F2i and AXA capped their run of success in buying Italian gas assets in October 2011 with a portfolio financing for the three businesses it has acquired since 2009. The series of acquisitions leaves the two sponsors’ holding company, Enel Rete Gas, with a roughly 20% share of the Italian retail gas market, second only to Eni.

The three-year acquisition, financing, and refinancing process, known internally as Project Fenice, took place against a changeable financing market backdrop. The Eu2.2 billion ($2.8 billion) was among the largest financings of any kind to close in Italy, and one of the largest asset-based leveraged financings anywhere in Europe, in 2011. The lending group supporting the duo held its nerve – not to mention its pricing – as conditions deteriorated over the year.

The combined business will have 3.8 million customers, distribute about 6 billion cubic meters per year and operate a grid of 57,000km. It holds concessions with over 2,000 municipalities to distribute gas, giving it an enormous number of government clients, but a hugely diverse stream of revenues.

The largest part of the business consists of the 80% of Enel’s distribution business that the two paid Eu1.5 billion for in September 2009, and funded through a Eu1.025 billion debt package. The two buyers financed that acquisition on a standalone basis with five- year debt, led by Banca IMI, Mediocredito Centrale, Mediobanca, Monte dei Paschi di Siena, JP Morgan Chase, Credit Agricole, SG, BNP Paribas, HSBC, Natixis and Banco Santander.

The original Enel Rete financing closed before the sponsors’ later run of success, and while, like any other bank financing, it could be refinanced as convenient, it did not explicitly set out how other assets would be accommodated. When the E.On Rete assets came up for bid, however, the sponsors started looking at how the businesses might be combined and they could produce synergies.

The financing for E.On Rete closed in April 2011. The E.On debt also had a five year term, but as an illustration of how debt market conditions had improved since 2009, pricing started at 225bp over Euribor, compared to the Enel debt’s 275bp. The long-term financing had margins pitched between the two, starting at 240bp over Euribor, rising to 375bp, but over a seven-year term. The upfront fees, at 200bp, are slightly lower than the 220bp on the original Rete deal.

The sponsors, however, were putting together a financing as market sentiment was beginning to turn demonstrably. When GDF’s G6 assets came on the market, the two sponsors, while knowing that their existing asset base would allow them to put in a competitive bid, had to decide whether to close the refinancing of all three at the same time as the acquisition of the third, or finance G6.

By the time F2i/AXA entered exclusive negotiations with GDF in May 2011, and after conducting a market-sounding, the two decided to accelerate the refinancing process, and tie in banks into the refinancing as soon as possible. According to Matteo Ambroggio, a partner in F2i’s investment group, the sponsor decided to lock in the deal’s economic terms by offering a ticking fee instead of remaining exposed to a downturn. Pricing in October would probably have come in 100bp-200bp wider, so the harder line on flex paid off.

The sponsors spoke to four banks – two US and two Italian – about using a smaller underwriting group but the commitment had too much flex. The sponsors have also entertained pitches for a bond deal, but incorporating capital expenditure facilities would complicate the structuring of a bond issue.

The borrower’s ability to retain its concessions depends on promising certain levels of capex, and a bond refinancing would make more sense when the three sets of assets have been better integrated and their capex burden is better understood. Enel, which retained a 20% stake in the Enel Rete business, saw its stake reduce to 15% after declining to participate in a equity call for the G6 acquisition.

The sponsors closed the refinancing with a 12-strong club of banks that exhibited considerable overlap with the existing group of lenders. The club comprises Credit Agricole and BancaIMI (documentation and coordinating banks), Bank of America Merrill Lynch and UniCredit (both modelling banks), HSBC (technical bank), BNP Paribas, ING, Mediobanca, MPS, Natixis, SG, and Centrobanca. Of the group, ING was the principal new addition, while Centrobanca joined late in the process for a comparatively small commitment.

The Eu2.2 billion debt breaks down into a Eu1.865 billion seven-year acquisition facility with an underlying amortisation profile of 22 years, a Eu300 million working capital facility and a Eu35 million revolving credit facility. Banks had few issues with the credit of the assets, and the debt amounts to only 65% of the businesses regulated asset value. The sponsors were also able to resist the imposition of a cash sweep for the first four years of the debt’s life.

The Eu2.2 billion was among the largest financings of any kind to close in Italy, and one of the largest asset-based leveraged financings anywhere in Europe, in 2011. The lending group supporting the duo held its nerve – not to mention its pricing – as conditions deteriorated over the year.

Enel Rete Gas
STATUS: Financial close 3 October, drawdown 4 October 2011
SIZE: Eu3 billion
DESCRIPTION: Portfolio refinancing of three Italian gas network businesses
SPONSORS: F2i (75%) and AXA (25%)
DEBT: Eu2.2 billion
MLAS: Credit Agricole and BancaIMI (documentation and coordinating banks), Bank of America Merrill Lynch and UniCredit (both modelling banks, HSBC (technical bank), BNP Paribas, ING, Mediobanca, MPS, Natixis, SG, and Centrobanca.
FINANCIAL ADVISER: Merrill Lynch SPONSORS’ LEGAL COUNSEL Gianni, Origoni, Grippo & Partners (M&A) and Ashurst (financing)
LENDERS’ LEGAL COUNSEL: Linklaters
TECHNICAL ADVISER TO G6 SELLER: Arup
TECHNICAL ADVISERS TO LENDERS: Poyry, Nera
SPONSOR MARKET CONSULTANT: BCG
VENDOR ACCOUNTING DUE DILIGENCE: PwC
BUYER ACCOUNTING DUE DILIGENCE AND MODEL AUDITOR: Deloitte
FISCAL ADVISER: Vitali