Financing for the Eu340 million ($449.8 million) Heron II power project, a 430MW combined cycle gas turbine (CCGT) plant in Thiva Greece, closed more than three years after first launching. The deal’s structure has changed significantly during this time, and evolved in response to both the international financial crisis and the Greek debt crisis. Heron II is the first CCGT plant in Greece and reached financial close through a hybrid financing, featuring full sponsor guarantees initially before switching to a project finance structure if certain conditions are met.

In 2007 GEK Terna secured a licence to develop a 400MW CCGT on the site of its already completed Heron I 147MW dual-fuel open-cycle gas turbine plant. In the same year the Greek government offered support to the nascent private power market by launching a tender on the basis of which power availability certificates would be bought by the grid operator, the Hellenic Transmission Systems Operator (HTSO). Bidding was based on the price at which these certificates would be bought by the HTSO.

Before bidding started, however, EFG Eurobank, which was advising the sponsors, indicated that their interests would be better served outside of the tender. Although the availability certificates were attractive, the contract’s penalty clauses rendered the project unworkable when coupled with a winning bid with a tight return on equity. GEK remained in the process, but EFG’s advice was vindicated when the Copelouzos group, the winner of the tender, was not able implement its plan.

GEK Terna originally planned to sell the power on the spot market, but it announced in June 2008 that it had an offtake agreement in place for a third of the plant’s power and was expecting financial close imminently. Documentation was near completion in August 2008, but the agreement fell through, with GEK Terna blaming the market outlook for power. Another change came in December 2008 when GEK Terna accept­ed a proposal from GDF Suez to buy a 50% stake in both the Heron I and Heron II power plants. This process was finalised in June 2009 and financing for the project reverted back to fully merchant risk. ­During 2009 Eurobank and Piraeus Bank also provided a Eu140 million bridge loan with a two-year tenor to cover construction costs.

Financing finally closed in November 2010, with EFG Eurobank, Emporiki Bank, Piraeus Bank and the EIB providing Eu203 million in debt. Fortis Bank was originally part of the commercial bank tranche but dropped out following its merger with BNP Paribas. The Eu150 mil­lion in senior debt is split 50:50 bet­ween the EIB and the commercial banks. The remaining debt is being provided by the commercial banks as a non-recourse VAT bridge financing with a three-year tenor. The tenor on the term loan is 13.5 years and the loan life coverage ratio (LLCR) is 1.75x. The minimum average debt service coverage ratio is 1.35x. There is no debt sculpting in place, however, and ADSCR forecasts are volatile due to erratic Ebitda projections. The debt to equity ratio is 50:50, with Eu150 million in equity.

GEK Terna and GDF Suez had both hoped to close the deal with a full project finance structure in place. Electricity market data projections were badly affected by the Greek financial crisis, however, and it was necessary to resort to a hybrid structure in order to reach financial close. Although the long-term financing has all the hallmarks of project financing, the two sponsors are required to provide full sponsor guarantees until certain conditions are met. GDF Suez is guaranteeing the EIB tranche and GEK Terna is guaranteeing the commercial tranche. The pressure for guarantees came largely from the EIB.

The conditions for the switch to project financing include: no event of default outstanding, historical and projected cover ratios met, minimum debt to equity ratio met and a minimum operational track record for the power plant met. During this final change of financing structure other aspects of the deal were renegotiated, including the debt to equity ratio, which had been set at 70:30 earlier in the year.

The pricing on the debt starts at 460bp over Euribor for the commercial banks with built in step-ups over time. There are also step-downs if the ADSCR is above a certain level and if the Hellenic Republic’s credit outlook improves. A 60% cash sweep is in place until Eu25 million of the debt is swept. There is an obligation for this to be achieved during the first seven years, after which the sweep is reduced to 30%. These sweeps allow the debt to be repaid more quickly if market conditions improve, with the life of the loan expected to be roughly 11 years.

The pricing on the EIB tranche, thanks to the GDF Suez guarantee, begins at 55bp before increasing to 200bp after the switch to full project financing. Margins would have been lower still if the deal had closed before the Greek debt crisis, but lenders have stressed that pricing was still cheaper than if the project had been initiated after the crisis.

Heron II may be the first CCGT plant in Greece to be delivered with long-term financing but it is unlikely to provide a financial template for pipeline projects such as the Edison led plant in Viotia. Other CCGT projects have no proposed EIB financing and, as it was the EIB that pushed for Heron’s hybrid structure, commercial lenders are likely to take on much more project risk. The financial close of Heron bodes well for these pipeline projects though, as the commitment of both the project sponsors and the commercial banks to close the deal after so many challenges suggests that there is sufficient liquidity coupled with a willingness to support significant developments in the energy sector.

Heron II also benefits from a long-term gas contract with state owned gas supplier DEPA for its feedstock. Construction on the Heron II power plant was completed in May 2010, the plant became operational in August and licence to operate was obtained during November. 

Heron II
Status: Financial close November 2010
Size: Eu340 million
Location: Greece
Description: Eu150 million in senior debt, Eu50 million VAT bridge.
Sponsors: GEK Terna (50%) and GDF Suez (50%).
Mandated lead arrangers: ERG Eurobank, Emporiki Bank, Piraeus Bank and the EIB.
Market adviser to the Lenders: Poyry
Sponsor legal counsel: Chadbourne & Parke and Potamitis Verikis
Lender legal counsel: Norton Rose and KGDI
Insurance adviser: Marsh
Lender technical: Scott Wilson and TUV Hellas
EPC contractor: Terna, with GE as the main equipment supplier