Ten years ago, the Tanjung Jati power project was little short of a disaster. Conceived in the early 1990s and sponsored by Hong Kong's Hopewell Holdings, the project was quickly mired in controversy with links to the corrupt regime of President Suharto and accusations that Indonesia was over-paying for the electricity produced.

The already strained purchase agreements were stretched to breaking point as the Asian financial crisis wreaked havoc in 1997-98. Hopewell withdrew, pleading force majeure and leaving the first two units around one-third complete. Sumitomo Corporation, the main contractor, was left with unpaid bills and thousands of tonnes of equipment that needed to be stored.
Years of political upheaval following Suharto's fall left Tanjung Jati mothballed and Indonesia's power sector crumbling. Sumitomo stepped in with an offer to finance the project under a ground-breaking lease agreement with Perusahaan Listrik Negara (PLN).

Construction resumed in September 2003 after Sumitomo secured financing from JBIC and a group of commercial lenders, backed by political risk insurance from Nexi.

A decade on and things look very different. Tanjung Jati B began producing electricity in October 2006 and the project has just completed its second round of financing, allowing Sumitomo to expand the plant from two to four 660MW units. Financing that expansion, however, was far from simple.

Sumitomo brought Bank of Tokyo Mitsubishi-UFJ on board as financial advisor in 2006, with the task of structuring a financing package that could fit alongside the existing agreements between Central Java Power (the project company) and PLN. As Tanjung Jati had been planned as a single, expandable complex, with no new tender process held for the new units, the expansion project needed to fit within the same legal framework. The two new units were also designed to share infrastructure with the existing assets, and that required cross-collateral agreements between the two sets of lenders. To further complicate matters, the expanded documentation needed to allow PLN to buy out the first two units without disrupting the financing of the second phase.

"The transaction required a complicated multi-step default, enforcement, call option and buy-out regime to achieve the goal of synthetically separating the projects to replicate the commercial risk of two financings in separate legal vehicles," says Mark Plenderleith, head of the Tokyo project finance practice at Milbank, Tweed, Hadley & McCloy, which advised JBIC and the lenders.

Sumitomo and its advisers again relied on the assistance of JBIC, which had been working hard behind the scenes to win some assurance that Indonesia would not let PLN fail. Those negotiations resulted in a memorandum of understanding with Indonesia's Ministry of Finance in September 2006.

The umbrella note, as it has become known, recognised JBIC's role as a supporter of independent power producers (IPPs) in Indonesia, and included a 'keepwell agreement' whereby Indonesia's Ministry of Finance pledged to provide appropriate financial support for PLN. While the note stopped short of an explicit government guarantee, it gave JBIC the assurances it needed to sign up to the new financing.

JBIC pledged to provide ¥96 billion ($1.07 billion) as a direct loan to Central Java Power, supporting the export of equipment from some of Japan's biggest manufacturers, including turbine and generators from Toshiba, boilers from Mitsubishi Heavy Industries and civil engineering services from Mitsui Engineering.

JBIC also agreed to guarantee a further ¥64 billion against political risk, becoming the first export credit agency to offer four-point political risk insurance on PLN. The guarantee goes beyond the three basic risks of expropriation, war and currency inconvertibility, also insuring lenders against any contractual breach by PLN.

That encouraged commercial lenders to back the project and eliminated the need for further insurance from Nexi – as had been used in the original financing in 2003 – while also keeping Sumitomo's cost of financing to a minimum.

Sumitomo signed up lead banks to that ¥64 billion commercial tranche in March 2007, bringing in BNP Paribas and Sumitomo Mitsui Banking Corp as mandated lead arrangers alongside BTMU. Four more Japanese banks joined the JBIC-backed tranche in syndication, with Shinsei Bank, Sumitomo Trust & Banking, Shinkinchukin Rokinren and Mizuho Corporate Bank all providing funds.

Sumitomo put up ¥20 billion of equity and guaranteed a further ¥25 billion of mezzanine debt provided by Sumitomo Trust, BNPP, BTMU, Shinsei and SMBC.

But the saga did not end there. Just as Tanjung Jati had been hit by the Asian financial crisis 10 years earlier, the project again found itself facing financial turmoil as the rescues of Bear Stearns, AIG, and then the collapse of Lehman Brothers tested lenders' commitments to the deal. Pricing had been agreed long before Lehman failed, and banks had to push up margins to reflect their own cost of funds.

Bankers involved refused to disclose final margins on the project, but the levels were enough to convince most of the original syndicate to stick with the deal, and the ¥205 billion expansion was finally signed in Tokyo on December 25, becoming the biggest Asian power project to be financed by an international investor since Lehman filed for bankruptcy protection on September 15.

"The fact that the deal was financed in yen really helped," said a banker close to the transaction. "The Japanese market escaped the worst of the credit crisis, at least at first, and Sumitomo's long relationships with Japanese lenders played a big part." Others pointed to Sumitomo's continued support of the Tanjung Jati project as an important factor in convincing lenders that it was not likely to pull out or abandon the deal.

Tanjung Jati tested an unusual finance lease structure that has yet to be repeated on any other deal in Indonesia, but bankers expect the JBIC umbrella note will become the template for future power deals in the country.

Central Java Power
Status: Signed 25 December 2008
Description: 1,350MW to 2,640MW expansion of coal-fired power plant
Project size: ¥205 billion
Senior debt: ¥160 billion
Maturity: 16 years
Financial adviser: Bank of Tokyo-Mitsubishi UFJ
Sponsor: Sumitomo Corp
Lead arrangers: JBIC, BNP Paribas, BTMU, SMBC
Participants: Shinsei, Sumitomo Trust & Banking, Shinkinchukin Rokinren, Mizuho Corporate Bank
Lender legal counsel: Milbank, Ali Budiardjo (Indonesian counsel)
Sponsor legal counsel: Paul Weiss