KEY
TAKEAWAYS
- A French uranium enrichment plant has become
the world's first nuclear asset to receive limited recourse
financing;
- Stringent industry regulations prevent shell
companies being responsible for running plants, and prevent
banks from taking security over nuclear
assets;
- This deal overcame these issues through a
hybrid loan which combines elements of project and
corporate financing;
- The borrower's involvement in a group-level
cash pooling system was the biggest challenge to getting
banks comfortable. This was resolved by giving them rights
to suspend the pooling to trap cash at the borrower level
in distressed circumstances
- The deal took nearly a year to negotiate and
execute.
Normal nuclear financing
Strict environmental and safety regulations have
prevented the nuclear sector benefiting from the limited and
non-recourse funding arrangements available to other
industries. Neither empty project companies nor third-party
operators can be responsible for running nuclear assets, and
banks can’t have security or step-in rights
regarding a plant’s assets or operations.
This means
that greenfield and brownfield funding is usually provided by
equity injections and corporate bonds. When bank financing is
provided, it is a corporate or export finance-based loan.
Borrower SET
has a limited track record and credit history, and so would
have struggled to raise funds through unsecured corporate
bonds. Instead, it turned to its parent’s
regular lenders to explore alternatives.
The funds
raised through the hybrid loan will be used to refinance a
portion of the equity in, and complete the remaining 20%
construction of, the Georges Besse 2 plant in southwest
France.
Cash pooling and security
For the banks, the major challenge was the borrower
not being a bankruptcy-remote special purpose vehicle, but
rather an operating company whose finances were integrated
into the Areva group structure.
While they
took on a number of risks they were not accustomed to, of
particular note, according to de Luze, is the risk the cash
would not be kept at the company level but would be pooled on
a regular basis at a group-level.
The
lenders’ security was limited to
SET’s bank accounts and the cash receivables
generated by the plant’s offtake agreements. So
they found it difficult to get comfortable with the cash
pooling system.
"Accordingly,
the lenders put in place a number of features to suspend that
system in certain circumstances to keep control of the cash
that was generated by the plants," said de Luze.
Fiszelson
explained that in limited, distressed circumstances, if a
trigger event occurs, then the cash is blocked at the level
of SET and the pooling is suspended for as long as those
events aren’t remedied or waived. "That specific
treatment of cash is something that I have never seen in a
project finance."
These
blocking rights were critical to getting the banks
onboard.
Hybrid structure
The loan agreement is a true hybrid, balancing
corporate and project finance terms to satisfy both
parties.
Fiszelson
explained it is Loan Market Association (LMA) based
documentation but has a strong project finance flavour in
terms of financial ratios, security, prepayment obligations
and insurance covenants.
The
representations, undertakings and events of default are more
comparable to corporate finance, although certain specific
covenants – such as those relating to bank accounts
(which hold the lenders’ major form of security)
– are in line with project finance techniques.
The
borrower's grace periods are also longer than those of a
usual corporate financing, although this longer remediation
period only applies in certain types of default events.
The hybrid
nature of the financing is most evident from its risk
allocations.
Risk matrix
More than 80%
of the plant has already been built. The outstanding
construction risk - and operational risks - are covered by a
corporate guarantee offered by Areva.
The business
risk is borne by the lenders, but the long-term and
fixed-price offtake arrangements create predictable
cashflows. The maturity mismatch between these agreements and
the loan, however, required a solution. The banks could get
comfortable with the terms of the existing sales contacts,
but there was no assurance that subsequent contracts
– entered into once the existing agreements expired
– would contain similar terms.
"So we
included project finance-like provisions to give the lenders
comfort that the replacement contacts would comply with
certain pre-determined conditions," said Fiszelson.
The lender
also had to become accustomed to labour law risks (a
non-issue when the borrower is a shell project company) along
with new technology and insurance risks. These latter two
areas required particular attention as the enrichment process
is relatively new and the insurance considerations are not
comparable to other industries.
The lenders
had to heavily rely on technical and insurance experts to get
comfortable with these issues.
Benchmark, not precedent
While
heavily-negotiated structural protections made this deal
happen, the borrower and project’s
characteristics also helped.
"One of the
deal’s strengths is that it sits behind a very
strong corporate structure with a strong market rationale and
long-term contracts with major utilities on a worldwide
basis," said de Luze. The fact construction of the plant had
almost completed was also looked on favourably by the
banks.
While this
deal opens the door to more limited-recourse financings in
the nuclear sector, the particular sensitivities of the
sector mean structures could differ significantly from deal
to deal.
Given nuclear
accounts for 75% of France's energy, it is likely to be
involved in the next deals.
Tearsheet
The €650 million, 10-year loan to Areva
subsidiary SET was signed on June 13. The first drawdown was
during the week commencing June 23.
The bank
syndicate consisted of BBVA, Bank of Tokyo-Mitsubishi, BNP
Paribas, Crédit Agricole Corporate & Investment
Bank, Crédit Industriel et Commercial, HSBC,
HVB-Unicredit, Natixis, Santander and
SociétéGénérale.
The funds
will be used to refinance part of the equity of the Georges
Besse 2 uranium enrichment plant in Tricastin, southwest
France. It will also be used to complete the final 20% of the
plant’s construction. The plant will be running
at full capacity within 18 months.
Herbert Smith
Freehills advised the bank syndicate and Allen & Overy
advised Areva.
See also
Project finance’s brave
new world
Germany: making the switch from
nuclear
Project bonds fund construction of
French PPP