While Singapore has long been a hub for project finance in Asia, most of project financings arranged in the city state have been for developments situated in neighbouring countries. However, over the next six to seven months, at least four financings are expected for Singapore-based projects. Provided everything goes to schedule the deal list will include two power deals and a financing for the fourth NEWater factory. Additionally, a groundbreaking securitisation transaction could be raised against an existing water project. The deal would be the first ABS for a project in South East Asia.

The two power projects, the 720MW natural gas-fired Island Power project and the 500MW Keppel Merlimau power development are both IPPs, but little else appears to connect the two ventures. Sources suggest that, of the two, the Keppel project is the bank market's clear favourite.

Glorious isolation?

Sponsored by InterGen and Sime Darby and advised by Macquarie Bank, Island Power is seeking a S$740 million ($440 million) limited recourse financing. Six banks have been appointed as lead arrangers for the transaction, namely: Standard Chartered, WestLB, KBC, UOB, OCBC and RBS. According to one of the arrangers, a seventh bank, DBS, is due to join shortly.

The arranger says that the financing package for Island Power will include guarantee and ancillary facilities but will be split primarily between two limited recourse tranches, a bullet tranche and an amortization tranche. "The guarantee facility may be denominated in US Dollars but the bulk of the financing will be in Singapore Dollars," he adds.

The source confirms that pricing is in the range of 140bp to 160bp over the Singapore dollar rate. The underwriting fee, rumoured to stand at 120bp, was not disclosed by the official.

The financing is expected to close in the next three to six months, but it is understood that several major banks walked away from the deal because of concerns about the sponsors' credit, the gearing level and the venture's market position.

"There are several reasons for questioning the sponsors' credit profile, including the fact that InterGen plans to sell off a sizeable portion of its stake in the asset and news that InterGen itself may be for sale," says a second Singapore-based banker.

Michael Reading, InterGen's general manager for the project, admits the company is considering whether to dispose of part of its stake in the asset, but, he says: "we would not sell the majority of our stake."

Reading also refutes suggestions that the financing plan will put excessive leverage on the project. "The debt to equity level is lower than SembCogen's and that project was financed successfully," he points out. The debt to equity ratio quoted by the lead arrangers is in fact 60:40, quite typical for merchant power financings.

But several bankers have expressed concerns about the underlying loan to value ratio. "InterGen is one of the plant sponsors and InterGen's part parent, Bechtel is the EPC contractor. Given the relationship between the two, people are a bit concerned that Bechtel will be able to charge more for the cost of building the power station, and therefore the cost will be artificially inflated," says one financier.

The third major concern for bankers is the venture's competitive position in Singapore's electricity market. On the plus side, Island Power will be one of the lowest-cost producers. But it is also the only venture not owned by a Singaporean government-linked company (GLC). Nor does Island Power have a retail arm in Singapore that could provide some hedge against pool prices.

The project is now also facing potential problems over gas supply due to a dispute over pipeline access between Power Gas, the sole licensed gas transporter and gas system operator and Gas Supply Pte Ltd, Singapore's natural gas importer and supplier.

In July last year, Island Power signed a $1.5 billion natural gas supply deal with ConocoPhillips, whereby the venture will purchase 100 million cubic feet of gas per day from the gas producer's field in South Sumatra. The gas is to be delivered via a Power Gas pipeline.

Reading believes the dispute will be resolved well before Island Power needs the gas (in 2006). "Both the companies involved are state-owned companies. I can't see the Singapore government allowing this to develop into a long-standing problem," he says.

Although Island Power is the only non-GLC player at the moment, privatisation of other government-owned generating plant, such as Tuas Power, PowerSeraya and Senoko Power, is still on the agenda, according to Lee Kim Shin, a partner at law firm Allen & Gledhill. Singapore was expected to sell these assets to the private sector back in 2001, but the economic downturn in the region led to depressed energy prices, poor investor sentiment and poor valuation. Privatisation was therefore put on the back burner.

As Lee remarks, Temasek, the investment arm of the Singapore government, announced last year that privatisation of the generating companies is still very much on the agenda. When the New Electricity Market was established (it commenced trading in January 2003) the government-controlled generating companies were issued with new generation licenses. The licenses facilitate divestment to private investors, says Lee.

The local hero

Slightly behind Island Power in the race to financial close, Keppel Energy has invited banks to become lead arrangers for its approximately S$500 million project financing, which will include a two-year, S$200 million equity bridge loan. UFJ Bank is advising the power company on the financing and banks have until the end of October to submit offers. Keppel Energy expects to have the plant in operation at the end of 2006.

It remains to be seen how Keppel Merlimau's pricing will compare to the Island Power deal. From a banker's point of view, the project (a combined cycle gas turbine facility to be located on Singapore's Jurong Island) and the financing present quite a contrast with the Island Power deal. Apart from the smaller plant size, Keppel is a Singapore GLC, it has an electricity retailing arm and, according to one banker, has already pre-sold 200MW of the new plant's output into the market.

"In fact, Keppel Energy's subsidiary, Keppel Electric Pte Ltd (the retailer) is the only independent licensee in Singapore allowed to sell electricity to industrial and commercial customers," says a banker close to the company.

Island Power's arrangers may privately recognize that they are second favourites behind Keppel but on the face of it, they remain upbeat about appetite for the financing. "The evidence is that appetite will be good," says one arranger. "Judging by interest we have had, we expect quite a few banks to join the facility who have not previously been involved in the IPP business in Asia."

Giving ABS the water treatment

The Island Power and Keppel deals may be larger, but Hyflux, the Singaporean water treatment company, has come up with the most noteworthy financing proposal for a domestic project, a future flow securitisation of cashflow from the company's SingSpring venture. SingSpring is under construction and will be the country's first ever seawater desalination plant, at a cost of S$200 million. Deutsche Bank has been mandated to evaluate the feasibility of the deal.

There have been several examples of securitisations for water utilities before. For instance, Deutsche Bank has arranged a deal for the UK's Northumbrian Water. However, if completed, it is thought that the deal would be the first securitisation of a yet to be built water facility and the first for a desalination plant. More importantly for Singapore and Asia more generally, it would also be the first future flow securitisation of any sort for a utility outside of Australia.

According to Murray Ashdown, head of project finance for HSBC in Singapore, the planned transaction is not just the first ABS for a project in Singapore, but also the first project bond. All the bonds we have seen in Singapore up until now have been for corporates or property assets," says Ashdown.

Hyflux hopes to launch a transaction this year, which would not leave Deutsche much time to complete the feasibility study. But in favour of the deal, bankers say the country has the necessary legal infrastructure for a future flow transaction. Moreover, a take-or-pay purchase contract (Singapore's Public Utilities board is the offtaker) gives a high degree of certainty to the cashflows and should allow a cost-effective issue. "The major risk which still needs to be offset, is completion risk," says a banker. The SingSpring plant, which has a designed capacity to supply 136,380 m3 of potable water a day, is not due for completion until December 2005. It is estimated that revenues from the plant will be up to S$50 million a year over the 20-year concession.

Another financier questions whether the unrated nature of the Public Utilities Board (PUB) presents a problem for the securitisation proposal, but a securitisation specialist argues that an implied rating of the government entity would be sufficient. Singapore has a long term AAA credit rating from Standard & Poor's, a rating which the PUB would also enjoy.

The proceeds from the securitisation will be used to repay the original financing for SingSpring. This earlier transaction was arranged by DBS, with ING, KBS and Standard Chartered as co-leads. According to a source involved in the original deal, the bank financing included a S$158.5 million, 16-year loan and a S$6.5 million standby loan to fund a portion of any cost overrun. If the securitisation is completed, Hyflux would hold only a minority interest in the desalination plant.

Market sources says Hyflux has mandated the securitisation study because of the sizeable capital expenditure commitments it has outside of Singapore and its relatively modest balance sheet. The company recently won two water seawater desalination plant ventures in China. Combined, the projects have an estimated cost of $140 million. If Hyflux decides that the securitisation plan is not cost efficient, a banker says it is likely to sell of part of its shareholding in the asset to private investors.

Waiting in the wings is another water project for Singapore, the S$100 million NEWater design-build-own-operate (DBOO) project. NEWater is scheduled to start operations at Ulu Pandan by 2006. In keeping with its guidelines for tendered government projects, the Singapore government has disclosed details of the nine bids submitted for the project on its procurement website: www.gebiz.gov.sg. Most of the bidding groups have the support of financial advisers. Keppel Engineering, for instance, is advised by HSBC, Hyflux by DBS, and CH2M Hill by Calyon.

According to the details released, the three lowest priced bids have come from (in order from the lowest up): Dayen Environmental, Keppel and Hyflux. However, one banker says that controversy has arisen over the way in which bidders were asked to draw up their cost estimates. "There was little in the way of detailed instruction about what to include in the bid price estimate or how to formulate it. Bidders didn't know whether the costs (from which the price is derived) should be based on first year cost, some sort of levelised cost, or other," he says.

The banker believes that this now presents a considerable problem for the PUB when it comes to evaluating the bids. "They are going to have to go for some lengthy closed door discussions with the individual bidders to fully understand their costings," he says. Market sources therefore expect a delay to the original timetable for announcing the project winner. "The announcement is due, under the original timetable, in January 2005. I would expect that to be pushed back between one and three months," says a bank advising one of the bid groups.

Although the Hyflux securitisation highlights new options for refinancing water projects in Singapore. It is unlikely that the financing for the eventual bid winner will be anything other than a bank debt deal. "The PUB left plenty of scope in its request for proposals for financing innovation, but a standard limited recourse deal, with gearing of between 70:30 and 80:20 is probable," the source suggests.