Daegu: on track for foreign debt
South Korea's first Private Participation in Infrastructure (PPI)
project with foreign bank participation is scheduled to close in
July to finance the construction of the Daegu-Pusan Expressway.
According to a source at Dai-Ichi Kangyo (DKB) Bank which is
arranging the $100 million off-shore loan, three foreign banks, one
European and two Japanese will join the syndication. The arrangers
declined to give further details of the participants until after
the deal has formally closed.
The offshore loan is part of the total Won 2.762 trillion ($2.14 billion) project, of which Won 2.052 trillion is construction cost. The offshore tranche is the last piece in the funding jigsaw that includes a Won 490 billion Won-denominated on-shore tranche, a Won 500 billion project bond (to be launched in two to three years time depending on market conditions) and a Won 921 billion government subsidy. Sponsor equity will make up the balance. Korea Development Bank (KDB) arranged the onshore tranche in December last year and will act as lead manager for the project bond.
The sponsors and EPC contractors for the expressway include Hyundai Heavy Industries, Doosan Heavy Industries, Kumho Industrial, Hanjoong, Songchon Construction, Daewoo Engineering & Construction, Kyungdong and SK Engineering & Construction. The sponsor list has been substantial altered from the original list, partly due to the restructuring of the Korean corporate sector. The expressway is being built on a Build Transfer Operate (BTO) basis.
Banking sources say that it has been a challenge to sell the offshore tranche to the foreign banking community. ?Korean law is very similar to Japanese law and is based on continental rather than common law concepts,? says one financier involved in the transaction. ?That means that lenders have had to rely heavily on interpretation, and, where the documentation provisions are not clear, the existing law has to be applied. All in all, its meant the arrangers had a lot of careful explaining to do,? says the banking source. Market observers expect legal uncertainties to be reflected in the price which was undisclosed as Project Finance went to press. Local legal counsel for the banks was Kim & Company. Linklaters acted for the lenders internationally.
As a PPI development, the Daegu-Pusan Expressway enjoys substantial government support in addition to the initial state subsidy. Among the incentives for private participation in infrastructure under the PPI legislation are: a 50% exemption on capital gains tax, a tax rate of 15% on infrastructure bonds issued by the concessionaire, and exemptions from acquisition tax and registration tax for all projects. The government also allows for adjustment of tariffs or financial support for foreign exchange loans, in the event of severe adverse foreign currency fluctuations. Bankers say the expressway financing will also enjoy a minimum revenue guarantee.
In this deal, the protection mechanism against severe foreign exchange fluctuations kicks in if the Korean Won depreciates by over 20% against a pre-agreed base exchange rate. In that even, the government will compensate the sponsors for 50%of the FX loss incurred for the period that the currency has devalued over by 20%. By the same token, if the currency appreciates by over 20%, the sponsors are obliged to pass fifty percent of the FX gains back to government.
Meanwhile, an official at Korea Development Bank says that the project bond will either be launched with a term of 17 years or two separate bond issues will be launched consecutively first for seven years and then for 10 years. Market conditions will decide which of the two options is chosen.
The full list of participants in the onshore bank debt tranche comprises: Hanvit Bank, Housing & Construction Bank, Samsung Life Insurance, Kobo Life Insurance, Cho Hung Bank, Pusan Bank, Daegu Bank, Shinhan Bank and National Agricultural Cooperative Federation. The onshore loan carries a margin of 1.6% over the 3 year A+ corporate bond rate. Maturity is 18 years from signing compared with a maturity of 17 years after signing for the offshore loan.
The construction and financing costs are to be recovered from tollgate fees for a 30-year period after the completion of the road. If construction goes to schedule, and according to KDB, the expressway will be operated by the sponsors between June 2006 and May 2035. Government sources expect the expressway to handle over 55,000 vehicles per day when the road is opened, climbing to over 95,000 vehicles a day in 2020. The government estimates that the road project will deliver a return on equity of 14.67%.
The PPI scheme was set up in 1999 because of the failure of the original private sector participation legislation, including the Social Overhead Capital Investment Act of 1994, to induce companies to work with government on infrastructure projects. The new PPI landscape includes an Infrastructure Fund to carry out equity and loan investment in PPI projects on a commercial basis and the Private Infrastructure Investment Center of Korea (PICKO) which provides approves and facilitates the involvement of foreign and domestic companies in PPI deals.
Is this a market that the foreign banking community will be able to tap into? One foreign banker notes that while there are a lot of PPI deals on the horizon, the Korean financial sector is currently flush with liquidity and eager to invest in local projects. ?It's only the very largest deals like the Daegu-Pusan deal which are likely to have a foreign currency tranche and foreign banking involvement,? he says.
The offshore loan is part of the total Won 2.762 trillion ($2.14 billion) project, of which Won 2.052 trillion is construction cost. The offshore tranche is the last piece in the funding jigsaw that includes a Won 490 billion Won-denominated on-shore tranche, a Won 500 billion project bond (to be launched in two to three years time depending on market conditions) and a Won 921 billion government subsidy. Sponsor equity will make up the balance. Korea Development Bank (KDB) arranged the onshore tranche in December last year and will act as lead manager for the project bond.
The sponsors and EPC contractors for the expressway include Hyundai Heavy Industries, Doosan Heavy Industries, Kumho Industrial, Hanjoong, Songchon Construction, Daewoo Engineering & Construction, Kyungdong and SK Engineering & Construction. The sponsor list has been substantial altered from the original list, partly due to the restructuring of the Korean corporate sector. The expressway is being built on a Build Transfer Operate (BTO) basis.
Banking sources say that it has been a challenge to sell the offshore tranche to the foreign banking community. ?Korean law is very similar to Japanese law and is based on continental rather than common law concepts,? says one financier involved in the transaction. ?That means that lenders have had to rely heavily on interpretation, and, where the documentation provisions are not clear, the existing law has to be applied. All in all, its meant the arrangers had a lot of careful explaining to do,? says the banking source. Market observers expect legal uncertainties to be reflected in the price which was undisclosed as Project Finance went to press. Local legal counsel for the banks was Kim & Company. Linklaters acted for the lenders internationally.
As a PPI development, the Daegu-Pusan Expressway enjoys substantial government support in addition to the initial state subsidy. Among the incentives for private participation in infrastructure under the PPI legislation are: a 50% exemption on capital gains tax, a tax rate of 15% on infrastructure bonds issued by the concessionaire, and exemptions from acquisition tax and registration tax for all projects. The government also allows for adjustment of tariffs or financial support for foreign exchange loans, in the event of severe adverse foreign currency fluctuations. Bankers say the expressway financing will also enjoy a minimum revenue guarantee.
In this deal, the protection mechanism against severe foreign exchange fluctuations kicks in if the Korean Won depreciates by over 20% against a pre-agreed base exchange rate. In that even, the government will compensate the sponsors for 50%of the FX loss incurred for the period that the currency has devalued over by 20%. By the same token, if the currency appreciates by over 20%, the sponsors are obliged to pass fifty percent of the FX gains back to government.
Meanwhile, an official at Korea Development Bank says that the project bond will either be launched with a term of 17 years or two separate bond issues will be launched consecutively first for seven years and then for 10 years. Market conditions will decide which of the two options is chosen.
The full list of participants in the onshore bank debt tranche comprises: Hanvit Bank, Housing & Construction Bank, Samsung Life Insurance, Kobo Life Insurance, Cho Hung Bank, Pusan Bank, Daegu Bank, Shinhan Bank and National Agricultural Cooperative Federation. The onshore loan carries a margin of 1.6% over the 3 year A+ corporate bond rate. Maturity is 18 years from signing compared with a maturity of 17 years after signing for the offshore loan.
The construction and financing costs are to be recovered from tollgate fees for a 30-year period after the completion of the road. If construction goes to schedule, and according to KDB, the expressway will be operated by the sponsors between June 2006 and May 2035. Government sources expect the expressway to handle over 55,000 vehicles per day when the road is opened, climbing to over 95,000 vehicles a day in 2020. The government estimates that the road project will deliver a return on equity of 14.67%.
The PPI scheme was set up in 1999 because of the failure of the original private sector participation legislation, including the Social Overhead Capital Investment Act of 1994, to induce companies to work with government on infrastructure projects. The new PPI landscape includes an Infrastructure Fund to carry out equity and loan investment in PPI projects on a commercial basis and the Private Infrastructure Investment Center of Korea (PICKO) which provides approves and facilitates the involvement of foreign and domestic companies in PPI deals.
Is this a market that the foreign banking community will be able to tap into? One foreign banker notes that while there are a lot of PPI deals on the horizon, the Korean financial sector is currently flush with liquidity and eager to invest in local projects. ?It's only the very largest deals like the Daegu-Pusan deal which are likely to have a foreign currency tranche and foreign banking involvement,? he says.
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