Uijeongbu: Currency tracking

The first light rail project to close under the new Korean PPI scheme and the first time international banks have undertaken a municipal government-backed PPI project in Korea, but most significantly the Uijeongbu light rail (LRT) financing features dual-currency long-term Korean Won and Euro debt along with cross-currency interest swaps from both domestic and international banks – a further first for Korean PPI.

The project – a 30-year BOT concession (excluding a 4 year construction period) – was awarded by Uijeongbu City municipal government to a consortium led by GS Engineering & Construction (formerly LG Engineering & Construction) along with KDC, Hanil, Isu Engineering & Construction, Systra, Unison and LS Industrial Systems. The BOT comprises construction of 10.6km of automated light rail line (using tried and tested Siemens driverless technology) in Uijeongbu City, a light rail depot and 14 railway stations.

The economic fundamentals behind the project are sound. Uijeongbu City is in the Seoul commuter belt, is expanding rapidly as Seoul commuters migrate to the suburbs and has two station with links to Seoul, one of which will be on the LRT line. When operational the LRT is expected to rise from an initial 85,000 passengers per day to 125,000 over five years.

The concession is tariff-based with adjustments on an annual basis in accordance with inflation, and the deal comes with a minimum revenue guarantee (MRG) of 80% of base case for the first five years of operation and 70% for the following five years. It also comes with a construction subsidy for 43% of the total project cost and a 50/50 share of foreign exchange variation costs in excess of 20%.

The MRG is unusual in that it has been structured to incentivise sponsors to keep traffic forecasting conservative. The MRG is void in any year where the revenue falls below 50% of base case forecast. Consequently, and in keeping with the sponsors' interests, traffic forecasting by Parsons Brinckerhoff is described as conservative.

Lenders also get added comfort from a termination payments scheme payable by the concession awarder to the sponsors. Payments vary according to the cause of termination – whether by force majeure or either concession party – but irrespective of cause, the termination payment is sufficient to cover senior lenders.

Korea also has a good public-private-partnership track record. Although the deal is ultimately municipal-backed, all Korean PPIs called for by central government (which this deal was) to date have met their obligations. Furthermore, although the Korean market has changed, it is relatively long established and Korea has a developed solid legal system for PPI.

Financing closed in October 2006 after signing of the concession agreement in April. The total project cost is $688 million of which 43% is government funded subsidy, 22% is equity and sub-debt, and 35% senior debt.

The dual-currency senior debt comprises a Eu132 million 18 year tranche priced at 108bp over Libor, a W58 billion 20-year tranche priced at 95bp over AA corporate bond, a W60 billion standby credit and W51 billion of 23-year sub debt.

Calyon, Kookmin Bank and Shinhan Bank jointly provided financial advisory to the sponsors. Following an RFP in 2005, both KDB and Standard Chartered came in with preferred bids with Calyon and Kookmin exercising their right to match at the end of the bidding process and joining the final mandated lead arranger (MLA) line-up.

The Euro tranche is designed to match all payments to Siemens during construction but nevertheless carries currency risk given all operational revenue will be in Korean Won. The tranche therefore includes an option for the borrower to convert to Won up until 12 months from start of commercial operations. Furthermore, the foreign exchange exposure is locked in during construction by a cross-currency interest swap provided equally by the MLAs.

In addition to the many financial and concession-based risk mitigants in the project, GS Engineering & Construction – lead sponsor and main EPC – is providing completion guarantees to fund any additional costs during construction.

Uijeongbu LRT demonstrates not only the sophistication of the Korean PPI market but that the new PPI system can deliver and that the Korean PPI programme will continue as a source of project deals at both international and domestic funding levels.

Uijeongbu LRT
Status: Financial close 18 October 2006
Description: First light rail PPI in Korea
Total cost: $688 million
Debt: $381 million
Equity: $98 million
Sponsors: GS Engineering & Construction, KDC, Hanil, Isu E&C, Systra, LS I&S, Unison
Lead arrangers: Standard Chartered, Calyon, Korea Development Bank, Kookmin Bank
Participants: Kyobo Life, Daegu bank, Pusan Bank, Balhae Infra fund
Legal counsel to lenders: Lee & Ko; Linklaters
Legal counsel to sponsors: DW Partners
Consultants: Parsons Brinckerhoff (technical and traffic), JLT (insurance), Ernst & Young (accounting)