F2i and Ardian have closed a €2.45 billion bank and bond refinancing of their 2i Rete Gas distribution assets. The deal is the largest combined bank and bond refinancing ever in Italy, and the largest bond issue ever by an unlisted Italian gas distributor.

The deal is also the latest in a series of bond refinancings of regulated energy distribution assets by financial sponsors. Recent bond refinancings include the €1.5 billion Vier Gas/Open Grid deal in Germany, which closed in June 2013, the €650 million issue by Goldman Sachs’ Redexis gas distributor in Spain, and the €710 million issue by the Czech Republic’s Net4Gas. 

But what sets 2i Rete Gas (2iRG) apart is its size – with the note proceeds complementing €1.15 billion in bank debt – and the fact that it took place in Italy, where banks’ funding costs have made it hard for sponsors to roll over debt commitments.

An additional layer of complication came from the fact that the two sponsors carried out a rationalisation of the assets’ corporate structure at the same time as the refinancing. In the period between the close of the last bank refinancing for 2i and the attest refinancing Ardian has been spun out from its former parent Axa Private Equity.

The refinancing in outline

The refinancing consists of:

• €750 million in 1.75% five-year notes
• €600 million in ten-year 3% notes
• A €750 million five-year term loan
• A five-year €300 million capital expenditure facility
• A five-year €100 million revolving credit

The refinancing package at launch also included a 12-month €600 million bridge-to-bond facility, to be drawn in the event that the bond issue came up short. Given the success of the initial €1.35 billion issue, under a total €3 billion medium-term note programme, the bridge was not required.

The banks involved in the refinancing were:

• Banca IMI
• BNP Paribas
• Bank of America Merrill Lynch
• Cassa Depositi e Prestiti (CDP)
• Credit Agricole
• Mediobanca
• UniCredit

All of the banks bar CDP were dealers on the bonds, while UniCredit was the arranger on the bond refinancing, and Banca IMI was administrative agent on the bank refinancing.

The 21RG portfolio

2i Rete Gas owns concessions in 1,961 municipalities and manages 3.8 million connection points and 57,123km of pipeline, or 24% of Italy’s network. It carries about 5.9 billion cubic metres of gas - a 17% market share by volume.

2iRG is the second largest operator in its sector, after Snam, a former subsidiary of Italy’s national oil company, Eni. Snam’s largest shareholder is CDP, and it has issued several tranches of bonds since 2012. With €13.3 billion in outstanding debt at the end of 2013, it is an established borrower in Italy.

2i’s operating subsidiaries earn revenues primarily under concessions regulated by the Autorità per l’energia elettrica, il gas e il sistema idrico. Concessions do not expose the issuer or lenders to volume risk, but operators receive revenues with reference to a regulated asset base (RAB).

Most of 2iRG’s concessions are up for re-tender, and the process by which they are retendered may change. Municipalities now make tendering decisions themselves, but that role is likely to shift to a smaller number of regional organisations. Until concessions are retendered, 21RG’s subsidiaries will continue to earn revenues under the same terms as before.

Reimbursement in the event that a concession does not roll over is likely to be based on valore industriale residuo (VIR) – essentially the cost of replacement. The processes for dealing with large variations between the VIR and RAB numbers are yet to be established, though final regulations are likely to provide clarity on that point and others.

F2i and Ardian acquired the portfolio in three stages between September 2009 and October 2011. Their first acquisition was of Enel Rete Gas for €1.5 billion, while the second, of E.ON Rete for €290 million, took place in April 2011. The Enel and E.ON acquisitions were financed with bank deals of €1.025 billion and €190 million, respectively.

The last acquisition, of GDF’s G6, was for €772 million, and closed in October 2011, alongside a €2.3 billion refinancing of the two earlier deals and financing for G6. That deal comprised a €2 billion term loan, a €300 million capital expenditure facility and a €40 million revolving credit facility.

Simplifying the structure

In the period between close on that refinancing and the latest deal, Ardian started life as an independent entity, and the two sponsors acquired a residual 14.86% stake in the Enel Rete Gas assets from Enel between December 2013 and May 2014.

With Enel’s departure as a shareholder, Enel Rete Gas, the brand name for the company, as well as the holding company for the G6 acquisition, became 21 Rete Gas. But the two sponsors used a different vehicle for the acquisition of the residual stake.

At present, F2i's fund I owns 75%, and Ardian's Finavias 25%, of holding company FRI, which in turn owns 85.1% of the issuer. F2i's fund II owns 55%, and Ardian's Axa I Fund owns 45%, of FRI2. FRI2 owns 14.85% of the issuer, and minority shareholders another 0.05%.

The two sponsors plan to merge the two holding companies, with a single FRI owning 99.906% of 2i Rete Gas, and minorities and treasury shares accounting for the remaining 0.094%. This new holding company will then replace the existing issuer, 2i Rete Gas, as issuer and holding company for the network's four operating companies.

Neither the reorganisation nor the migration of the debt to a holding company unnerved investors. The assets are established, and their regulatory framework is well understood. The bonds were able to gain ratings of Baa2/BBB (Moody's/S&P). The bank/bond refinancing launched shortly after close on the Enel residual stake, and closed on 16 July.

The close on the refinancing suggests that other Italian infrastructure assets, particularly toll roads, may get a fair hearing in capital markets. In particular, portfolios of solar projects might be able to access the capital markets in the future. Any advance in that sector, would require government to commit more strongly to upholding solar projects’ tariffs.

The legal advisers to the issuer on the refinancing were Ashurst (Italian and English law) and Tremonti Vitali Romagnoli Piccardi e Associati (Italian tax law), while Linklaters advised the dealers. Deutsche Bank is trustee and KPMG is auditor to the issuer.