrap.
The three keynote deals of the year were for government offices, the first of which was GOGGS, a treasury building funded by a £141 million Ambac-wrapped bond and the first to use the new documentation issued by the Treasury Taskforce. This included new default and fair market value provisions and the unfamiliarity made it a candidate for Newchange, Allen & Overy's web-based document-sharing software. Another deal, for the Ministry of Defence, was led by Dresdner, Halifax, Credit Agricole and the Bank of Scotland, and impressed by its size, at £550 million the largest the PFI has yet seen.
The Ministry of Defence has several large equipment contracts out to tender including the roll-on-roll-off ferry contract, recently awarded to Andrew Weir Shipping, the Future Strategic Tanker Aircraft and, more distantly, the Synet 5 communications satellite deal. All have serious jurisdictional and risk apportionment issues to deal with, but they mark a major shift from the smaller simulator deals that have until now been the mainstay of PFI procurement. For sheer secrecy, look at the bond financed GCHQ deal, an FSA-wrapped Deutsche deal of £415 million for the UK government's eavesdropping centre where all of the participants say they were vetted for security.
Interesting deals to look out for also include more of the bundled schools deals following the template of the Glasgow 3ED financing, £375 led by Halifax for Miller Group, Amey and the Halifax Equity Arm, and a possible communications project for the highway agency, that will attempt to replicate aspects of the Connect CityLink deal for London Underground. Water financings should be thinner on the ground in Scotland, since most of the work required to meet EU environmental standards will need to be started soon.
The European telecoms market has been hard to stop, this despite warnings from regulators and the IMF of the levels of lending on the books of the major banks. The CLEC boom created almost single-handedly by Chase (see: Utfors, Enitel and Jazztel) slowed a little, although significant bank/high-yield financings came out for Grapes Communications and several other Spanish operators. The concept of using the integrated model may have been dealt a blow by persistent rumours that some of the top Wall Street banks are sitting on large high-yield losses in the sector.
Mobile ventures have fared better, as CSFB brought in a long-term, more tightly priced deal for Swiss operator diAx. The Sfr1.4 billion deal establishes the SBC and Swiss Re-controlled GSM as a formidable player in the market, although indications from the 3G auctions in the country suggest a relatively light burden on winning telcos. The 3G licence process has only thrown up two project financings so far: the Mobilcom miniperm deal, led by Merrill Lynch, Deutsche, ABN Amro and SG for key client France Telecom, and the Hutchison deal, believed to be in the hands of Chase, WestLB and HSBC.
Telecoms will be a tricky market to get banks into next year, even if the major vendors have done the spring-cleaning of their loan books that recent securitizations suggest. The sell-off of Deutsche Telekom's cable assets in Germany continues. The two acquisitions in the market so far ? Callahan and eKabel ? have been difficult sells. There are another nine to come, usually from private equity names without the relationship pull of the big European 3G sponsors.
North America
The 1999 buzzword for the power market ? project bonds. The 2000 buzzword ? synthetics. Power is the US project finance market, aside from a small number of league tables-skewing CLEC and mobile financings, so shortages and brownouts promised a strong deal flow throughout the year. Whether sponsors looked to finance single assets or portfolios; greenfield, brownfield or acquisitions of projects, structural innovation remained at the forefront.
Some predictions for the year have proved to be reasonably accurate. Bank liquidity is still not strong, especially beyond seven years. The mini-perm structures exhibited on the Son of Calpine Revolver and Orion Power Holdings deals offered, as the banks protested, good flexibility for operating in a merchant market and the possibility of a capital markets takeout. The main reason for their popularity is probably more prosaic ? that the 3-5-year tenor represents as far as the lending community is prepared to go right now.
Those arrangers that prepared for a serious assault on the institutional market are probably amongst the happiest at year-end. This has not merely been a question of building up a project fund, although Credit Suisse First Boston, first into the market last year, Chase, with the $165 million in long-dated paper for the Liberty deal and CIT, which used $240 million from its own fund on the $400 million Pasadena expansion leveraged lease for Calpine, have all been big users.
The institutional tranche is now an established part of most long-term financings, especially for those using leveraged leases and with little intention of ever hitting the bond markets. RS Cogen, the PPG/Enetergy plant, whose debt was placed by SG, came with a $75 million tranche from Teachers Insurance and a respectable tenor on the bank piece.
Other single asset deals were concentrated around Tenaska and Cogentrix. Cobank, along with Hypovereinsbank and DG Bank, funded the $125 million Lakefield debt, with Credit Lyonnais stepping in to replace ABN Amro as arranger of the $421 million Lindsay Hill station (ABN, along with BOT-Mitsubishi and TD Securities took co-arranger titles). Cogentrix have completed four deals this year, two of them led by Bank of America, although the last, the Dresdner-led Southaven may have to wait till the first quarter of 2000 for syndication. Panda and PSEG strengthened their Texas Independent Energy venture with the Odessa plant, a $529 million successor of the Guadelupe plant in the crowded ERCOT market.
The most notable single-asset bond was the AES Red Oak deal led by Dresdner and Lehman Brothers, a virtual copy of the Ironwood deal from 1999. The $384 million in 20- and 30-year bonds were structured to match the tolling agreement agreed with Williams for a similar duration to the short piece. The Oxy Taft deal carried a leveraged lease structure and a private placement of $325 million led by SG.
But it was acquisition finance which led much of the activity in 2000, spurred by continuing deregulation-led spin-offs and divestments. NRG was the largest issuer of pure project bonds ? $1.5 billion in all, supporting the NRG Northeast GenCo, and the NRG South Central deal, which financed the Northern States (now Exel) subsidiary's acquisition of the bankrupt Cajun electrical co-operative's generating assets. Apart from the Ameren spin-off financing, a $551 million deal to fund assets split off from a utility, again led by Lehmans, this was the last heard from the straight bond markets.
Where this leaves the large bridge facilities surrounding acquisitions by Duke and Southern, amongst others, is less easy to tell. Many sponsors have been listening to their shareholders, who seemingly unimpressed by the fact the generating assets have not gone the same way as internet stocks, and have taken to earnings and accounts management instruments with a vengeance. The Edison Mission/ComEd deal now looks like more of a template from 1999 than Calpine ? lease carve-outs and the use of CP conduits are commonplace now.
PPL Montana, the $338 coal and hydro lease trust deal was the first out this year, and CIT's structure followed a similar course to the AES Eastern deal, and Reliant Energy eventually chose to finance its Sithe acquisitions through a $1 billion lease trust that carried no parental guarantee. It came out at investment grade but with wide pricing and criticism of Chase's structuring. Edison carved out some more assets from the ComEd GenCo, and guaranteed the lease payments on the $1.146 billion Edison Midwest deal to bring pricing more in line with the corporate.
Calpine brought forward a Scotia and CSFB-led revolver along the lines of last year's Calpine Construction Finance, only two and a half times as big, at $2.5 billion. The new loan was spurred by a series of acquisitions from Panda and of SkyGen. Calpine has been successful in squeezing the capital it needs out of banks, partly by offering them a share of its lucrative capital markets offerings. It has as yet no imitators, although it has forced the issue of turbine availability to the forefront of financing debate.
With it came the rise of turbine warehousing deals, the way to secure turbines and keep them off balance-sheet, according to US accounting rules. PG&E's $7.8 billion deal represents the future value of all plants built with its 44 turbines and whilst unlikely to be fully drawn, represents solid bank commitments. WestLB is the only other institution to have admitted doing such deals and says that their clients are not as talkative as PG&E. Roughly 11 deals, all underwritten by the landesbank, have covered a series of major energy sponsors, amongst who Enron, Sempra and El Paso have been mentioned in the market.
Single Asset synthetics have been generating serious arrangement fees for banks, with this capability now representing the benchmark for a bank wanting to be taken seriously by power clients. La Paloma, the largest single asset financing this year, a $730 million repeat of last year's lake road that used Citibank's securitized CP conduit. 2001 should be marked by further testing, or even convergence of the construction revolver, turbine warehouse and conduit financings. Capacity shortages are predicted again for next year, possibly equalling the savagery of the Californian crisis, and sponsors are gearing up to cruise through the permitting process in several states.
The oil and gas market has been unsettled by the wave of mergers in the industry, the BP Amoco/ Atlantic Richfield takeover chief amongst them. The nearest thing to a project deal has been the Hovensa refinery in the Virgin Islands, a $600 million upgrade sponsored by Amerada Hess and Petroleos de Venezuela and supported by $450 million in loans from Barclays, Bank of America and Scotia Capital. Activity will pick up if the slew of gas pipelines get closer to approval and the Canadian market takes off again.
Latin America
The markets should have seen a rapid increase in debt issuance in 2000, as the large banks welcomed their payback for two years of bridge loans by tapping cautious participants ready to return to the markets for long-term deals. Despite the large deals and structural innovations witnessed in the power and mining sectors in 1999, the last twelve months saw more of the same. The occasional bridge made the transformation into a seven-year deal or longer, particularly in telecoms, and power sector lending confined itself to the reorganisation of the distribution companies (DisCos) of Brazil and Argentina.
Merger mania was the defining feature of the electricity sector outside of Mexico, the most notable examples being the Metropolitana and LIGHT refinancings and AES' highly structured debt package for its EDEN and EDES franchises in Argentina. The LIGHT deal backed its acquisition of Metropolitana with anticipated retail revenues, and thus gained financing in the form of a mixture of R650 million in local debentures and a $150 million international loan earlier this year. A further $200 million followed this October. Since then Reliant Energy (formerly Houston Industries) has divested its Latin interests, which EdF and AES carving up its stake.
AES has picked up a number of DisCos in the region, including Reliant's El Salvador interests, backed by a $100 million non-recourse loan from Dresdner. In August, it also completed the acquisition of a 59% stake in the 1000MW hydro plant Hidroeléctrica Alicurá in Argentina from Southern Energy and its partners. Its hunger for assets was highlighted by the hostile take-over of the Venezuelan utility Electricidad de Caracas, after making a deal with Union Fenosa, a possible rescuer. It looks like repeating the tactic in its bid for Chilean generator Gener, this time by attempting to buy off TotalFinaElf, which approached Gener for a joint venture.
Thus power plant projects have been thin on the ground, with the exception of Pluspetrol, the Argentinean plant expansion sponsored by YPF-Repsol (the result of another merger), with support from Coface and the European Investment Bank and ABN Amro as arranger. Investors have in general been shy, however, of deals in South America until a clearer picture of the offtake security that can be gained in Brazil and until prices in Chile and Argentina continue to recover.
Further north the picture gets a little more encouraging, especially in the unlikely hot spot of the Dominican Republic. AES dominates here as well, bringing the $340 million AES Andres station online and consolidating its hold on the EDE Este DisCo. Cogentrix and the UK's CDC (now CDC Capital Partners) also closed financing on the $233 million San Pedro de Macoris deal featuring an innovative reinsurance agreement between the ECGD and Hermes and a BBB-rated private placement, covered by a partial risk wrap from the IDB, led by WestLB. Its use a template is slightly constrained by the fact that this is the last sovereign backed PPA that the republic is likely to offer.
No such reticence has been displayed by the Mexican government, which has ensured that the Mexican market led the way in financings for the year by a comfortable margin. Sponsors, however, have been looking for ways to minimise their exposure levels to the state electricity monopoly, the CFE, by partnering with private offtakers. This took the form either of the Bajio deal, a $439 million plant sponsored by InterGen and AEP that sold excess capacity direct to domestic corporates, or the Termoelectrica del Golfo (TEG) deals, Sithe and Alstom's $700 million inside-the-fence plants dedicated to Cemex and Penoles. The IDB, US Ex-Im, Deutsche, BNP Paribas, Dresdner and Citibank (and its conduit) backed Bajio, the first deal anywhere to feature construction guarantees from Ex-Im. The TEG deals featured Coface cover for both stages, with the IDB giving way to ECGD political risk cover in the second. TEG's arrangers were ABN Amro and Deutsche (Phase I) and ABN Amro, Credit Agricole Indosue and ANZ (Phase 2)
Other players, including EdF, with the Rio Bravo and Saltillo financings, Iberdrola, with the Monterrey III deal, another industrial supply deal backed by a corporate loan, and Union Fenosa, with Hermosillo, took more straightforward routes. The next deals, which may close by the end of 2000, are the SG-led Enron Monterrey inside-the-fence financing, Bank of America's $140 million loan for Transalta's Campeche CFE plant, and InterGen's La Rosita facility, which may sell electricity into the US.
Mexico and Brazil also provided the bulk of the oil and gas financings in the last year, although few of them can lay claim to pure project status since they were with state oil companies and more obviously count as export financings. Pemex brought through the Tula, Salamanca and Madero upgrades with Ex-Im support, and the EVM and Barracuda deals gained backing from JBIC, the BNDES, Deutsche, ABN Amro, BOT-Mitsubishi, IBJ, CSFB, Fuji, ANZ, Chase, BNP Paribas and Hypo, for backing operating leases of over $3 billion of Japanese offshore equipment.
Two deals in Argentina give some hope to the sector, which should recover still further if oil prices stay at their present levels. The Profertil refinancing retired a post-crisis bridge and put in place a $315 million 10-year loan for the world's largest single-train fertiliser factory. The TGN bonds, issued by Merrill Lynch, saw a $175 million partil risk wrap issued by Opic for an Argentinean gas distribution network.
The final star in the region was the telecoms sector, which saw two giant financings, both in Brazil. The BCP refinancing (sponsors: BellSouth and Grupo Safra) ended a cycle of rolling over bridge loans after an ABN Amro, Bank of America and WestLB group arranged $1 billion of dollar debt covered by multisourced political risk insurance and $275 million in locally denominated five-year debentures. Vesper, the alternative fixed-line carrier for the country's most built-up areas, sponsored by Bell Canada, Velocom and Qualcomm, received $1.83 billion in vendor finance from Lucent and Ericsson, amongst others, and is looking to refinance it soon.
Current subsea cable deals may be mired in uncertainty, but the telecoms sector, operating under a benign regulatory environment, will be the pattern to follow in regional power financings next year. Most of the sponsors say that their 23 or so planned projects are necessary, but activity has so far been thin on the ground. Should a clearer picture present itself, next year will be the time to make good on promises.
Two developments ? the successful adaptation of public private partnerships by European governments and the deregulation of the European power market ? would have made 2000 a good year for dealflow. Both, however, moved along patchily at best, and largely followed trends laid down the year before. It is significant that some of the most interesting deals done were refinancings, Drax, diAx and Arlanda in particular.
The UK power industry, after the series of large acquisition deals at the end of 1999, stopped to take breath. Market sentiment has been that generating assets were likely to reach the same inflated heights of the regional electricity companies, and both TXU and PowerGen, which announced plans to sell, have to date found few takers for their plants. EdF, through London Electricity, bought the Cottam and Sutton Bridge plants but left the price on their balance sheet. The National Power sales, Killingholme and Eggborough, have essentially reached close: Killingholme, a $390 million Bank of America-arranged merchant deal for NRG, signed in July, and Eggborough, $550 million arranged by Barclays Capital for British Energy, is set to sign next year. Indications are that a higher level of gearing may be behind the delay.
The Drax refinancing proved to be the real pace-setter, as AES went beyond its original plan to take out a $200 million subordinated bridge in the high-yield market and brought in Goldman Sachs and Deutsche to co-ordinate a new package using a $400 million senior bond, ranking pari pasu with the debt, and high-yield, to stretch out funding further. The deal marked a number of firsts, as a high-yield project bond financing, a sale of a tax efficient structure to the capital markets, and for the bond/bank senior debt mix. Here the innovation was forced by the size of the capital requirements, whilst ABN Amro led an interesting deal for Rolls Royce, Heartlands, a $115 million loan where pricing was linked to turbine performance milestones. Alstom and others take note.
Refinancing ruled in Italy, where the end of the protracted struggles over the CIP6 tariff grandfathering led to several deals, including the $672 million API Energia (for ABB) and the $260 million Centro Energia (for Foster Wheeler) refinancings, both through BNP Paribas. There are few indications yet of a switch to securitization to exploit CIP6, and most sponsors' attentions are now taken by the Enel genco sell-off, which should go ahead next year. Spain is the most likely market to bring in foreign IPPs, but front runners AES and Enron have yet to announce mandates and are examining gas supply issues.
Transport and infrastructure deals made up the bulk of the rest of the European non-telecoms action. Syndication wrapped on the Warnow crossing in Germany, led by NordLB, an interesting $264 million toll tunnel that will spawn imitators if the German planning process can be streamlined. The Arlanda rail-air link in Sweden received a cheaper financing package arranged by Bank of America, but further deals will depend on a cross-party consensus with regard to public private partnership. Likewise Greece, where the tortuous process of funding the Athens ring road ended.
Portugal remained a promising source of deals, as the Eu750 million Beira Interior syndicated and the Algarve and Costa de Prata road were awarded to Ferrovial and Mota-led consortia, respectively. The first, a Eu232 million package, was led by WestLB, Hypovereinsbank, BSCH and ICO, whilst the second waits on an EIB guarantee. Spanish deals also hit the market, as three sections of the M45 road near Madrid, tendered to three sets of operators, all funded separately.
Noises have been made about the use of the public-private-partnership route in places as diverse as Ireland and Greece (not to mention Japan) for facilities such as schools and government offices, although few tenders have yet been awarded. In the UK, however, projects coming to market increased substantially as the private finance initiative finally became the indisputable creation of the labour government, three years into its term.
Several strides have been made towards contract standardisation, and some of the more intractable projects have neared close, the Birmingham Northern Relief Road in particular. The road's £685 million debt, arranged by Abbey National and Bank of America, is presently in syndication. The A130 in Essex, a £104 million loan led by Barclays, Dresdner, and Dai-Ichi Kangyo syndicated after the removal of protesters, and the £110 million A13 bond led by Greenwich NatWest (now Royal Bank of Scotland) went out with a high spread despite an MBIA wrap.
The three keynote deals of the year were for government offices, the first of which was GOGGS, a treasury building funded by a £141 million Ambac-wrapped bond and the first to use the new documentation issued by the Treasury Taskforce. This included new default and fair market value provisions and the unfamiliarity made it a candidate for Newchange, Allen & Overy's web-based document-sharing software. Another deal, for the Ministry of Defence, was led by Dresdner, Halifax, Credit Agricole and the Bank of Scotland, and impressed by its size, at £550 million the largest the PFI has yet seen.
The Ministry of Defence has several large equipment contracts out to tender including the roll-on-roll-off ferry contract, recently awarded to Andrew Weir Shipping, the Future Strategic Tanker Aircraft and, more distantly, the Synet 5 communications satellite deal. All have serious jurisdictional and risk apportionment issues to deal with, but they mark a major shift from the smaller simulator deals that have until now been the mainstay of PFI procurement. For sheer secrecy, look at the bond financed GCHQ deal, an FSA-wrapped Deutsche deal of £415 million for the UK government's eavesdropping centre where all of the participants say they were vetted for security.
Interesting deals to look out for also include more of the bundled schools deals following the template of the Glasgow 3ED financing, £375 led by Halifax for Miller Group, Amey and the Halifax Equity Arm, and a possible communications project for the highway agency, that will attempt to replicate aspects of the Connect CityLink deal for London Underground. Water financings should be thinner on the ground in Scotland, since most of the work required to meet EU environmental standards will need to be started soon.
The European telecoms market has been hard to stop, this despite warnings from regulators and the IMF of the levels of lending on the books of the major banks. The CLEC boom created almost single-handedly by Chase (see: Utfors, Enitel and Jazztel) slowed a little, although significant bank/high-yield financings came out for Grapes Communications and several other Spanish operators. The concept of using the integrated model may have been dealt a blow by persistent rumours that some of the top Wall Street banks are sitting on large high-yield losses in the sector.
Mobile ventures have fared better, as CSFB brought in a long-term, more tightly priced deal for Swiss operator diAx. The Sfr1.4 billion deal establishes the SBC and Swiss Re-controlled GSM as a formidable player in the market, although indications from the 3G auctions in the country suggest a relatively light burden on winning telcos. The 3G licence process has only thrown up two project financings so far: the Mobilcom miniperm deal, led by Merrill Lynch, Deutsche, ABN Amro and SG for key client France Telecom, and the Hutchison deal, believed to be in the hands of Chase, WestLB and HSBC.
Telecoms will be a tricky market to get banks into next year, even if the major vendors have done the spring-cleaning of their loan books that recent securitizations suggest. The sell-off of Deutsche Telekom's cable assets in Germany continues. The two acquisitions in the market so far ? Callahan and eKabel ? have been difficult sells. There are another nine to come, usually from private equity names without the relationship pull of the big European 3G sponsors.
North America
The 1999 buzzword for the power market ? project bonds. The 2000 buzzword ? synthetics. Power is the US project finance market, aside from a small number of league tables-skewing CLEC and mobile financings, so shortages and brownouts promised a strong deal flow throughout the year. Whether sponsors looked to finance single assets or portfolios; greenfield, brownfield or acquisitions of projects, structural innovation remained at the forefront.
Some predictions for the year have proved to be reasonably accurate. Bank liquidity is still not strong, especially beyond seven years. The mini-perm structures exhibited on the Son of Calpine Revolver and Orion Power Holdings deals offered, as the banks protested, good flexibility for operating in a merchant market and the possibility of a capital markets takeout. The main reason for their popularity is probably more prosaic ? that the 3-5-year tenor represents as far as the lending community is prepared to go right now.
Those arrangers that prepared for a serious assault on the institutional market are probably amongst the happiest at year-end. This has not merely been a question of building up a project fund, although Credit Suisse First Boston, first into the market last year, Chase, with the $165 million in long-dated paper for the Liberty deal and CIT, which used $240 million from its own fund on the $400 million Pasadena expansion leveraged lease for Calpine, have all been big users.
The institutional tranche is now an established part of most long-term financings, especially for those using leveraged leases and with little intention of ever hitting the bond markets. RS Cogen, the PPG/Enetergy plant, whose debt was placed by SG, came with a $75 million tranche from Teachers Insurance and a respectable tenor on the bank piece.
Other single asset deals were concentrated around Tenaska and Cogentrix. Cobank, along with Hypovereinsbank and DG Bank, funded the $125 million Lakefield debt, with Credit Lyonnais stepping in to replace ABN Amro as arranger of the $421 million Lindsay Hill station (ABN, along with BOT-Mitsubishi and TD Securities took co-arranger titles). Cogentrix have completed four deals this year, two of them led by Bank of America, although the last, the Dresdner-led Southaven may have to wait till the first quarter of 2000 for syndication. Panda and PSEG strengthened their Texas Independent Energy venture with the Odessa plant, a $529 million successor of the Guadelupe plant in the crowded ERCOT market.
The most notable single-asset bond was the AES Red Oak deal led by Dresdner and Lehman Brothers, a virtual copy of the Ironwood deal from 1999. The $384 million in 20- and 30-year bonds were structured to match the tolling agreement agreed with Williams for a similar duration to the short piece. The Oxy Taft deal carried a leveraged lease structure and a private placement of $325 million led by SG.
But it was acquisition finance which led much of the activity in 2000, spurred by continuing deregulation-led spin-offs and divestments. NRG was the largest issuer of pure project bonds ? $1.5 billion in all, supporting the NRG Northeast GenCo, and the NRG South Central deal, which financed the Northern States (now Exel) subsidiary's acquisition of the bankrupt Cajun electrical co-operative's generating assets. Apart from the Ameren spin-off financing, a $551 million deal to fund assets split off from a utility, again led by Lehmans, this was the last heard from the straight bond markets.
Where this leaves the large bridge facilities surrounding acquisitions by Duke and Southern, amongst others, is less easy to tell. Many sponsors have been listening to their shareholders, who seemingly unimpressed by the fact the generating assets have not gone the same way as internet stocks, and have taken to earnings and accounts management instruments with a vengeance. The Edison Mission/ComEd deal now looks like more of a template from 1999 than Calpine ? lease carve-outs and the use of CP conduits are commonplace now.
PPL Montana, the $338 coal and hydro lease trust deal was the first out this year, and CIT's structure followed a similar course to the AES Eastern deal, and Reliant Energy eventually chose to finance its Sithe acquisitions through a $1 billion lease trust that carried no parental guarantee. It came out at investment grade but with wide pricing and criticism of Chase's structuring. Edison carved out some more assets from the ComEd GenCo, and guaranteed the lease payments on the $1.146 billion Edison Midwest deal to bring pricing more in line with the corporate.
Calpine brought forward a Scotia and CSFB-led revolver along the lines of last year's Calpine Construction Finance, only two and a half times as big, at $2.5 billion. The new loan was spurred by a series of acquisitions from Panda and of SkyGen. Calpine has been successful in squeezing the capital it needs out of banks, partly by offering them a share of its lucrative capital markets offerings. It has as yet no imitators, although it has forced the issue of turbine availability to the forefront of financing debate.
With it came the rise of turbine warehousing deals, the way to secure turbines and keep them off balance-sheet, according to US accounting rules. PG&E's $7.8 billion deal represents the future value of all plants built with its 44 turbines and whilst unlikely to be fully drawn, represents solid bank commitments. WestLB is the only other institution to have admitted doing such deals and says that their clients are not as talkative as PG&E. Roughly 11 deals, all underwritten by the landesbank, have covered a series of major energy sponsors, amongst who Enron, Sempra and El Paso have been mentioned in the market.
Single Asset synthetics have been generating serious arrangement fees for banks, with this capability now representing the benchmark for a bank wanting to be taken seriously by power clients. La Paloma, the largest single asset financing this year, a $730 million repeat of last year's lake road that used Citibank's securitized CP conduit. 2001 should be marked by further testing, or even convergence of the construction revolver, turbine warehouse and conduit financings. Capacity shortages are predicted again for next year, possibly equalling the savagery of the Californian crisis, and sponsors are gearing up to cruise through the permitting process in several states.
The oil and gas market has been unsettled by the wave of mergers in the industry, the BP Amoco/ Atlantic Richfield takeover chief amongst them. The nearest thing to a project deal has been the Hovensa refinery in the Virgin Islands, a $600 million upgrade sponsored by Amerada Hess and Petroleos de Venezuela and supported by $450 million in loans from Barclays, Bank of America and Scotia Capital. Activity will pick up if the slew of gas pipelines get closer to approval and the Canadian market takes off again.
Latin America
The markets should have seen a rapid increase in debt issuance in 2000, as the large banks welcomed their payback for two years of bridge loans by tapping cautious participants ready to return to the markets for long-term deals. Despite the large deals and structural innovations witnessed in the power and mining sectors in 1999, the last twelve months saw more of the same. The occasional bridge made the transformation into a seven-year deal or longer, particularly in telecoms, and power sector lending confined itself to the reorganisation of the distribution companies (DisCos) of Brazil and Argentina.
Merger mania was the defining feature of the electricity sector outside of Mexico, the most notable examples being the Metropolitana and LIGHT refinancings and AES' highly structured debt package for its EDEN and EDES franchises in Argentina. The LIGHT deal backed its acquisition of Metropolitana with anticipated retail revenues, and thus gained financing in the form of a mixture of R650 million in local debentures and a $150 million international loan earlier this year. A further $200 million followed this October. Since then Reliant Energy (formerly Houston Industries) has divested its Latin interests, which EdF and AES carving up its stake.
AES has picked up a number of DisCos in the region, including Reliant's El Salvador interests, backed by a $100 million non-recourse loan from Dresdner. In August, it also completed the acquisition of a 59% stake in the 1000MW hydro plant Hidroeléctrica Alicurá in Argentina from Southern Energy and its partners. Its hunger for assets was highlighted by the hostile take-over of the Venezuelan utility Electricidad de Caracas, after making a deal with Union Fenosa, a possible rescuer. It looks like repeating the tactic in its bid for Chilean generator Gener, this time by attempting to buy off TotalFinaElf, which approached Gener for a joint venture.
Thus power plant projects have been thin on the ground, with the exception of Pluspetrol, the Argentinean plant expansion sponsored by YPF-Repsol (the result of another merger), with support from Coface and the European Investment Bank and ABN Amro as arranger. Investors have in general been shy, however, of deals in South America until a clearer picture of the offtake security that can be gained in Brazil and until prices in Chile and Argentina continue to recover.
Further north the picture gets a little more encouraging, especially in the unlikely hot spot of the Dominican Republic. AES dominates here as well, bringing the $340 million AES Andres station online and consolidating its hold on the EDE Este DisCo. Cogentrix and the UK's CDC (now CDC Capital Partners) also closed financing on the $233 million San Pedro de Macoris deal featuring an innovative reinsurance agreement between the ECGD and Hermes and a BBB-rated private placement, covered by a partial risk wrap from the IDB, led by WestLB. Its use a template is slightly constrained by the fact that this is the last sovereign backed PPA that the republic is likely to offer.
No such reticence has been displayed by the Mexican government, which has ensured that the Mexican market led the way in financings for the year by a comfortable margin. Sponsors, however, have been looking for ways to minimise their exposure levels to the state electricity monopoly, the CFE, by partnering with private offtakers. This took the form either of the Bajio deal, a $439 million plant sponsored by InterGen and AEP that sold excess capacity direct to domestic corporates, or the Termoelectrica del Golfo (TEG) deals, Sithe and Alstom's $700 million inside-the-fence plants dedicated to Cemex and Penoles. The IDB, US Ex-Im, Deutsche, BNP Paribas, Dresdner and Citibank (and its conduit) backed Bajio, the first deal anywhere to feature construction guarantees from Ex-Im. The TEG deals featured Coface cover for both stages, with the IDB giving way to ECGD political risk cover in the second. TEG's arrangers were ABN Amro and Deutsche (Phase I) and ABN Amro, Credit Agricole Indosue and ANZ (Phase 2)
Other players, including EdF, with the Rio Bravo and Saltillo financings, Iberdrola, with the Monterrey III deal, another industrial supply deal backed by a corporate loan, and Union Fenosa, with Hermosillo, took more straightforward routes. The next deals, which may close by the end of 2000, are the SG-led Enron Monterrey inside-the-fence financing, Bank of America's $140 million loan for Transalta's Campeche CFE plant, and InterGen's La Rosita facility, which may sell electricity into the US.
Mexico and Brazil also provided the bulk of the oil and gas financings in the last year, although few of them can lay claim to pure project status since they were with state oil companies and more obviously count as export financings. Pemex brought through the Tula, Salamanca and Madero upgrades with Ex-Im support, and the EVM and Barracuda deals gained backing from JBIC, the BNDES, Deutsche, ABN Amro, BOT-Mitsubishi, IBJ, CSFB, Fuji, ANZ, Chase, BNP Paribas and Hypo, for backing operating leases of over $3 billion of Japanese offshore equipment.
Two deals in Argentina give some hope to the sector, which should recover still further if oil prices stay at their present levels. The Profertil refinancing retired a post-crisis bridge and put in place a $315 million 10-year loan for the world's largest single-train fertiliser factory. The TGN bonds, issued by Merrill Lynch, saw a $175 million partil risk wrap issued by Opic for an Argentinean gas distribution network.
The final star in the region was the telecoms sector, which saw two giant financings, both in Brazil. The BCP refinancing (sponsors: BellSouth and Grupo Safra) ended a cycle of rolling over bridge loans after an ABN Amro, Bank of America and WestLB group arranged $1 billion of dollar debt covered by multisourced political risk insurance and $275 million in locally denominated five-year debentures. Vesper, the alternative fixed-line carrier for the country's most built-up areas, sponsored by Bell Canada, Velocom and Qualcomm, received $1.83 billion in vendor finance from Lucent and Ericsson, amongst others, and is looking to refinance it soon.
Current subsea cable deals may be mired in uncertainty, but the telecoms sector, operating under a benign regulatory environment, will be the pattern to follow in regional power financings next year. Most of the sponsors say that their 23 or so planned projects are necessary, but activity has so far been thin on the ground. Should a clearer picture present itself, next year will be the time to make good on promises.
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