Project finance draws Asian liquidity
As international commercial banks scale back, vacuum attracts new lenders
|Chen: China and India are able to take care of themselves|
|McCormack: Chinese banks have huge appetite to lend|
|McCoole: Sponsors are seeking flexibility and faster delivery|
|Agarwal: Road projects will be a major project finance attraction in India|
|Clement-de-Givry: Good common sense analysis is back|
McCoole notes that pricing of project finance deals rose sharply in the wake of the financial crisis and for now, it appears to be holding up. “But as the interbank funding market stabilizes, we could see some of the additional risk premium working its way out.”
Landmark power project in Kashmir
The New Bong Escape hydroelectric power project is the first project financing of any kind in Azad Jammu & Kashmir. The electricity will be sold into Pakistan under a 25-year power purchase agreement. As a result of the multiple sources of financing, it features complex inter-creditor arrangements and this complexity is reinforced by the novel ijara-lease structure provided by the IDB.
For William McCormack, a partner at the law firm Sherman & Sterling who worked on this project, its closing represents a considerable achievement given the number of political and other risks associated with the project, which had to be overcome. The project is set against the backdrop of the Indus Waters treaty between India and Pakistan, and a growing interest in Pakistan for the relatively cleaner and cheaper hydroelectric power.
Work on the project first started in December 2004. Ranhill Berhad of Malaysia tried to push the project forward in 2005 and 2006, but several events set back the project such as a devastating earthquake in 2006, the epicentre of which was quite close to the location of the project. Then in December 2007, when the parties were close to signing the final documentation, former Pakistani Prime Minister Benazir Bhutto was assassinated.
Eventually, Ranhill pulled out and was replaced by Hubco, a well-regarded Pakistani power company, which provided the much-needed impetus for the project. IFC and Proparco joined ADB, IDB and the Pakistani commercial banks, and the revised finance documents were signed in November 2009. The first drawdown took place in the last few days of 2009.
An LNG project to transform a nation
US$14 billion debt package obtained in difficult market environment
One of the most eagerly anticipated project finance transactions in 2009 was the huge liquefied natural gas (LNG) project in Papua New Guinea (PNG), which received a final investment decision in early December.
The project is significant not only because of its size, but because of its impact on the future economic and social aspirations of the PNG population. It has the potential to transform the nation by giving a boost to its GDP and export earnings, increasing government revenues at all levels, providing royalty payments to landowners and creating employment opportunities during its construction and operation.
In mid-December 2009, PNG LNG, a special-purpose vehicle created for the project, obtained a total of US$14 billion in funding through a series of agreements via a consortium of 17 commercial banks and export credit agencies (ECAs). Amid a difficult market environment, the financing was well oversubscribed, underpinned by a well-developed commercial structure designed to ensure an acceptable risk-sharing mechanism between the project and the financiers.
The debt package consisted of US$4.6 billion in commercial tranches, US$5.7 billion of direct lending from ECAs and a US$3.8 billion loan from the sponsor, ExxonMobil. The commercial tranches were divided into a US$2 billion uncovered term loan, US$800 million term loan guaranteed by Export-Import Bank of the US (US Eximbank), US$900 million guaranteed facility by the Italian ECA Servizi Assicurativi del Commercio Estero (SACE) and a US$950 million facility insured by Nippon Export and Investment Insurance.
The ECA facilities are split into a US$2.2 billion direct loan from the US Eximbank, US$1.8 billion term loan from Japan Bank for International Cooperation, US$1.3 billion loan from the Export-Import Bank of China and US$350 million loan from the Export Finance and Insurance Corporation. All facilities have a tenor of 17 years, except for the US$2 billion uncovered tranche, which has a maturity of 15 years.
There are 17 banks that participated in the syndication of the commercial tranches, including ANZ, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Calyon, China Development Bank, Commonwealth Bank of Australia, Crédit Industriel et Commercial de Paris, DnB NOR Bank, Intesa Sanpaolo, Mizuho Corporate Bank, National Australia Bank, Natixis, Société Générale (SG), Standard Chartered Bank, Sumitomo Mitsui Banking Corporation, UniCredit and Westpac Banking Corporation.
SG and Sullivan & Cromwell were appointed financial adviser and international legal adviser, respectively, in early 2008. The ECA negotiation process began in January 2009 and commercial banks were invited to submit financing proposals in July/August 2009.
The PNG LNG project is an integrated development that includes gas production and processing facilities, onshore and offshore pipelines and liquefaction facilities with a capacity of 6.6 million tonnes per year. Participating interests include affiliates of ExxonMobil, including Esso Highlands as operator (33.2%), Oil Search (29%), the PNG Government through Independent Public Business Corporation (16.6%), Santos (13.5%), Nippon Oil Exploration (4.7%), PNG landowners through Mineral Resources Development Company (2.8%) and Petromin PNG Holdings (0.2%).
The project has already signed various sales and purchase agreements with overseas buyers, including Tokyo Electric Power Company, Osaka Gas Company and Unipec Asia Company (a subsidiary of Sinopec of China).