Relief rather than elation seems to have been the prevailing emotion following the recent closure of the Kepco Ilijan Corporation (KEILCO) project financing. Launched back in 1997, the financing for KEILCO's 2x600 MW combined cycle, IPP power plant overran a number of deadlines on its way to eventual financial close on November 10, including the sponsor's own self-imposed deadline of June 30.

The current political turmoil in the Philippines surrounding the possible impeachment of President Estrada had little to do with the delay, say bankers involved in the transaction. Rather the sponsors, the lenders and the off-taker (National Power Corp) have spent much of the time over the last three years restructuring an energy concession agreement (ECA), originally signed in 1997, in order to turn the document into bankable material.

"One of the most significant features of the negotiations," says one of the arrangers, "centered on how National Power Corp would get to grips with its obligations to provide natural gas to the project, a relatively unfamiliar fuel source for both it and many other power purchasers in Asia." In the Ilijan development, the IPP itself is not responsible for sourcing fuel - that will be provided by NPC under the ECA, in contrast to a more traditional PPA structure where a power producer is responsible for fuel supply.

Another challenge, the KEILCO power station will run using Mitsubishi Heavy Industries latest 501G gas turbine, a piece of equipment that has never before been financed on a project finance basis, says a Hong Kong based banker. Although Mitsubishi describes 501G as proven technology, the arrangers and lenders, with their different interpretation of the word proven requested additional sponsor support (exactly what bankers wouldn't reveal) which kicks in the unlikely event that the turbine fails to perform to expectations.

The deal is also noteworthy for being one of the few instances in which US Eximbank has been prepared to provide a comprehensive guarantee commencing from pre-completion. As part of the Exim tranche, Citibank will establish an SPV to issue asset backed CP notes backed by the Exim guarantee. "Usually," notes one banker, "Exim provides political risk insurance during construction and then a comprehensive guarantee and/or a direct loan after the development is operational." Exim was prepared to go the extra mile, says one Hong Kong banker, because the institution was comfortable with the risk allocation between lenders and sponsors and because of the high level of support from other export credit agencies. The Ilijan deal is, in fact, the first in which US Exim, Japan Bank for International Cooperation and Korea Export Import Bank have worked together.

Pricing of the $102 million JBIC co-financing tranche has been confirmed by a banker involved in the deal as 85bp over Libor during construction and at 120bp over Libor after construction. This represents a substantial discount to the financing cost of other recent IPP project financings in the Philippines ? a function of the substantial sponsor and ECA support and the 50% commercial risk coverage from Japan's Ministry of International Trade and Industry (MITI), attached to the co-financing piece.

There will be no general syndication of the co-financing tranche because of its relatively small size.

Contrary to what has been reported elsewhere, this is not the first time that MITI has provided commercial insurance on a limited recourse basis. "But," says a source at the Japanese institution, "we aren't regular providers of commercial risk insurance for power sector projects. In this case security issues were tough for the lenders and that's why we got involved."

The Ilijan tariff is also said to be very low by historical Philippine IPP standards. "That's not good for Kepco's margins, and it also means that the overall funding package lacks the substantial financial cushion seen in other Philippine power deals," says a Singapore financier. In one respect, however, the low tariff is good news for the project financing. "What it means," says Christophe Rousseau at BNP Paribas, "is that it is unlikely that the ECA will have to be renegotiated as the deregulation of the Philippines power market gets underway, unlike some of the more unfavourable PPAs signed in the Ramos era." "The Ilijan ECA will stand the test of deregulation," agrees an official at Kepco.

NPC is expected to renegotiate high priced PPAs because, as part of the deregulation process, the company will transfer some of its existing power purchase obligations to private distributors. Since, private distributors will be unwilling to enter into agreements that are well above current market rates, NPC could be forced to rewrite current PPA's to make its power assets more attractive to potential buyers.

KEILCO is scheduled to complete the Ilijan plant in 2002 and will then run the plant under a build-operate-transfer scheme for 20 years, after which ownership will revert to NPC.

Ilijan is one of three gas-fired plants being built in the Philippines that will be linked to the Malampaya gas field, the largest natural gas development project in the Philippines and one of the largest-ever foreign investments in the country. Shell Philippines Exploration, Texaco, and the Philippine National Oil Company have joined together to tap the Malampaya natural gas field's reserves which are located off Palawan, in the South China Sea.