Financing documents for Senoko Power's S$2.35 billion ($1.69 billion) senior debt refinancing of its acquisition bridge facility closed in November 2009. The refi achieved a five-year non-recourse project financing despite the relative volatility of the merchant power cashflows backing the deal – banks are principally lending against a portfolio of merchant power assets and future capacity upgrades – and lack of bank appetite for lending at the time.

Senoko is Singapore's largest power generation company, having a licensed capacity of 3,300MW and providing about 30% of the nation's electricity needs. Although the sponsors had to deleverage the refinancing in the face of falling power demand to give banks comfort, they were also able to persuade lenders to accept low levels of scheduled amortisation in return for cash sweeps on excess cash to amortise the debt, thus allowing the sponsors and lenders to share the merchant risk equitably.

The refinancing included five-year senior debt of S$2.35 billion provided by a club of 16 banks and 8.5 year mezzanine bond debt of around $220 million from the Development Bank of Japan. The dollar-denominated bond was swapped into Singapore dollars. This is the first time DBJ had structured a subordinated loan for a borrower outside Japan.

The five-year S$2.35 billion debt includes a S$150 million revolver to fund working capital and carries a margin of 250bp for the first year, 300bp for the second year and 325bp for the remaining years.

In 2008 Singapore's incumbent generator Temasek sold all three of its gencos. The Senoko assets were bought by the Lion Power consortium comprising a stellar cast of developers, utilities and a financing powerhouse – GDF Suez, Marubeni, Kansai Electric, Kyushu Electric and JBIC. Lion Power signed the share purchase agreement on September 5 2008 and completed the transaction on September 12 2008.

The bridge financing comprised S$2.8 billion in term loans and S$100 million in working capital. The tenor was 1.5 years, with a maturity date in March 2010.

Despite the strength of the sponsor group, demand in the Singaporean power market contracted along with domestic GDP which fell at an annualized rate of 16.4% in the last quarter of 2008. This meant a fall in Ebitda for Senoko that resulted in a technical breach of covenants on the bridge. Rather than seek a waiver, that would have pushed the all-in cost of the bridge upwards of 300bp from around 170bp, the sponsors decided to opt for a longer term refinancing, but on a less levered basis, incorporating DBJ sub-debt and equity.

Immediately after the acquisition, Senoko Power launched its Stage 2 repowering programme, and announced that it would invest about S$750 million to convert three 250MW oil-fired power plants into two 430MW gas-fired combined cycle plants. The repowering cost is met by a pre-existing ¥67 billion repowering loan facility, not included in the original project financing or subsequent refinancing, and provided by BTM and Mizuho with full recourse to the sponsors. Although the market would not have accepted additional leverage, the repowering contracts were signed before the Temasek sale so could not be combined into a project financing.

The repowering will use Mitsubishi's latest gas turbines, which are at least 2% more efficient than Senoko Power's existing combined-cycle plant. The re-use of existing equipment and infrastructure means that the construction cost of the new plant is 40% lower than that of a comparable greenfield development.

Lenders had to get comfortable with feedstock especially as Senoko Power relies on LNG to partly fuel the plant, which would need to be imported at a price yet to be determined via an LNG terminal that had yet to be built.

This risk was difficult to mitigate directly and lenders ultimately relied on the experience and track record of the sponsors: GDF Suez and Marubeni are experienced buyers and traders of LNG, and Kansai Electric Power and Kyushu Electric Power are large LNG consumers. Also, since the Singapore government's emphasis on LNG imports and a moratorium on natural gas imports for power generation was ultimately a security issue, the lenders came to the view that the government would ensure that the cost differential between piped natural gas and LNG would not unduly disadvantage generators that needed to rely on LNG.

The balance of multi-tiered debt and the interests of senior and mezzanine hedge counterparties led to complex intercreditor arrangements. Chief among them was the agreement to keep the sub-debt provider DBJ comfortable with its position vis-à-vis the senior debt providers. DBJ was persuaded to lend longer than the senior creditors by being strategically placed in the cash waterfall: DBJ is paid its debt service after scheduled senior debt service but prior to any senior claims on excess cashflow.

One of the most challenging aspects about the deal, aside from the market conditions and intercreditor arrangements, stemmed from the fact that the bridge loan was made at the holding company level to allow the consortium to purchase the shares in Senoko Power from Temasek. In order to achieve a more efficient structure, so that the debt was raised at operating company level, an asset restructuring was required.

Ultimately the refinancing took place before the asset restructuring, which required the banks to first lend to the holdcos for the takeout financing, then lend an equivalent amount to Lion Power in order for the asset restructuring to take place before being repaid by the holdcos, resulting in an intra-day double exposure.

Senoko Power refinancing
Status: Closed November 2009
Description: Refinancing of an acquisition bridge for one of Singapore's gencos
Sponsors: GDF Suez SA (30%), Marubeni Corporation (30%), Kansai Electric Power Co Inc (15%), Kyushu Electric Power Co Inc (15%), Japan Bank of International Cooperation (JBIC) (10%)
Financial adviser: Macquarie Capital
Mandated lead arrangers: Bank of Tokyo-Mitsubishi UFJ, DBS Bank, Oversea-Chinese Banking Corporation, Sumitomo Mitsui Banking Corporation, Calyon, Mizuho, Natixis, Societe Generale, BNP Paribas, Fortis, ING, Australia and New Zealand Banking Group, KBC, Royal Bank of Scotland, National Australia Bank, Sumitomo Trust
Lender legal counsel: Allen & Overy, TSMP
Borrower legal counsel: Latham & Watkins, Rajah & Tann
DBJ legal counsel: Clifford Chance
Sponsors' market consultant: ACIL Tasman
Lenders' market consultant: IPA Energy + Water Economics
Technical adviser: Parsons Brinckerhoff
Insurance: Marsh