Australian deal of the year
When InterGen first formalized plans to enter the Queensland energy
market through a merchant power plant at Millmerran, the US-based
operator knew that speed was of the essence. Two other serious
contenders, Entergy and Consolidated Electric Power Asia were also
in the Australian state with competing proposals for the limited
supply shortfall. ?It was clear that neither the financing market
nor the Queensland government was going to be enthusiastic about
more power plants once they gave their support to the first new
build,? explains Richard McIndoe, vice-president of finance at
InterGen in Hong Kong.
The A$1,462 million financing for the baseload plant was arranged by five joint leads, NAB, CBA, ANZ, Bank of America and ABN Amro, and was designed to give what Bank of America's John O'Neil calls crucial early mover advantage. InterGen and the five banks first got together to hammer out the deal in March 1999 and funds from the arrangers were committed by July. ?In my experience that's very quick for a deal of this size,? says McIndoe. The deal was finalized and closed three months later, on October 15, featuring an A$935 million non recourse tranche (eventually oversubscribed), and an A$527.6 million sponsor guaranteed tranche, financed on a club-deal basis.
In moving fast and by specifically targeting the big domestic lenders ANZ, NAB and CBA, InterGen was able to lock the alternative Queensland IPP schemes out of Australia's limited and consolidating project syndication market for several months. The proof of the strategy's success was there for all to see. When it became clear how advanced Milmeran's finance negotiations were, Entergy dropped its power supplier ambitions in the state.
The Millmerran deal featured a number of other distinctive elements. Perhaps the most noteworthy was that it was closed without any power purchase agreement or hedging contracts being in place, a unique departure in the Australian context.
What was therefore a 100% merchant risk deal came at a time when the privatized power assets in the state of Victoria were performing poorly, due in large part to an unforeseen and irrational bidding behavior in the Victorian electricity pool. Funding participants were only able to get comfortable with the deal because of structural arrangements that were new to the Australian context and, says Steve Zuckerman at ABN Amro, InterGen's pragmatic approach to pricing, terms and conditions. The two main distinctions were Millmerran's merchant reserving concept, which put debt service cover ratios on a more secure footing, and in a similar vein, the introduction of a second LLCR (loan to life cover ratio) test at the end of the construction period supplementing the standard LLCR test undertaken during financing.
The merchant reserving concept, seen before in UK project finance, kicks in if debt service coverage breaches a certain ratio. A mechanism within the project documentation then limits distribution of cash to the sponsor's shareholders until a more comfortable ratio is achieved.
Of the second LLCR test, O' Neil says, ?if the electricity market assumptions underpinning the financing prove to be flawed and market conditions deteriorate, the project goes in to lock up and pays down debt until an LLCR of a pre-agreed multiple is met.?
To further encourage an Australian project finance market that has undergone a period of contraction, the Milmerran deal also witnessed a deliberate effort to get gearing levels below 65%. Previously, in the Victorian energy sector privatization, assets were financed with gearing at 75%. At the same time, pricing and terms are at a premium to funding arrangements for the Victorian power plants.
According to the arrangers, the non recourse tranche has an annualized margin of 1.55% over BBSY during the construction period and a commitment fee of 50 basis points will apply to the tranche during construction. After the construction period, which under the terms of the financing will be a maximum of 40 months, InterGen will provide equity to repay the sponsored guaranteed equity tranche. At the same time, the non recourse tranche will convert into a A$397.66 million 5 year bullet tranche and an A$537.34 million 12 year fully amortizing term loan tranche. The margin for the bullet and amortizing term loan tranches will step up three times during the 12 year term. McIndoe says, ?we were very satisfied with the outcome, particularly given the problems in Victoria and the timeframe we set ourselves to complete the deal.?
McIndoe adds the transaction lends itself to refinancing when construction is complete or near-complete. InterGen envisage a long term refinancing of the bullet tranche using the capital markets. ?Then we will be hoping to achieve a term of 20 years plus,? the vice-president concludes.
Millmerran is scheduled to begin dispatching electricity in 2002. ANZ is facility agent, ABN Amro and NAB are joint syndication banks, CBA was responsible for the financial modeling and Bank of America acted as technical bank. The sponsor was advised by Freehill Hollingdale & Page. Allen Allen & Hemsley acted for the banks.
The A$1,462 million financing for the baseload plant was arranged by five joint leads, NAB, CBA, ANZ, Bank of America and ABN Amro, and was designed to give what Bank of America's John O'Neil calls crucial early mover advantage. InterGen and the five banks first got together to hammer out the deal in March 1999 and funds from the arrangers were committed by July. ?In my experience that's very quick for a deal of this size,? says McIndoe. The deal was finalized and closed three months later, on October 15, featuring an A$935 million non recourse tranche (eventually oversubscribed), and an A$527.6 million sponsor guaranteed tranche, financed on a club-deal basis.
In moving fast and by specifically targeting the big domestic lenders ANZ, NAB and CBA, InterGen was able to lock the alternative Queensland IPP schemes out of Australia's limited and consolidating project syndication market for several months. The proof of the strategy's success was there for all to see. When it became clear how advanced Milmeran's finance negotiations were, Entergy dropped its power supplier ambitions in the state.
The Millmerran deal featured a number of other distinctive elements. Perhaps the most noteworthy was that it was closed without any power purchase agreement or hedging contracts being in place, a unique departure in the Australian context.
What was therefore a 100% merchant risk deal came at a time when the privatized power assets in the state of Victoria were performing poorly, due in large part to an unforeseen and irrational bidding behavior in the Victorian electricity pool. Funding participants were only able to get comfortable with the deal because of structural arrangements that were new to the Australian context and, says Steve Zuckerman at ABN Amro, InterGen's pragmatic approach to pricing, terms and conditions. The two main distinctions were Millmerran's merchant reserving concept, which put debt service cover ratios on a more secure footing, and in a similar vein, the introduction of a second LLCR (loan to life cover ratio) test at the end of the construction period supplementing the standard LLCR test undertaken during financing.
The merchant reserving concept, seen before in UK project finance, kicks in if debt service coverage breaches a certain ratio. A mechanism within the project documentation then limits distribution of cash to the sponsor's shareholders until a more comfortable ratio is achieved.
Of the second LLCR test, O' Neil says, ?if the electricity market assumptions underpinning the financing prove to be flawed and market conditions deteriorate, the project goes in to lock up and pays down debt until an LLCR of a pre-agreed multiple is met.?
To further encourage an Australian project finance market that has undergone a period of contraction, the Milmerran deal also witnessed a deliberate effort to get gearing levels below 65%. Previously, in the Victorian energy sector privatization, assets were financed with gearing at 75%. At the same time, pricing and terms are at a premium to funding arrangements for the Victorian power plants.
According to the arrangers, the non recourse tranche has an annualized margin of 1.55% over BBSY during the construction period and a commitment fee of 50 basis points will apply to the tranche during construction. After the construction period, which under the terms of the financing will be a maximum of 40 months, InterGen will provide equity to repay the sponsored guaranteed equity tranche. At the same time, the non recourse tranche will convert into a A$397.66 million 5 year bullet tranche and an A$537.34 million 12 year fully amortizing term loan tranche. The margin for the bullet and amortizing term loan tranches will step up three times during the 12 year term. McIndoe says, ?we were very satisfied with the outcome, particularly given the problems in Victoria and the timeframe we set ourselves to complete the deal.?
McIndoe adds the transaction lends itself to refinancing when construction is complete or near-complete. InterGen envisage a long term refinancing of the bullet tranche using the capital markets. ?Then we will be hoping to achieve a term of 20 years plus,? the vice-president concludes.
Millmerran is scheduled to begin dispatching electricity in 2002. ANZ is facility agent, ABN Amro and NAB are joint syndication banks, CBA was responsible for the financial modeling and Bank of America acted as technical bank. The sponsor was advised by Freehill Hollingdale & Page. Allen Allen & Hemsley acted for the banks.
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