The 4GW Sasan coal-fired ultra mega power project (UMPP), in the state of Madhya Pradesh, India, reached financial close on April 21. The project is expected to cost around Rs194 billion ($3.94 billion).

Sasan is the first of three UMPP projects in India being developed by Reliance Power, and the first to close in India without multilateral or foreign commercial banking commitments – the $3 billion debt is India's largest ever project financing sourced solely from domestic lenders and a measure of the relative depth of India's domestic banking market, in which lending rates have fallen since the start of 2009.

Reliance Power was awarded the project in mid-2007 at a levelised tariff of Rs1.196/KWh, after the bid of original developer Lanco Infratech-Globeleq consortium was disqualified by the Indian government. The Sasan plant is to supply power to 14 offtakers across seven states. The project has a debt-to-equity ratio of 75/25 and Reliance Power had to source Rs145 billion from lenders.

Tata Power's Mundra plant, the country's first UMPP to be financed, had a large chunk of international financing and closed in April 2008, before global markets froze over. Sasan faces a more difficult lending environment, but unlike Mundra, Sasan has captive coal mines allocated that take out fuel procurement risk – Mundra had to source coal from the international market.

Lead arranged by State Bank of India (SBI), which committed Rs35 billion to the project, lender participations are: Indian Infrastructure Finance Company (IIFCL) Rs32 billion, Power Finance Corporation (PFC) Rs17.7 billion, Rural Electrification Corporation (REC) Rs13.42 billion, Punjab National Bank Rs9 billion, Axis Bank and IDBI Bank Rs7.5 billion each. United Bank of India, Bank of Baroda, the, Life Insurance Corporation, Andhra Bank, Corporation Bank and Union Bank of India are putting up the remainder.

The IIFCL is to lend most of its Rs32 billion participation in dollar debt (around $500 million). IIFCL sourced the dollar debt through its UK-based subsidiary IIFCL UK and this segment will go towards dollar project costs.
In the absence of full tie up of the loan, the developer has agreed to inject or arrange around Rs10 billion and "is in the advanced stages of talks with several domestic lenders on this," according to a local banker.

Tenor on the IIFCL, REC and PFC debt is 20 years (5 years construction plus 15) while the remaining lenders have agreed to 15 years. The debt pricing for all lenders is pegged flat with the SBI's Prime Lending Rate (PLR) until the construction period is over – the PLR is currently at 12.25%. When the plant is commissioned the lending rate flicks back to PLR minus 25bp for the remaining years.

Some of the banks were able to offer a rate lower than PLR, and if the rates offered by the remaining banks can be lowered to similar levels, the developer hopes to see the overall price flick back to PLR minus 25bp before the commissioning date: SBI's PLR has also come down by around 150bp in the past six months and Reliance Power expects base and margin interest rates to reduce further.

Fifty percent of the loan will be repaid by year 15 when a bullet repayment is made on the balance of the 15-year debt through refinancing – the project is unlikely to repay the full loan amount through internal accruals. "This structure was worked out because domestic banks were not comfortable with a tenor of 20 years," says a banker on the deal.

Although there are no foreign lenders in the project, Standard Chartered has been mandated to arrange commercial funding from international banks, as well as an ECA tranche, at a later date. Reliance Power wants to improve the pricing of the project, if it can, by bringing international banks into the deal when the markets are more liquid, whilst keeping hold of existing lenders. The developer is looking to source $1 billion to $1.5 billion of international lending via a mixture of commercial and ECA debt. The existing lenders would remain in place and allocate less debt to the project.

ECA agreements could be made with China and the US through equipment supply deals, according to a spokesman for Reliance Power. Shanghai Electric is to supply the Boiler Turbine and Generators and the coal mining equipment will be supplied by US and Chinese firms.

A fixed time wrap EPC contract has been signed with Reliance Infrastructure which means that EPC cost overruns will be borne by Reliance Infrastructure, and not Reliance Power or the project.

The captive coal aspect was contested by Tata Power, through legal action, after Reliance Power was granted permission by the government to use surplus coal from the blocks allocated to the Sasan project to fuel its 4GW Chitrangi plant project, which is currently at the approval stage.

Tata Power said it did not know the surplus coal from the allocated mines could be used for other projects, when it bid for Sasan. The Delhi High Court recently dismissed Tata Power's suit, and the Sasan project is likely to be built to schedule, a Reliance spokesman says.

The Sasan power plant complex is to have six 660MW units, and the construction work has commenced. The first unit is to come online in December 2011. Thereafter, the other units will come on line one at a time roughly every three months. Whilst the funding covers construction period of five years, the scheduled start date of the last unit is March 2013.

Sasan UMPP
Status: Signed 21 April 2009
Description: Ultra mega power project financing
Sponsor: Reliance Power
Lead arranger: State Bank of India
Participants: Indian Infrastructure Finance Company; Power Finance Corporation; Punjab National Bank; Axis Bank; IDBI Bank; United Bank of India; Bank of Baroda; Rural Electrification Corporation; Life Insurance Corporation; Andhra Bank; Corporation Bank; Union Bank of India
Lenders engineering consultant: Lahmeyer International
Lenders legal counsel: Luthra & Luthra
Borrowers engineering consultant: Black & Veatch
Lenders mining consultant: Marston
Insurance adviser: Marsh