The refinancing of the Castor gas storage project off the coast eastern Spain was one of the most significant deals in European energy finance in 2013. It marked the debut of the project bond credit enhancement product from the European Investment Bank (EIB).

Watercraft Capital SA/Escal UGS

STATUS

Priced 25 July 2013

SIZE

€1.7 billion

DESCRIPTION

1.9 billion cubic feet gas storage facility located

15km off the coast of Spain

SPONSORS

ACS (67%); Castor UGS (33%, with Dundee Energy representing 74% of that shareholding)

EQUITY

€252 million

DEBT

€1.43 billion

BOOKRUNNERS

Bankia, BNP Paribas, La Caixa, Cré́dit Agricole, Natixis, Santander, SG

MATURITY

2034

COUPON

5.76%

PROJECT BOND ENHANCEMENT

EIB

MONITORING ADVISER

Trifinium

SPONSOR LEGAL COUNSEL:

Watson Farley & Williams

BOOKRUNNER LEGAL COUNSEL

Allen & Overy (Luxembourg, English and Spanish law)

EIB LEGAL COUNSEL

Clifford Chance

TRIFINIUM LEGAL COUNSEL

Ashurst

INDEPENDENT ENGINEER

Gaffney Cline

INSURANCE ADVISER

Willis

MODEL, ACCOUNTING AND TAX ADVISER

Deloitte

Special purpose vehicle Watercraft Capital issued €1.43 billion in bonds, and lent the proceeds on to project company Escal UGS, the concession company for the construction and operation of an underground gas storage facility. The concession company used the proceeds of that loan to refinance the bank loans that funded Castor’s construction.

That original financing closed in 2010 and stretched the bank market in the aftermath of the 2008 financial crisis. Banesto Santander, Caja Madrid, Crédit Agricole, SG, WestLB, BayernLB and Natixis headed up a 12-strong group of mandated lead arrangers.

The bond issue priced at the end of July of 2013 and settled on 2 August 2013. The deal was the first fruit of the European Commission and EIB’s project bond initiative. The initiative is meant to attract additional long-term lending to infrastructure from institutional investors such as insurance companies and pension funds.

Spain has a troubled economic climate and its energy sector faces severe structural weaknesses. But Castor featured minimal remaining construction, and a regulatory framework that allowed the project company to recover its costs and a return on equity from gas network users.

The EIB provides a €200 million liquidity line that can be drawn in a variety scenarios that reduce the project’s ability to service its debt. The global coordinator was Santander, while the structuring banks were Bankia, Credit Agricole, Caixabank, Natixis, Santander and SG. Bookrunners were BNP, Bankia, Crédit Agricole, Caixabank, Natixis, Santander and SG.

The coupon on the amortising bonds, which mature in 2034, is 5.756%, equivalent at pricing to around 100bp over the 20-year Spanish government bond. The bonds have an average weighted life of 12 years, and a rating from Fitch of BBB+, a notch above the Spanish sovereign rating.

The order book comprised institutional investors (61%), agencies (including the EIB, with a €300 million ticket, 25%), fund managers (10.1%) and banks (3.9%). The investors’ geographical split was Germany (28%), Benelux (including the EIB, 23%), Spain (18%), France (11%), the UK (10%) and Italy (10%). The EIB was pleased, in particular, at the level of response from insurance companies, which had been following the project bond initiative closely.

The banks probably breathed a sigh of relief when the bonds closed, because final acceptance on the project had been delayed while the Spanish government tinkered with Castor’s revenue regime and cushion gas acquisition. After the bonds closed, the sponsors detected seismic activity in the region of the facility. The Spanish government again delayed final cushion gas injection and acceptance, while additional seismic surveys take place.

The vagaries of the Mediterranean’s geology, then, could test the termination provisions of Castor’s concession contract sooner rather than later. But these delays should not put investors off the entire bond initiative. Since then, the EIB’s bond enhancement has featured on the Greater Gabbard offshore transmission operator project, which runs under the more seismically stable North Sea. If the product can help refinance a project with Castor’s technical challenges and history, it should be able to enhance a variety of other unusual credits.