Stoneway – A new market blueprint
From relative obscurity to a billion dollars of capital for power projects in a few years. Stoneway shows how to get it done when opportunities present themselves. By Nic Stone.
A couple of years ago while in his early twenties, Roger Nores was beginning his career in the giddy world of hedge funds and Wall Street when he noticed something back in his native land of Argentina. Summer blackouts and an inconsistent grid were crippling the country.
Using knowledge he picked up in the financial world, Nores launched his own investment company at 23 with help from the Nores family’s Araucaria group. The group is a private investment company that manages a portfolio of diverse investments in farm land in Argentina and investment services through a privately owned asset manager and registered broker-dealer, with around US$280m of assets under management.
Nores founded Stoneway Capital Corporation, incorporated in New Brunswick, Canada. The company was formed for the purpose of owning and operating, through its Argentine subsidiaries, Araucaria Energy and SPI Energy, power generation projects that will provide electricity to the wholesale electricity markets in Argentina.
Around the same time as Nores was setting up his companies, another Argentine was hatching a plan. This time, business-friendly politician and former mayor of Buenos Aires, Mauricio Macri, was planning a run for the Casa Rosada, the residence of the president of the country. Also weaned on the bosom of Wall Street, Macri ended up winning his place in the palace after an election in late 2015.
Only a couple of years have passed and this confluence of events has seen Macri hailed in business circles as being the architect of delivering Argentina from the purgatory of being locked out of international debt markets – a change that has given rise to the country’s first project finance deals for decades.
The first of those was achieved by Nores and his Stoneway Capital Corporation, which ended up selling US$500m of 10% senior secured notes due 2027 backing four power projects in Argentina.
Now at age 28, Nores has raised a little under US$1bn backing the series of power plants, when equity, revolving credit facilities, and a bond add-on are taken into account. He is looking to push the company into other countries in the region. His exploits have even earned him a nod on Forbes’ notable 30 Under 30 list for energy.
But the story of how, in a short space of time, such a deal was possible might well provide a benchmark for other countries, as it has provided a benchmark in Argentina.
Finding the equity
Nores suspected the government of Argentina would also be keen to fix the issues surrounding intermittency and blackouts.
On March 22 2016, the Secretariat of Electrical Energy announced, through its agent, Compañía Administradora del Mercado Mayorista Eléctrico (CAMMESA), and pursuant to SEE Resolution 21/2016, a new bidding process for the installation of new generating capacity to be brought online during the summer (November through April) of 2016-2017, the winter (May through October) of 2017 or the summer (November through April) of 2017-2018. The aim was to quickly solve the need for more capacity.
Pursuant to the bidding process, Nores’ Araucaria Energy was awarded four power purchase agreements (PPA) to sell an aggregate of 686.5MW of generation capacity to CAMMESA at a fixed price for 10 years. That was around 38% of the capacity awarded.
The projects being developed by Araucaria and parent company Stoneway include four simple-cycle power generating plants that will utilise diesel fuel or natural gas to provide electricity to the market.
The 254MW Matheu project and the 202MW Las Palmas project both have a US$17,800/MW, 10-year power purchase agreement with Cammesa, the 127MW Lujan project has a US$21,600/MW, 10-year PPA and the 103.5MW San Pedro project was originally awarded a US$16,700/MW, 10-year PPA.
Nores approached a number of companies about partnering with him to help deliver the projects. He was close to signing a deal with Caterpillar, but after that deal fell through he went to German giant Siemens. It was here the first major financing help came in.
The company agreed to not only supply a total of four turnkey industrial power plants, but also offered up US$115m via a subordinated equity loan to a holding company to help really get the ball rolling.
Project sponsorship group Stoneway Capital thus had its US$136.5m in equity coming from the Nores family with an 85.5% equity interest through the subordinated equity loan to the issuer’s holding company from Siemens and SoEnergy International Inc with US$21.5m for 14.5%.
Stoneway also approached Credit Agricole with the new financial clout behind it, which offered the company a one-year revolving credit facility for US$25m to dip into when needed. So far, only a couple of million dollars from that facility has been drawn, according to Nores.
With the PPAs and equity taking shape, it was then time to try to secure debt. The deal with Siemens was worth around US$570m for the German company, so the debt slice was going to need to be in the same ballpark. The estimated aggregate revenues for the offtake agreements over the 10-year term exceeded US$1.8bn.
“When you are looking to raise around US$600m to US$700m, it is unrealistic,” says Nores. “There is the fear of the unknown, the construction risk, and the fact that there has been no greenfield project finance in Argentina.”
Stoneway Capital hired Seaport Global Securities (SGS) as financial adviser in August 2016 to assess its options for debt.
The credit strengths of the deal included long-term, dollar-linked PPAs, fixed capacity payments regardless of energy dispatch, no fuel exposure, simple technology and construction from well-known equipment providers, Siemens’ commitment to the project through an engineering and procurement contract (EPC) and operations and maintenance contract (O&M), plus an subordinated loan to fund equity from a Siemens affiliate to the project sponsor, and strong coverage metrics during the operating phase, according to Moody’s Investors Service.
Credit challenges included a tight construction schedule, a limited liquidity cushion during construction, revenues fully exposed to Cammesa, and a limited track record of main sponsor with power projects.
A lack of liquidity in the local market and years in the wilderness meant that a bank financing was an unlikely option, although it did look at that possibility.
“The Argentina story, and its greatest challenge, is liquidity,” says Nores. “From Argentina to Wall Street there needs to be bridge building.”
The sponsors and advisers also thought that if they sold the deal as an emerging markets story, they would be able to bring in bond investors that had knowledge and expertise on these types of deals. The bond idea took shape.
Jefferies was brought in by SGS as an additional underwriter and acted as global coordinator and joint bookrunning manager, while SGS was a joint bookrunning manager. The group had the clout to get some of the bigger names in investment interested.
The deal is structured as a project finance bond with terms similar to a project finance term loan, including interest during construction (IDC), capital costs, waterfall, reserve and amortisation requirements. The structuring was intended to allow the deal to reach the broadest investor base, according to Matthew Gourlay, managing director and head of power and infrastructure investments at SGS.
In February, Stoneway Capital Corporation was able to sell US$500m of 10% senior secured notes due 2027, making it the first bond market project financing in Argentina in around 15 years. Moody’s and Fitch rated the notes B2 and B. The notes have a six-year weighted average life, while order books were a few hundred million dollars oversubscribed.
“This really is a bellwether for other project finance deals to get done in Argentina,” said Gourlay. “We saw a who’s who of financial institutions as buyers; from the biggest hedge funds, insurance funds and pension funds. It bodes really well.”
The buyers included BlackRock, Fidelity, Massachusetts Financial Services, Amundi + Pioneer Investments, PGGM, BlueBay Asset Management, BlueCrest Capital Management, and Allianz, among others. The financing included a 30% downpayment from the funds.
The trustee, US collateral agent, registrar, paying agent and transfer agent is Bank of New York Mellon, while the onshore trustee is TMF Trust Company Argentina.
The roadshow, completed within the span of one week, saw orders come in from 75 institutions. About 60% of the deal was sold to US investors and 30% to Europeans, while the balance was sold to Latin American groups, according to Gourlay.
The net proceeds from the offering will be used to pay engineering, procurement, construction and development costs, including the cost of land, to provide the initial funding of the IDC account, to fund a construction contingency account and to pay fees and expenses related to the offering of the notes.
The deal is senior secured. There is limited currency risk, as both the deal and the PPAs are denominated in US dollars. The principal of the notes will be payable in semi-annual instalments, commencing on September 1 2018.
With the success of the deal behind them, there was an opportunity to source more money. Stoneway Capital Corporation in November sold a further US$165m of the 144A/RegS bonds. The senior secured notes will rank pari passu with the existing debt. Moody’s Investors Service affirmed the B3 rating for the notes this month.
The four plants are well advanced on their respective construction schedules, with reported progress levels above 80% on average.
The new funds will be used to finance the conversion of the San Pedro natural gas simple-cycle plant, which is under construction, into a gas natural combined-cycle plant, thereby adding 120MW of capacity and taking it to 223.5MW.
The expansion and conversion of the San Pedro plant is supported by a new award for incremental capacity granted to Stoneway by the energy secretariat following a recent auction.
As part of the award, a new long term 15-year PPA will be signed with CAMMESA under similar terms and conditions to the existing contracts with the other four Stoneway plants.
Furthermore, the new capacity will secure other relevant contracts that also will have similar terms and conditions to Stoneway’s existing contracts for the other four plants, including with respect to its deals with Siemens. Siemens had also implemented an accelerated work plan to complete three of the four plants by the scheduled commercial operations date of December 1 2017.
Not all plain sailing
The project is exposed to Argentina’s regulatory framework for power companies, which, while improving, has not been supportive of power generation companies and has been highly unpredictable in the past years, says Moody’s. Moreover, all of the project revenues under the PPA are contracted with CAMMESA.
While CAMMESA’s operating costs are financed through mandatory contributions by the wholesale market agents, the subsidies in place for the electricity prices in Argentina (the difference between the seasonal price charged to consumers and spot price paid to generators) translate into CAMMESA posting structural operating deficits that need to be covered by the federal government. As such, having CAMMESA as the off taker leaves the project with a high degree of exposure to Argentine government (B3, stable) credit risk that is captured in both the issuer’s rating level as well as its outlook.
CAMMESA has never defaulted but it does have a history of late payments, which was something that had to be considered during the structuring process.
Despite this, once operating, Moody’s expects the project to produce a debt service coverage ratio (DSCR) of more than 1.4x over the life of the contract, given the expectation of stable and predictable cashflows from the fixed price, long-term capacity payments under the PPAs. In addition, the amortising debt profile eliminates the potential for refinancing risk and provides a steady decline in leverage, which strengthens the collateral position for the senior bondholders.
“The investors were able to get comfortable with the deal because they understood emerging markets,” says Nores, who adds that once it is recognised that some of the bigger names in the investment and private equity space are starting to come to Argentina, more will follow and the benefits will last more than a couple of years.
The simple-cycle facilities will be made in Houston in the US before being moved to Argentina. The idea of involving Siemens and using low-risk technology was formed to mitigate construction risk on the deal. “We buttoned it up from a risk perspective,” said Gourlay.
Siemens will provide six SGT-A65 TR, former Industrial Trent 60, gas turbines that will form the heart of the Luján and Matheu facilities in Buenos Aires Province in eastern Argentina. Siemens will also supply six industrial gas turbines of type SGT-800 for Las Palmas and San Pedro in the cities of San Pedro and Zarate.
Six law firms worked on the deal, including two international firms, two Argentine firms, and two Canadian firms. Simpson Thacher & Bartlett, Cabanellas, and Etchebarne Kelly represented the lenders. Holland & Knight and Stewat McKelvey advised Stoneway. Latham & Watkins also had an advisory role on the deal.
So with the pieces of the puzzle all falling into place, Stoneway has secured about US$920m by Nores’ reckoning and is now almost finished construction on the projects. Quite the feat, coming in such a short space of time.