Foreign companies, banks and corporates have long been involved in Korean infrastructure projects, but rarely on the scale seen in the Pusan port project, which signed last month. Pusan represents both the largest offshore loan yet seen in a Korean infrastructure project financing and also one of the largest investments in a Korean development by a foreign company (in this case CSX World Terminals).

The first phase of the greenfield project (the phase currently being financed) involves the construction of a new port with six container berths, and 2000 metres of quayside and facilities. The total cost of this phase is about $1.2 billion.

The financing package for the project company, Pusan Newport Company (PNC), comprises a non-repayable government subsidy of approximately $300 million, $250 million in sponsors' equity, W245 billion ($200 million) of debt raised onshore and the ground-breaking $276 million offshore tranche. The investors provide only 50% of their equity upfront, with the remaining 50% to be committed soon after competition.

The mandated lead arrangers for the Won-denominated debt are Kookmin Bank and Samsung Life Insurance. The international mandated lead arrangers comprise Banca Intesa, Bayerische Hypo-und Vereinsbank (BHV), Credit Lyonnais, DZ Bank and Bank of Tokyo-Mitsubishi.

The $276 million offshore loan is more than twice the size of the largest previous offshore loans. In 2001, two road project financings, for the Deagu Pusan Expressway and the Soeul Beltway, raised $100 million from offshore sources. Even with those limited amounts, bankers questioned the reason for US Dollar funds when both projects would benefit purely Won revenues. The lion's share of Pusan's revenues, in contrast, will be denominated in US Dollars, coming from the port's trans-shipment business.

Not only is this the largest offshore loan yet seen, it is also the only offshore loan that has been put together minus political risk insurance (PRI). This is both a reflection of the project itself, ?in contrast to a lot Korean infrastructure schemes it does have very good underlying economics,? says one banker, and the nature of government support.

The transaction features government support in the form of termination payouts and foreign exchange protection, but the forex mechanism is relatively unimportant to the fundraising given its projected US Dollar income. According to the terms of the scheme, the government will compensate the sponsors for 50% of the FX loss incurred if the Won devalues over 20% against a pre-agreed base exchange. By the same token, if the currency appreciates over 20%, the sponsors are obliged to pass 50% of the FX gains back to government.

Under the termination payout scheme, creditors' funds are protected. The sponsors may also receive government compensation, but are not guaranteed the same level of payout, says Jamie Douglass, a partner at Linklaters in Hong Kong .

However, the major difference between Pusan and other Korean Private Participation in Infrastructure projects lies in the absence of a minimum revenue guarantee (MRG) support package from government, says Simon Black, at Allen & Overy Hong Kong, which acted for PNC.

Under a typical MRG scheme, the government would be obliged to provide financial support if project revenues fell below 90% of the base case. ?The sponsors opted to do without MRG support because they would also have to pay government if revenues exceed the base revenue case by a certain margin,? says Douglass.

According to a banking source, the government subsidy reflects the relatively high cost of land reclamation and provides, says one, ?an appropriate private sector capital cost for the terminal?.

Syndication of the offshore debt is about to commence. KfW, KBC and WestLB are all acting as sub-underwriters on the US Dollar facility, with final credit approvals pending. For the Won facility, Pusan Bank and Samsung Fire & Marine Insurance have joined the transaction, says a banker.

The Dollar facility is priced between 175bp and 195bp over Libor while the won facility has been priced between 100bp and 150bp over three-year corporate bond paper. Both limited recourse facilities have the ability to reduce their margins based on the debt service coverage ratios that the project achieves. The debt, both won and dollar, has a tenor of just under 13 years.

Underpinning the financing was a construction arrangement that was also a progression for the Korean market. ?It hinges on a western-style EPC contract with no completion guarantees,? says Black. ?The construction contracts therefore had to be made robust enough to deal with construction risk.?

Linklaters acted for both the onshore and offshore lenders, also unusual as Korean banks are usually represented by Korean counsel alone. This reflects the fact that the terms of the contract are governed by English law.

But one important question remains: will the Pusan project financing be a template for other project deals in Korea? ?It will depend on the nature of other Korean projects,? says Douglass, ?the Pusan project is unusual for having most of the revenue stream coming in US Dollars and much of the equipment being sourced internationally and paid for in US Dollars. That made a large foreign currency tranche very rational.? Few other upcoming Korean projects fit the same bill.

For the record, bookrunners are Banca Intesa (also modeling bank), BHV and Credit Lyonnais. Documentation is done by BHV (also technical bank), Credit Lyonnais, Kookmin and DZ Bank. Inter-creditor agent and facility agent for the offshore banks is BTM. Kookmin is onshore facility agent and security agent. DZ Bank is insurance bank. Credit Lyonnais is market study bank.

Drawdown is slated for June or July.

Pusan Newport Company

Status: Financing, OEM and Construction documentation signed May 29

Size: $1.2 billion

Location: Pusan, South Korea

Description: Debt, equity and government subsidy package financing construction of new port

Sponsors: Samsung Corp (25%), CSX World Terminals (24.5%), Hyundai (10%), government-owned Korean Container Terminal Authority (9%), Hanjin Group, Hyundai, Korean Airlines, Doosan and the Lotte Group.

Project equity: $250 million

Project debt: $476 million

Financial advisor: Babcock & Brown

Lawyers: Allen & Overy, Kim & Chang (representing PNC); Linklaters (acting for Korean and International lenders); Lee & Ko (Lenders Korean counsel)