The result is pent up demand for well structured deals with good sponsors, and this appetite was recently demonstrated with the loan syndication for Exeltium, the so called ‘virtual power project’, which was a blowout at the senior debt level.

Exeltium is a special purpose vehicle that buys bulk power from Electricite de France (EDF) and sells it on to its shareholders, who are a group of major industrial electricity users looking to ensure long term electricity supplies. The unusual nature of the transaction makes it hard to categorise, but it was targeted at major power banks that understand the risks involved.

Meanwhile the syndication for the Toul Combined Cycle Gas Turbine power plant in eastern France also illustrates the strong bank appetite for power deals.

The sponsor is Poweo Toul Production, a joint venture between Poweo of France and Austrian hydro specialist Verbund. Poweo has been fighting hard to weaken the strong grip that EDF has on the French electricity market (where it still has an 85% market share) and has complained that the process of opening up the market is too slow.

The Toul sponsors are building a 420MW Combined Cycle Gas Turbine plus a 28km pipeline connection to the national gas system. Construction will start later this year and will take 30 months. There is a 20-year power purchase agreement (PPA) with Poweo. Clifford Chance acted for the lenders.

Financial advisor Credit Agricole went out into the market in March and received a very strong response from banks on syndication of the 20-year term loan. “It was a good quality deal with a good sponsor, and there are not a lot of similar deals round at the moment, so a positive response was expected,” comments one syndicate member. “But the demand was massive.”

The financing had originally been planned with a European Investment Bank (EIB) tranche, which was a sensible approach in 2009 because of the tremendous uncertainty in the financial markets. The EIB was looking to provide as much as Eu190 million of the total Eu485 million debt package.

But appetite was so strong that sponsors now have the option of using 100% commercial bank debt. Bypassing the EIB would certainly make the commercial bankers happy, given that the EIB can often be a complicating factor on deals, and slow them down.

At time of going to press the sponsor was looking at the various options available, and deciding whether or not to involve the EIB. “They are spoilt for choice,” says the syndicate member.

Exeltium

Exeltium is an unusual transaction in that it can viewed as part of France’s overall industrial and nuclear energy strategy.

The starting point for the concept was that, as deregulation of EU electricity markets proceeded, many large industrial users in France actually experienced an increase in prices. This left some of them questioning whether it might not be better to move some very energy intensive processes outside of France, which was a worrying development for the government already deeply concerned about unemployment.

The solution is Exeltium, which provides long-term bulk electricity supplies to a group of corporates while at the same time complying with EU competition rules (since very large long term bulk contracts can clearly impact the overall market). The long term power purchase agreements also tie-in big customers to EDF for much of their energy needs, and these contracts plus some upfront payments in turn helps EDF plan its investment drive in the nuclear sector.

“The Exeltium transaction is designed to give electro-intensive industrial companies in France better long term visibility on what their electricity costs will be, as well as cheaper bulk prices,” says Simon Ratledge, partner at Linklaters in Paris, which acted as counsel to the lenders.

Exeltium is a special purpose vehicle that buys electricity from EDF and then sells it on to the 26 shareholders. The main corporates in the deal are Air Liquide, Arcelor Mittal, Arkema, Rhodia, Rio Tinto Alcan, and Solvay. Twenty other companies had joined by closing. EDF sells the power via take or pay contracts to the Exeltium SPV, which then sells the power on to the shareholders on long term contracts out as far as 24 years.

EDF had won the Exeltium public tender back in 2007, hardly surprising since it was the only French player realistically capable of meeting the vast electricity demands within the contract. There were suggestions that other power providers might come in on the deal with EDF, but this did not eventually happen.

The basic structure had been agreed as far back as 2005, but had to be restructured twice, first to meet the demands of the Directorate General for Competition at the European Commission, and second to meet the concerns of EDF. With both the EU and EDF comfortable with the Exeltium structure, the global financial crisis then intervened, making it unrealistic to proceed with a sizeable bank debt syndication in chaotic markets.

But by 2009 the deal was moving again, albeit in a scaled down version, and by the first quarter of 2010 it was ready for syndication. It was targeted at the major project finance banks involved in the power sector, who are familiar with some of the risks involved.

One interesting factor is that the 26 electricity users can opt out of the deal after ten years, which inevitably raised concerns among some potential lenders.

This has been mitigated by risk sharing, with EDP taking around half of this risk, and the other half dealt with via the use of hedging instruments. But bank lenders are still exposed to counterparty risk should a major offtaker go into bankruptcy during the initial life of the contract, so the creditworthiness of each offtaker was closely examined. During this first ten years, if a major offtaker fails to take its stipulated allotment of power, then the surplus can be sold into the market, so there is also some electricity price risk.

The opt-out clauses were a factor in moving away from trying to syndicate a 17-year bank loan in what was already viewed as a difficult market. Instead the issue of opt out contracts has been pushed out to be addressed in the future, since the current financing is for a 9.5-year term.

This could potentially make a future refinancing more complicated, since it will come at a point where the opt-out clauses are imminent, and could have a major impact on cashflow forecasts. But the sponsors are comfortable that a refinancing will be possible. It is important to note the political support for the transaction, and the presence of four heavyweight French banks as Mandated Lead Arrangers; BNP Paribas, Credit Agricole CIB, Natixis and Societe Generale.

They came to market with Eu1.59 billion of 9.5-year senior bank debt, while a Eu233 million mezzanine bond has been placed with Caisse des Depots et Consignations. A share capital increase of Eu175 million completed the necessary funding.

In addition to the four original Mandated Lead Arrangers, three additional banks eventually came in as MLAs; Banca IMI, Bank of Tokyo Mitsubishi and Santander. Dexia, Banesto and ING came in with arranger roles.

“There is already a lot of interest in secondary, and we have had reverse inquiries from banks who would like to come in on the transaction,” comments a banker on the deal.

“In the downstream contract the purchasers have the right periodically to opt out of the deal, starting from year ten, and various mechanisms were found to mitigate the risks associated with potential opt out,” says Ratledge at Linkaters. “There are also mechanisms to encourage refinancing before the end of the 9.5-year loan, and the structure includes excess cashflow sweeps to repay debt, which quite rapidly build up to 100% excess cashflow sweep.”

Renewables

Appetite from bank lenders is also strong in the renewables sector, which is going to be a major area of business in France in the coming years given the ambitious targets that France has set itself. The goal is 23% of gross final consumption of energy from renewable sources by the year 2020. This was set out in a directive in April 2009. The specific renewable energy law was passed back in 2000, and has been amended several times since.

The overall targets include 5400MW of total installed solar generation by 2020, and 25,000MW of wind facilities including 6000MW offshore, 3000MW of which is to be tendered in September with projects due to be selected in mid-2011. Those targets are viewed in some circles as ambitious, especially since new legislation currently being negotiated by lawmakers (known as Grenelle 2 after the Paris district that houses the Ministry of Ecology, Energy, Sustainable Development and Territorial Planning) actually increases the bureaucracy for onshore wind developments.

“EDF and other grid operators are obliged to buy energy from renewable sources at preferential tariffs set by decree,” says Francois April, partner at Linklaters in Paris. “The PPAs are related to the amortisation period of the relevant assets, which is 15 years from commissioning for wind power and 20 years for photovoltaic.”

“There have been some recent changes in photovoltaic tariffs,” says April. “For example, ground PV tariffs have been slightly reduced from 32.83 Euro cents per kWh in 2009 to 31.4 cents per kWh in 2010 in order to reflect the decrease in prices for PV modules,” says April. “The new photovoltaic tariffs were adopted in January, and at the same time the inflation adjusted part of the tariff over the life of the PPA was reduced from 60% to 20%. However photovoltaic tariffs are still viewed as attractive by sponsors, and the feed-in tariff is a bankable structure, so we are seeing a significant amount of project lending in the renewables sector.”

One recent deal involves a 315MW portfolio of solar projects being developed by EDF Energies Nouvelles (EDF EN), the renewable energy subsidiary of EDF. The overall project is known as Zelios, and comprises solar plants in Italy as well as in France. Two pathfinder projects within the portfolio, located in Gabardan in the French department of Landes, have already been financed.

The EIB has allocated Eu500 million to the 2010 to 2012 Zelios investment programme, representing around 50% of total financing. The balance is being provided by commercial banks, and four banks have come in as senior lenders on the framework agreement alongside EIB. These are BBVA, BNP Paribas, Dexia and Societe Generale. Linklaters acted for the senior lenders.

French wind power and solar power is also benefiting from equity investment at the retail level in Germany, via the so-called KG closed end funds. Renewable energy funds with high returns and tax efficient are popular with German investors who can buy units as small as Eu10,000. One recent deal being placed goes under the name White Owl Capital AG, and involves existing PV facilities in France. The fund is placing Eu30 million of equity, with Eu98 million of debt.