Manx deal makes first splash
The Isle of Man interconnector deal has offered a rare chance for
financiers to do a deal on the UK island. The £45 million ($72
million) project was on the cusp of being too small to merit
project financing but would have been a burden on balance sheet for
the Manx Electricity Authority.
HSBC won the bidding to arrange financing, beating competition from all the other bank's on the island including Lloyds TSB, Isle of Man Bank ? NatWest's offshore subsidiary ? Barclays, Royal Bank of Scotland, Flemings and ING Barings. HSBC has arranged £36 million of debt to finance the deal. The loan which has been negotiated is only likely to have a tenor of between two and five years.
But while the deal has been financed through a project loan the debt is going to be transferred to a bond issue, the question is when?
The most likely timing is after the commissioning of the cable in October 2000, although bankers are likely to push to bring this forward. The removal of the construction and commissioning risk promises tighter margins for the Manx Cable Company (MCC), the 50/50 joint venture set up between the Manx Electricity Authority (MEA) and National Grid, to develop the project. Says Brian Machin, chief executive of the MEA in London: "We discuss the timing of the bond at our board meetings every three months and my gut feeling is that we will get the tightest possible terms if we take the commissioning risk out of the equation. Once the cable is on the seabed the bond is secure."
A 30-year concession agreement has been signed between the Manx Cable Company and the government with an option to extend for a further 10 years. As soon as the cable begins delivering power the revenue streams are guaranteed.
HSBC is the most likely bank to act as bookrunner for the issue although the decision will be put to an independent financial adviser who will decide whether MCC should go for another competitive tender or continue with HSBC. In the meantime there will be no sell down of the debt. Says Huw Zachariah, manager in project finance at HSBC in London: "In the expectation that a bond issue will take place we are happy to hold all the debt on our books; sell down just complicate it."
The pricing has not been disclosed by MCC and has been kept confidential from the press on the island. One of the reasons behind this is that at least three of the banks offered the same pricing but HSBC pipped them to the post. Says Machin: "HSBC approached us with a very professional team and a cradle-to-grave approach." Another reason that MCC is keen not to upset the island's banks is that it may yet approach them to launch the project bonds.
The choice of an interconnector cable had much to recommend it to the MCC when it decided to address the island's need for power. Says Machin: "We looked at all sorts of power stations and generation methods including bringing in oil and gas. It offers the security of tying us into the UK and European network and we don't need to worry about the heights of chimneys or how much land a power plant would take."
The cable also provides flexibility and offers MCC the chance to sell power back onto the grid.
Once the cable had been chosen as the solution the options available for financing, excluding an on-balance sheet deal which was too heavy a commitment for the MEA, were between project finance or government funding. Says Machin: "Government funding was not realistic as we had a UK partner and we realised we could get good terms on a project finance deal because of the inherent security of the deal."
Despite MCC's status as an Isle of Man company National Grid is a UK company which meant that both the Isle of Man and UK legal systems had to be adhered to. Says Craig Jones assistant in the project group at law firm Norton Rose in London which acted for HSBC: "People do not realise that the Isle of Man is an independent territory with a foreign jurisdiction. One cross border issue is the risk of a change in the law on the Isle of Man which might have an effect on the project. Although we do not expect that this will happen, things that happen in Westminster do not necessarily affect things that happen in the Tinwald, the Isle of Man's parliament."
The question was how the risk should be allocated? Says Ann Bradby, commercial manger for interconnections at National Grid: "The risk was placed where it could be most fairly dealt with. It was felt the risk could be influenced by someone resident in the Isle of Man then it would be allocated there. We used a common sense approach."
Construction of the 100km cable is already underway Southampton and Erith. Norweb, the North West arm of the national grid, is also doing construction work to prepare the landing site at Bispan on the north west coast of England.
Its is unlikely that this project will open the flood gated for project finance deals in the Isle of Man. Says Machin: "If you asked me whether I would do it all again I would say yes. But only if we could find a simpler way of sorting out the due diligence and conditions precedent. If the government decides to bring gas to the island then we will build a gas-fired power station, but it won't be as expensive as the interconnector and I doubt we would use project finance."
Manx interconnector
Project company: Manx Cable Company (MCC), a 50/50 joint venture between the Manx Electricity Authority (MEA) and National Grid.
Lead arranger: HSBC
Total cost: £45 million ($72 million)
Project debt: £36 million
Tenor: Initial tenor of between two and five years with option to convert to bond issue.
Description: 100km, 40MW AC cable from Bispan UK to Douglas Isle of Man. When complete it will be the longest AC cable in the world as cables carrying higher wattages must be converted to DC.
Commissioning date: October 2000
Lawyers: Allen & Overy for MCC, Herbert Smith for MEA, Norton Rose for HSBC and White & Case for National Grid.
Contractor: Pirelli BICC is constructing the cable
HSBC won the bidding to arrange financing, beating competition from all the other bank's on the island including Lloyds TSB, Isle of Man Bank ? NatWest's offshore subsidiary ? Barclays, Royal Bank of Scotland, Flemings and ING Barings. HSBC has arranged £36 million of debt to finance the deal. The loan which has been negotiated is only likely to have a tenor of between two and five years.
But while the deal has been financed through a project loan the debt is going to be transferred to a bond issue, the question is when?
The most likely timing is after the commissioning of the cable in October 2000, although bankers are likely to push to bring this forward. The removal of the construction and commissioning risk promises tighter margins for the Manx Cable Company (MCC), the 50/50 joint venture set up between the Manx Electricity Authority (MEA) and National Grid, to develop the project. Says Brian Machin, chief executive of the MEA in London: "We discuss the timing of the bond at our board meetings every three months and my gut feeling is that we will get the tightest possible terms if we take the commissioning risk out of the equation. Once the cable is on the seabed the bond is secure."
A 30-year concession agreement has been signed between the Manx Cable Company and the government with an option to extend for a further 10 years. As soon as the cable begins delivering power the revenue streams are guaranteed.
HSBC is the most likely bank to act as bookrunner for the issue although the decision will be put to an independent financial adviser who will decide whether MCC should go for another competitive tender or continue with HSBC. In the meantime there will be no sell down of the debt. Says Huw Zachariah, manager in project finance at HSBC in London: "In the expectation that a bond issue will take place we are happy to hold all the debt on our books; sell down just complicate it."
The pricing has not been disclosed by MCC and has been kept confidential from the press on the island. One of the reasons behind this is that at least three of the banks offered the same pricing but HSBC pipped them to the post. Says Machin: "HSBC approached us with a very professional team and a cradle-to-grave approach." Another reason that MCC is keen not to upset the island's banks is that it may yet approach them to launch the project bonds.
The choice of an interconnector cable had much to recommend it to the MCC when it decided to address the island's need for power. Says Machin: "We looked at all sorts of power stations and generation methods including bringing in oil and gas. It offers the security of tying us into the UK and European network and we don't need to worry about the heights of chimneys or how much land a power plant would take."
The cable also provides flexibility and offers MCC the chance to sell power back onto the grid.
Once the cable had been chosen as the solution the options available for financing, excluding an on-balance sheet deal which was too heavy a commitment for the MEA, were between project finance or government funding. Says Machin: "Government funding was not realistic as we had a UK partner and we realised we could get good terms on a project finance deal because of the inherent security of the deal."
Despite MCC's status as an Isle of Man company National Grid is a UK company which meant that both the Isle of Man and UK legal systems had to be adhered to. Says Craig Jones assistant in the project group at law firm Norton Rose in London which acted for HSBC: "People do not realise that the Isle of Man is an independent territory with a foreign jurisdiction. One cross border issue is the risk of a change in the law on the Isle of Man which might have an effect on the project. Although we do not expect that this will happen, things that happen in Westminster do not necessarily affect things that happen in the Tinwald, the Isle of Man's parliament."
The question was how the risk should be allocated? Says Ann Bradby, commercial manger for interconnections at National Grid: "The risk was placed where it could be most fairly dealt with. It was felt the risk could be influenced by someone resident in the Isle of Man then it would be allocated there. We used a common sense approach."
Construction of the 100km cable is already underway Southampton and Erith. Norweb, the North West arm of the national grid, is also doing construction work to prepare the landing site at Bispan on the north west coast of England.
Its is unlikely that this project will open the flood gated for project finance deals in the Isle of Man. Says Machin: "If you asked me whether I would do it all again I would say yes. But only if we could find a simpler way of sorting out the due diligence and conditions precedent. If the government decides to bring gas to the island then we will build a gas-fired power station, but it won't be as expensive as the interconnector and I doubt we would use project finance."
Manx interconnector
Project company: Manx Cable Company (MCC), a 50/50 joint venture between the Manx Electricity Authority (MEA) and National Grid.
Lead arranger: HSBC
Total cost: £45 million ($72 million)
Project debt: £36 million
Tenor: Initial tenor of between two and five years with option to convert to bond issue.
Description: 100km, 40MW AC cable from Bispan UK to Douglas Isle of Man. When complete it will be the longest AC cable in the world as cables carrying higher wattages must be converted to DC.
Commissioning date: October 2000
Lawyers: Allen & Overy for MCC, Herbert Smith for MEA, Norton Rose for HSBC and White & Case for National Grid.
Contractor: Pirelli BICC is constructing the cable
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.