Nuclear sector’s first limited-recourse financing

Author: Danielle Myles | Published: 21 Jul 2014
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France’s Georges Besse 2 project sets a benchmark for financing nuclear assets
A uranium enrichment plant in France has become the world’s first nuclear power project to receive limited-recourse financing.

The highly tailored €650 million ($879 million) loan to Sociétéd'Enrichissement du Tricastin (SET), a subsidiary of Areva, combined project and corporate loan conditions to account for the borrower being an operating business – rather than an shell company.

"We agreed a structure whereby the sponsors benefit from favourable project financing conditions, while also retaining access to the cash generated by the plant activity which limited the lender’s recourse to the assets," explained Guillaume de Luze, managing director at Société Générale which was part of the 10-bank syndicate.

As an unprecedented deal in a highly regulated and sensitive sector, the lenders had to take a view on a number of unfamiliar risks – one reason why it took nearly a year to negotiate and execute the loan documentation.

"It meant the due diligence was very thorough - on technical, insurance, environmental and regulatory aspects – so it took longer than usual to finalise the agreement," said Eric Fiszelson, a Paris-based Herbert Smith Freehills partner who led advice to the lenders.


  • 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.

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