With its 527MW Cerro del Águila run-of-river hydro project, IC Power and Quimpac provided a template for amassing more than $500 million in debt without the benefit of a feed-in tariff, bond tranches or multi-lateral support. Perhaps more significantly, IC closed the financing during a period of debt market uncertainty.

IC, the power generation arm of Israel Corporation, and Quimpac closed a $591 million financing for the project on 17 August 2012, about two years after starting to talk to lenders. IC owns a 74.9% stake in $910 million Cerro del Águila, while Quimpac owns the rest.

IC mandated several banks, including BBVA, HSBC, Scotiabank, Société Générale, SMBC and WestLB, early in the financing process. “You get the banks involved in early so that they get to know us and the project,” says Pablo Eguiluz, project finance manager at IC and Inkia Energy, IC Power’s Latin American arm. The makeup of the bank group evolved, however, partly due to an expansion of the project’s scope and mostly because of the eurozone crisis. Crédit Agricole dropped out during a period when French banks struggled to attract long-term funding, while WestLB stopped making new loans about six weeks before the deal closed.

Scotiabank, BBVA, HSBC, SMBC, Banco de Crédito del Perú and Intesa Sanpaolo were bookrunners, while Interbank, DEG, FMO and SG were lead arrangers and COFIDE participated. SMBC was also the agent on the financing – and helped line up cover from Sace, the Italian export credit agency.

The two-tranche financing broke down into a 12-year commercial tranche that in turn consists of two sub-tranches, one fully amortising and one featuring a bullet, and the SACE-covered tranche. SMBC is providing the $65 million 15-year Sace-covered tranche. Pricing on the financing starts at 425bp over Libor. It also features a currency swap during construction. The swap protects Cerro del Águila against variations in the exchange rate between the Peruvian sole and the US dollar during this period, because a significant part of the engineering, procurement and construction contract is paid in soles.

Several banks started talking to IC soon after the sponsor won the public bidding for a power purchase agreement with Electroperú. Besides a PPA, the project had several other strengths: a short-tunnel – 11.7km in length – which reduces drilling risk; strong area hydrology, backed by a 45-year history; and growth in power demand in Peru, which has turned back to hydro after a short fixation on gas. Cerro del Águila, located in Huancavelica Department, will increase the country’s generating capacity by 7%.

IC, however, included additional enhancements to maximise commercial bank enthusiasm. So it signed a full engineering, procurement and construction contract with a consortium of Astaldi and Graňa y Montero. The consortium is building the plant under a $680 million contract. “Everything in the development process was done with the expectation of a project financing – and what banks like,” Eguiluz explains.

After the initial lenders signed on, the EPC consortium told IC that it could make the project larger. “At that point, the project had been fully financed, until the EPC said it could be larger,” Eguiluz says. “We had to attract new banks in the middle of the [Eurozone] crisis.” IC then signed an additional 10-year PPA with distributors Luz del Sur, Edelnor and Edecaňete. Between the two PPAs, 402MW of Cerro del Águila will be under contract, and the project will sell the output of the small uncontracted portion on the spot market. Cerro del Águila is expected to be operational in 2016.

The merchant component was not a significant concern for lenders, because most hydro projects tend to retain some merchant exposure. On a P50 revenue basis, the Cerro del Águila financing has a minimum debt service coverage ratio of 1.55x and an average DSCR of 1.65x.

The bullet commercial bank sub-tranche is designed to be refinanced. Indeed, IC expects to eventually refinance it, as well as its 556MW Kallpa gas-fired plant, in the capital markets. The Peruvian assets would first be rolled into a new holding company under IC.

That won’t be the first time institutional investors have been asked to help fund Cerro del Águila. In March 2011, IC priced a $300 million 144A senior bond issue to refinance existing corporate debt and raise about $150 million in equity for the hydro project. In total, IC and Quimpac contributed $319 million in equity to Cerro del Águila.

Cerro del Águila
STATUS
Closed 17 August 2012
SIZE
$915 million
DESCRIPTION
527MW run-of-river hydro project in Huancavelica, Peru
SPONSORS
IC Power (74.9%) and Quimpac (25.1%)
DEBT
$591 million
LEAD ARRANGERS
Interbank, DEG, FMO and Société Générale
BOOKRUNNERS
Sumitomo Mitsui Banking Corporation (agent), Scotiabank, BBVA, HSBC, Banco de Crédito del Perú, Intesa Sanpaolo
PARTICIPATING LENDER
COFIDE
EXPORT CREDIT AGENCY
Sace
OFFSHORE COLLATERAL AGENT & DEPOSITORY
Bank of Nova Scotia
ONSHORE COLLATERAL AGENT & TRUSTEE
Scotiabank Peru
SPONSOR LEGAL COUNSEL
Morrison & Foerster and Miranda & Amado
LENDER LEGAL COUNSEL
Milbank, Tweed, Hadley & McCloy and Rodrigo, Elias & Medrano
LENDER INSURANCE ADVISER
Marsh