Korea Electric Power (Kepco), Samsung C&T and Techint closed the $395 million financing for the 433MW Norte II independent power project in Mexico on 11 March. The deal is the first non-recourse financing for a Mexican IPP for several years, and the first under a new termination regime that exposes lenders to greater performance risk than earlier versions.

The deal is notable for Kexim involvement, which allowed the sponsors to benefit from a longer tenor of 21 years than would have been possible with just commercial lenders. Many market participants also say the deal demonstrates a growing Kexim interest in projects in the Americas, though the financing is far from its first in the region.

The US dollar-denominated financing includes $325 million in debt and $70 million in equity. Kexim provided a $174 million direct loan and guaranteed an $86 million loan from Credit Agricole CIB ($24.84 million) and Sumitomo Mitsui Banking Corporation (SMBC, $61.16 million). The same lenders provided a $65 million uncovered credit facility, with $50.14 million coming from Credit Agricole and $14.86 million from SMBC.

The tenor on the uncovered tranche is 20 years door-to-door and 21-years and 10-months for the covered and direct loan tranches. The grace period on all three is two years and six months, or construction. The debt finances construction of the plant and repays an $85 million corporate guaranteed bridge loan that the two lead commercial banks closed in December 2010. The equity split is 56% Kepco ($39.2 million), 34% Samsung ($23.8 million) and 10% Techint ($7 million).

The long tenor is its most notable characteristic of the financing. At nearly 22 years, it is one of the longest ever for an power project in Mexico and the longest by a wide margin since the credit crunch in 2008. For example, Banco Espirito Santo, Banco Santander, Credit Agricole and HSBC Mexicos $460.1 million loan to Abengoa and GE Energy Financial Services 300MW Nuevo Pemex cogen plant closed with a tenor of only 6.5 years in June 2010. One banker who worked on the deal says the tenor was a breakthrough for the Mexican power project financing market though they acknowledged that it was one of the most difficult aspects of the deal for lenders to digest.

Norte II is also the first IPP with a cap on the amount that that the offtaker, the Comision Federal de Electricidad, Mexicos state power company, must pay in the event of a termination of the projects power purchase agreement. On the last CFE-awarded IPP, the 450MW Norte I combined cycle plant that was awarded to Union Fenosa in March 2007, no limit was placed on how much the CFEs liability, potentially making it responsible for all of the project debt in the case of a default on either side. On Norte II, the concession agreement includes a specific price at which CFE would buy out the plant in the event of a default.

Pricing on the debt is also lower than on other recent deals, and though most of this reduction is down to Kexims involvement, there has been some downward movement on the uncovered pricing too. The uncovered commercial tranche begins at 230bp over Libor during construction, before stepping up to 250bp over Libor during years one to five of operations, in year six it steps to 270bp over Libor before maxing out at 290bp in year 11. The guaranteed tranche is priced at 150bp over Libor during construction, 175bp over Libor for years one to 10 of operations and 200bp over Libor from year 11 to maturity. The minimum debt service coverage ratio is 1.25x. By comparison, pricing on the debt for Nuevo Pemex started at 412bp over Libor, and increased to 462bp over Libor at maturity.

The Norte II financing is only the second time Kexim has covered a Mexican project financing. The first was time was for Korea Gas, Mitsui and Samsungs $876.4 million Manzanillo LNG financing that closed in December 2009. Kexim accounted for 70% of Manzanillos 14-year project debt, providing a $262.1 million direct loan and guaranteeing a $214.4 million loan from Bank of Tokyo Mitsubishi UFJ, BBVA, Credit Agricole, Development Bank of Japan and Standard Chartered Bank. BBVA, Credit Agricole, Mizuho and SMBC provided an uncovered $204.2 million loan and the sponsors contributed $195.7 million in equity. Pricing on that deal started at 320bp over Libor before rising to 370bp over Libor over the life of the debt.

CFE began procuring the 25-year Norte II plant in December 2008. At least 17 bidders expressed interest in the contract, including Abener, Alstom, Cobra, Endesa, GE, ICA-Fluor Daniel, Iberdrola, Iberinco, Mitsubishi, Mitsui, Prolec, Samsung C&T, Senermex Ingeniera y Sistemas, Siemens Energy, Suez Energia, Unin Fenosa and Techint. Final technical and economic bids were due in June 2010 after being delayed a year from the original procurement timeline. Kepco, Samsung C&T and Techint were awarded the concession on 9 August 2010.

The offtaker is currently in the process of bidding out the 288MW Baja California III IPP, which will be awarded before the end of 2011, and plans to begin procurement of the 683MW Norte III plant in the near future. If Baja is awarded to a Korean firm Samsung C&T has already expressed interest in the tender market participants expect Kexim to be involved in the financing.

Norte II is located in southern Chihuahua state, near the city of the same name. Participants in the financing say drug cartel-related violence in the northern part of the state did not significantly impact the debt package. The offtaker will purchase the plants full capacity under a 25-year power purchase agreement. Final projects cost came in roughly $25 million less than the sponsors original $420 million bid due to a cheaper than expected engineering, procurement and construction contract with Samsung C&T and Techint. Construction has already begun on the plant and is scheduled to be complete in 2013.

WestLB was financial adviser and Linklaters was legal counsel to the sponsors. Milbank was legal counsel to the lenders. Siemens and General Electric are supplying equipment to the plant.

Norte II IPP
Status: Closed 11 March 2011
Size: $395 million
Location: State of Chihuahua, Mexico
Description: 433MW natural gas-fired combined-cycle IPP
Offtaker: Comision Federal de Electricidad (CFE)
Sponsors: Korea Electric Power (Kepco, 56%), Samsung C&T (34%) and Techint (10%)
Equity: $70 million
Debt: $174 million Export-Import Bank of Korea (Kexim) tranche, $86 million guaranteed tranche and $65 million un-guaranteed tranche
Lenders: Credit Agricole, Kexim and Sumitomo Mitsui Banking Corporation
Financial adviser: WestLB (sponsors)
Legal counsel: Linklaters (sponsors), Milbank (lenders)
EPC contractor: Techint
Equipment suppliers: Siemens and GE