Financing for the controversial Nam Theun II Power Co (NTPC) hydro project in Laos closed on 3 May – the first major hydro project to get World Bank backing in ten years and featuring a number of signatories to the sustainable lending pact, the Equator Principles.

Sponsored by EdF International (35%), EGCO (25%), Electricité du Laos (25%) and Italian-Thai Development (15%) under a 25-year BOT concession from the Laos government, the $1.45 billion project involves the construction of a 1,070MW hydroelectric power plant and dam on the Nam Theun river, a tributary of the Mekong river, in central Laos.

The socio-environmental impact of the project on the local community – 93% of the Nam Theun River's flow will be diverted into the adjacent Xe Bang Fai River basin and nearly 40% of the Nakai Plateau will vanish beneath a reservoir covering 450 square kilometres – has sparked criticism from many NGOs. The rationale for the project is a compromise – much needed foreign currency for Laos to improve rural infrastructure offset against the environmental impact.

There are numerous figures circulating for what the Laos government will earn from the deal, but conservative estimates put it at around 10% of Laos GDP and the World Bank has circulated a figure of $1.9 billion in foreign exchange earnings over the 25-year operating period.

The Laos government equity contribution – up to 25% of the project company NTPC – is backed by loans and grants from the EIB ($55 million over 30 years with a six year grace period), the ADB ($20 million long term loan), the World Bank/IDA ($20 million) and AFD ($6 million).

The project is backed by a 25-year take-or-pay PPA with Thai state generator EGAT that covers 95% (995MW) of output. NTPC will export about 5,354 gigawatt-hours (GWh) of electricity annually to Thailand with the remaining 5% of output sold to Electricite de Laos.

The $1 billion multisourced debt (comprising 50% US dollar debt and 50% Thai baht) is split into 12 tranches – a $126 million three-tranche political risk guarantee (PRG) loan, a $200 million three-tranche export credit agency loan, a $174 million five-tranche direct loan, and a Bt20 billion ($500 million) loan. Tenor on the Baht loan is 15.5 years with US dollar debt running for 17 years – both tenors include a six-month caution for construction delay.

Offshore commercial lenders arranging the US dollar PRG and export credit agency financing are ANZ (technical and insurance), Bank of Tokyo-Mitsubishi, BNP Paribas (documentation), Calyon, Fortis (PRG/PRI Coordinator), ING, KBC Bank (Modelling), SG CIB (ECA coordinator) and Standard Chartered Bank. The banks will be lending on a pro rata basis with no sell down planned.
PRG providers for the loans are the Asian Development Bank (ADB), the World Bank/IDA (International Development Association) and the Multilateral Investment Guarantee Agency (MIGA).

Pricing on the three $42 million PRG tranches varies. The World Bank/IDA tranche is 200bp over Libor during pre-completion, and post-completion is on a step-up basis. Years one to four is 200bp, years five to eight is 215bp and years nine to 12 is 230bp.

The MIGA and ADB PRG loans are priced at 180bp over Libor during pre-completion, with post-completion step-ups of 155bp for years one to four, 167.5bp for years five to eight and 180bp for years nine to 12.

The $200 million export credit agency support is led by Coface and then reinsured with EKN and GIEK. The support includes construction risk – a first for Coface. The fronting structure also features an innovative fixed-rate lending mechanism via stabilised rates provided by Natexis.
The export credit agency facilities feature a spread of 100bp over Libor during construction, with post-completion step-ups of 80bp for years one to four, 85bp for years five to eight and 90bp for years nine to 12.

The five direct loans will come from: ADB with a $50 million contribution, Nordic Investment Bank (NIB) with a $34 million commitment, and Proparco, Agence Francaise de Developpement (AFD) and Export Import Bank of Thailand (Thai Exim) with a $30 million pledge apiece. The loans are priced at 300bp over Libor during pre-completion and 275bp post-completion. Thai Exim's portion is at 325bp for pre-completion and 300bp for post-completion.

The local Bt20 billion tranche is arranged by seven Thai banks – Bangkok Bank, Bank of Ayudhya, Kasikornbank, Krung Thai Bank, Siam Commercial Bank, Thai Military Bank and Siam City Bank. Lending will not be on a pro rata basis and there may be some sell-down to house banks.

The loan has two pricing features. The first Bht9 billion to be drawn down will be at a fixed rate of 8.25%, while the second Bht9 billion will be at 150bp over the minimum lending rate (MLR) during construction and 125bp after completion. The remaining Bht2 billion will be used for contingency measures.

Drawdown is scheduled for early June but construction – expected to take around 54 months – has already started, funded by $120 million in sponsor equity.

The project will always be remembered for the environmental arguments it has spawned. Arguably, Laos is way down the list in terms of benefit from the deal and the project is certain to raise questions over the effectiveness of development lending policy at the World Bank and whether the Equator Priniciples are anything more than window dressing.

But in terms of financial engineering, the deals most interesting feature is the role of Coface. The Coface-led tranches are small relative to the rest of the financing but the mechanisms employed illustrate a willingness to innovate and take on risk that has not been seen at Coface before.

Nam Theun II Power Co
Status: Financial close 3 May 2005
Description: $1.45 billion hydroelectric project in Laos
Sponsors: EdF International; EGCO; Electricité du Laos; Italian-Thai Development
Financial advisory to sponsors: ANZ; Kasikornbank
Equity loan participants: EIB; ADB; AFD
Multilateral direct loan participants: ADB; Nordic Investment Bank; Proparco; AFD; Thai Exim
PRG providers: ADB; Miga; World Bank/IDA
Mandated lead arrangers US dollar debt: ANZ; Bank of Tokyo-Mitsubishi; BNP Paribas; Calyon; Fortis; KBC Bank; SG; Standard Chartered Bank
Mandated lead arrangers Thai baht debt: Bangkok Bank, Bank of Ayudhya, Kasikornbank, Krung Thai Bank, Siam Commercial Bank, Thai Military Bank and Siam City Bank
Legal counsel to sponsor: Clifford Chance
Legal counsel to lenders: Allen & Overy; Chandler & Tong-Ek; Mekong Law Group
Technical adviser: PB Power