The refinancing of the 840MW Maritza East 3 power project shows how much banking confidence in the power sector has grown since the years of over-capacity that dogged the early part of the decade

Although the project was originally financed in 2003, changes in the sector and to the project specifically allowed the sponsors to refinance on significantly more favourable terms.

Maritza East 3 is one of three power projects located on the massive lignite complex near Stara Zagora in Bulgaria, including a lignite mine which has the capacity to supply all three power projects for the next 40 years.

The €1 billion (US$1.26bn) Maritza East 1 power plant was constructed on a build-own-operate-transfer basis by AES and comprises of two 300MW units.

The 1,450MW Maritza East 2 power station is owned by Bulgaria's state-owned power company Natsionalna Electricheska Kompania (NEK).

NEK is a minority holder in the Martiza East 3 project with a 27 per cent stake; Italy's largest power company Enel holds the remaining 73 per cent interest.

The original deal

In 2003, Enel and NEK received initial financing to rehabilite the Maritza 3 plant from three sources

• €112.1 (US$141m) million loan from the European Bank for Reconstruction and Development (EBRD)
• €75 million (US$94.4m) in debt souced from Bulgarian banks
• €140.7 million (US$177.1m) in debt provided by a syndicate led by Société Générale and Calyon and covered by MIGA

The loan was to extend the life of the plant and to install flue gas desulphurisation (FGD) equipment so that the plant will meet Bulgarian, EU and World Bank standards for sulphur dioxide and carbon dioxide emissions.

When the loan was arranged, the power sector was enduring a period of global economic slowdown which reduced power demand and made investors wary about committing to investment in generation.

The markets were also concerned that there may be over-investment in the Balkan power market with more power projects built and in the pipeline than were needed to satisfy demand.

At this time Bulgaria was expected to join the EU in 2008 but their accession was far from guaranteed, adding a certain amount of political risk.

Enel was happy to be able to get funding for the project given the state of the sector at the time even though the pricing of the loan was set at prime plus 300bp.

The refinancing

A number of factors played into the timing for the refinancing of the Maritza East 3 project:

• the power sector emerging from the tumultuous times with strong liquidity and banks finding out that they need not write off the projects that they had expected
• soaring electricity prices in recent years have mirrored the rising price of oil and gas and making lignite-fired power plants especially profitable
• Bulgaria's formal acceptance into the EU

Also, the project at Maritza East 3 was progressing as scheduled with the FGD equipment installed, the project as a whole carried much less risk and at that point.

Enel decided that the time was right to refinance on more favourable terms.

The Italian power giant mandated Société Générale to provide the financing for the single tranche €450 million (US$566.3m) refinancing with Italian export credit agency Sace providing an unconditional first demand guarantee.

While the pricing is being kept a closely guarded secret, the debt-equity ratio of 75:25 reflects the confidence of the lenders in the project.

A benefit of having Société Générale work on the refinancing of a deal that they originally arranged was the familiarity that the bank has with the project.

This meant a fast turnaround on the deal, which took only three months to push through. Quite a feat, especially when considering that those three months covered the summer holiday season when getting all the parties together to work on a deal is quite difficult in and of itself.

The lower pricing of the deal also lowers the risk of the project. The way the tariff is structured means that if Enel obtains a reduction in financing costs then the cost for the end user is also lowered.

This in turn lowers the political risk of the project as the government is unlikely to cause any problems for the producer of the country's cheapest electricity.

Power happy

Since the end of 2004, deals in the Bulgarian power sector have been surging with margins growing ever smaller as lender confidence in the projects rise.

There is much more confidence in the sector and, rather than a fear of overcapacity, the demand for new power projects in Bulgaria is so strong that there are even plans to build a nuclear power station near Belene despite its location on a seismic faultline.

Although the European banks backing this venture have withdrawn their support, the Bulgarian government's plans for nuclear new build show its fears for undercapacity in the long term.

If the Belene project stumbles, the government likely seek alternative methods to power a growing economy.

The Maritza East 3 deal indicates that there are good times ahead for project financing in the power sector.

With a wave of power projects coming through in the Middle East, expect a continued frenzy in the sector with margins creeping ever lower as consumers appetite for electricity consumption keeps on soaring.

The project at a glance