Polymirae – Korea hot to trot
The PolyMirae limited recourse financing which closed on September
27, is a groundbreaker in Korea's predominantly Won-driven project
finance market. This is the first time that a Korean project
financing has been completed including a significant US dollar
denominated debt tranche.
The transaction finances the acquisition of Daelim's Industrial's polypropylene business by a new joint venture comprising Daelim itself, and the Montell Group consisting of Montell International Holdings, Montell SDK Sunrise and Taiwan Polypropylene. Societe Generale, Fuji Bank and Hana Bank were the deal arrangers.
PolyMirae is not the first project finance transaction in Korea post Asian crisis ? several limited recourse deals have closed over the last two years including a water treatment plant acquisition financing for Vivendi and recently the acquisition by a consortium of LG-Caltex and Texaco of KEPCO's Anyang and Buchon power plants. However, none of these deals included a foreign currency debt portion. General changes in the Korean legal and financial environment including simpler ownership requirements and an easing of the forex regulations have helped to foster the market. So too have initiatives originally aimed at developing the securitization industry in Korea, says Huw Jenkins, partner at Clifford Chance which acted for the banks.
But shortcomings in both the legal framework and documentation standards in Korea have continued, up until now, to discourage international banks from more active involvement. According to industry rumours, the same issues ? an insufficient security package and patchy documentation papers ? were responsible the delay in the signing of the recent LG International/ PowerGen power purchase agreement.
Nevertheless, as there was such a clear rationale for a foreign currency denominated financing for PolyMirae, banks and legal counsel worked particularly hard in this deal to overcome the legal and structural hurdles. It is estimated that about 70% of the revenues from the joint venture will be US dollar revenues from abroad and, says Ashley Wilkins at Societe Generale, it made clear sense to match the US dollar revenue stream with a US dollar debt package (it is for the same reason that the financing is denominated in US dollars rather than Yen, despite the fact that the Won and the Yen have tended to be closer aligned that the US dollar and Won).
Regarding the legal difficulties that had to be overcome, Jenkins says, ?mortgages exist in Korea and its is possible to arrange pledges over a company's books and inventory but there are no general floating charges and registration and perfection of interests is both very difficult and costly?. Registration is so costly in fact that the process of registering all the relevant interests, if approached by conventional means, could amount to several hundred thousand dollars in a deal like PolyMirae.
In order to keep hedging costs within reason (the deal required the hedging of interest rate risks) the arrangers still had to be able to offer any hedging banks parri passu status and some sort of effective registration of their interests. They were therefore given access to the same security mechanism as the institutions lending to the sponsors. A number of potential financial institutions who had originally stepped forward and expressed their interest in providing hedge facilities were therefore also included in the security documents, ?rather like in an all-monies security document under English law,? says Jenkins.
Similarly, as it is difficult to take security over future receivables under Korean law but possible if the revenues are included in a pre-existing contract, the Polymirae financing places any future sales within the scope of a contract entered into at the time of the financing. Jenkins says Polymirae's sales agents signed a contract with the joint venture company whereby they agree to buy polypropylene from the new company in so far as they can in turn find customers to by the product. The contract does not oblige the sales agents to purchase any specific amount of the product and therefore the financing still hinges on pure market risk, but it serves its purpose as an indirect means to attain security over future receivables.
Lending institutions participating in tranches A and B of the transaction get further comfort from the Won22 billion tranche C working capital facility provided by Hana Bank. Frank Lee, at Hana Bank explains, ?if the project does get into trouble, tranche C acts as a sort of long term guarantee that can support the repayment of tranches A and B.?
It is also significant that two life insurance companies, Samsung Life Insurance Co and Kyobo Life Insurance were the two participants (apart from Hana Bank itself) in tranche B. ?We specifically decided to target life insurance companies for this deal in order to try and broaden the local project debt market,? says Lee. Until the PolyMirae deal, life insurance companies have not been particularly active in the domestic project finance business. As life insurance companies have now gained some exposure to limited recourse deals, Lee expects the institutions to be long term players in the market.
The US dollar tranche was priced at 325 basis points over Libor. Tranche B was priced at 230 basis points over benchmark three year A+ local corporate bond rates. ?The going rate in the local bond market?, says Lee, ?is about 200 to 250 basis points.?
Wilkins notes the limited recourse financing was achievable thanks to the extremely strong economics of PolyMirae. By investing at the bottom of the polypropylene industry cycle, PolyMirae was able to obtain a very competitive price for its assets which implied that it would be able to generate robust profits as soon as the downturn was over ? this is generally expected to take place within the next two years.
The transaction finances the acquisition of Daelim's Industrial's polypropylene business by a new joint venture comprising Daelim itself, and the Montell Group consisting of Montell International Holdings, Montell SDK Sunrise and Taiwan Polypropylene. Societe Generale, Fuji Bank and Hana Bank were the deal arrangers.
PolyMirae is not the first project finance transaction in Korea post Asian crisis ? several limited recourse deals have closed over the last two years including a water treatment plant acquisition financing for Vivendi and recently the acquisition by a consortium of LG-Caltex and Texaco of KEPCO's Anyang and Buchon power plants. However, none of these deals included a foreign currency debt portion. General changes in the Korean legal and financial environment including simpler ownership requirements and an easing of the forex regulations have helped to foster the market. So too have initiatives originally aimed at developing the securitization industry in Korea, says Huw Jenkins, partner at Clifford Chance which acted for the banks.
But shortcomings in both the legal framework and documentation standards in Korea have continued, up until now, to discourage international banks from more active involvement. According to industry rumours, the same issues ? an insufficient security package and patchy documentation papers ? were responsible the delay in the signing of the recent LG International/ PowerGen power purchase agreement.
Nevertheless, as there was such a clear rationale for a foreign currency denominated financing for PolyMirae, banks and legal counsel worked particularly hard in this deal to overcome the legal and structural hurdles. It is estimated that about 70% of the revenues from the joint venture will be US dollar revenues from abroad and, says Ashley Wilkins at Societe Generale, it made clear sense to match the US dollar revenue stream with a US dollar debt package (it is for the same reason that the financing is denominated in US dollars rather than Yen, despite the fact that the Won and the Yen have tended to be closer aligned that the US dollar and Won).
Regarding the legal difficulties that had to be overcome, Jenkins says, ?mortgages exist in Korea and its is possible to arrange pledges over a company's books and inventory but there are no general floating charges and registration and perfection of interests is both very difficult and costly?. Registration is so costly in fact that the process of registering all the relevant interests, if approached by conventional means, could amount to several hundred thousand dollars in a deal like PolyMirae.
In order to keep hedging costs within reason (the deal required the hedging of interest rate risks) the arrangers still had to be able to offer any hedging banks parri passu status and some sort of effective registration of their interests. They were therefore given access to the same security mechanism as the institutions lending to the sponsors. A number of potential financial institutions who had originally stepped forward and expressed their interest in providing hedge facilities were therefore also included in the security documents, ?rather like in an all-monies security document under English law,? says Jenkins.
Similarly, as it is difficult to take security over future receivables under Korean law but possible if the revenues are included in a pre-existing contract, the Polymirae financing places any future sales within the scope of a contract entered into at the time of the financing. Jenkins says Polymirae's sales agents signed a contract with the joint venture company whereby they agree to buy polypropylene from the new company in so far as they can in turn find customers to by the product. The contract does not oblige the sales agents to purchase any specific amount of the product and therefore the financing still hinges on pure market risk, but it serves its purpose as an indirect means to attain security over future receivables.
Lending institutions participating in tranches A and B of the transaction get further comfort from the Won22 billion tranche C working capital facility provided by Hana Bank. Frank Lee, at Hana Bank explains, ?if the project does get into trouble, tranche C acts as a sort of long term guarantee that can support the repayment of tranches A and B.?
It is also significant that two life insurance companies, Samsung Life Insurance Co and Kyobo Life Insurance were the two participants (apart from Hana Bank itself) in tranche B. ?We specifically decided to target life insurance companies for this deal in order to try and broaden the local project debt market,? says Lee. Until the PolyMirae deal, life insurance companies have not been particularly active in the domestic project finance business. As life insurance companies have now gained some exposure to limited recourse deals, Lee expects the institutions to be long term players in the market.
The US dollar tranche was priced at 325 basis points over Libor. Tranche B was priced at 230 basis points over benchmark three year A+ local corporate bond rates. ?The going rate in the local bond market?, says Lee, ?is about 200 to 250 basis points.?
Wilkins notes the limited recourse financing was achievable thanks to the extremely strong economics of PolyMirae. By investing at the bottom of the polypropylene industry cycle, PolyMirae was able to obtain a very competitive price for its assets which implied that it would be able to generate robust profits as soon as the downturn was over ? this is generally expected to take place within the next two years.
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