The Mexican independent power project market sustained many New York-based power bankers during some lean years early in the last decade. Japanese, Canadian, French and US developers brought deals to market that asked lenders to accept varying degrees of offtake and fuel risk before a slowing of power demand, and sponsor preference, sent fewer deals banks’ ways.

While Mexico’s state power company, the Comision Federal de Electricidad, and state oil and gas company, Pemex, struggled to allocate fuel risk between them, sponsors found it easier to raise corporate, or corporate-guaranteed, debt, to fund capacity additions. Even the CFE preferred to finance capacity on balance sheet using build-finance obras publicas financiadas structures.

In the intervening period Pemex produced a cogeneration plant financing that closed in the teeth of difficult debt markets, with a 6.5-year tenor and heavy participation of Mexican development bank Banobras, and the CFE was anchor tenant for a liquefied natural gas terminal financing for the Manzanillo terminal, which had a 14-year tenor, and heavy involvement from the Export- Import Bank of Korea (Kexim). Compounding this reversal of roles was the disparity between the tenors that the two projects were able to achieve.

The Norte II financing shows that recent years have not dimmed lenders’ willingness to stretch their tenors for the right credits, though the deal, small in its own right, has a comparatively small component that does not feature export credit agency cover. The common feature of Norte II and Manzanillo and the reason for this competition between lenders, is the presence of Korean sponsors.

Norte II’s sponsors are Korea Electric Power (Kepco, 56%), Samsung C&T (34%) and Techint (10%). Techint is a well-regarded local player, and together with Samsung is the project’s engineering, procurement and construction contractor, but the financing leans heavily on the Korean connection. It allowed the project to achieve the longest tenor ever for a Mexican IPP, and incorporated an equity bridge that does not get refinanced with sponsor equity until completion.

The three sponsors and their financial adviser, WestLB, assembled a debt package that breaks down into a $174 million direct loan from Kexim, $86 million Kexim-guaranteed tranche and $65 million uncovered tranche. The covered and direct loans have 23-year tenors, and the uncovered debt has a 20-year tenor.

The two commercial banks on the deal are Credit Agricole CIB and Sumitomo Mitsui Banking Corporation The takes between the two commercial lenders vary, with Credit Agricole taking $24.84 million of the covered loan and SMBC $61.16 million, while Credit Agricole takes $50.14 million of the uncovered piece to SMBC’s $14.86 million.

SMBC originally supported the losing Mitsubishi/Kyushu bidding group, but was able to switch quickly to being lead on a Kexim- driven deal because it has a branch in Seoul, a rarity even for international project finance lenders. Credit Agricole has a long history of operating in the Mexican market, and is comfortable with the credit of the CFE. The CFE is buying power from the plant under a 25-year power purchase agreement, and assuming all fuel risk. The deal also features a cap on the payments due from the CFE in the event of a termination in the PPA, but this is believed to be at a level sufficient to keep lenders whole.

Though the tenor on the debt comes close to the end of the power purchase agreement, pricing and coverages are keen. The deal’s minimum debt service coverage ratio is 1.25x, and it has a 2.5-year grace period for construction. Pricing on the uncovered debt starts at 230bp over Libor during construction, increases to 250bp in years 1-5, then to 270bp for years 6-10, and finally to 290bp in year 11 to term. On the guaranteed tranche pricing is 150bp pre-completion, 175bp in years 1-10, and 200bp thereafter.

The 433MW gas-fired combined cycle plant is located in the state of Chihuahua, in northern Mexico. The CFE plans to serve the plant with a new pipeline, for which Fermaca is preferred bidder. But the region has been one of the parts of Mexico worst affected by an upsurge in drug-related violence. The immediate vicinity of the plant has so far avoided the effects of the violence, though it has been little more than a brake on the pipeline’s development. It is more likely to be a factor in future financings if the federal government cannot keep a lid on the problem.

For now the financing for Norte II is a boost to the prospects for Mexico’s power sector, an important demonstration of what the independent sector can achieve after a delay of a year to bids on Norte II, and with 288MW Baja California III and 683MW Norte III still to be awarded. Fermaca’s financing for the Chihuahua pipeline, still coping with the withdrawal of Samsung, but with the support of lenders ING, BTMU, Mizuho, Credit Agricole and Bancomext, is next up in the market.

Norte II IPP
STATUS: Closed 11 March 2011
SIZE: $395 million
DESCRIPTION: 433MW natural gas-fired combined-cycle IPP - located in the state of Chihuahua, Mexico
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)
SPONSOR LEGAL COUNSEL: Linklaters (international); Gonzalez Cavillo (local) LENDER LEGAL COUNSEL Milbank (international); Lopez Velarde (local) INDEPENDENT ENGINEER: SAIC
INSURANCE ADVISER: Moore-McNeil
EPC CONTRACTOR: Techint
EQUIPMENT SUPPLIERS: Siemens and GE
DEPOSITARY AGENT: Deutsche Bank