Bowin to demand
Three years after the onset of the Asian financial crisis,
Thailand's power market is at long last showing signs of recovery.
Recent data released by the Thai authorities reveals power
consumption by industry was up 9.8% in May, compared with a decline
of 2.9% in May last year. Total monthly electricity demand
(compared with the same month the year previous) has been rising
since July last year.
Nevertheless, for international lenders caution is still the watchword. Of the major project finance deals for Thai power assets concluded this year, all have included blanket cover or finance from ECAs, or extensive corporate guarantees combined with political risk insurance (PRI), a reflection of the difficulties of raising finance on a clean (unsupported) basis.
The $284 million debt financing for Bowin Power's 741MW Chonburi power plant is a case in point. The three tranche debt package includes political risk insurance cover from three export credit and supranational organizations: ERG (covering a $150 million tranche), EIB (directly funding a $70.9 million facility) and OND providing cover for the third, $62.75 million tranche. The OND and ERG tranches do include clean portions but they are limited ? ERG's PRI cover extends to 95% of the ERG tranche, OND's to 90% of its tranche.
Similarly, earlier in the year, the Eastern Power and Electric Company financing for the 350MW Bang Bo IPP (arranged by BNP Paribas, Citicorp, and Tokai Bank on a club basis) included a $115 million offshore facility fully backed by political risk insurance from MITI and a second tranche of $45 million facility guaranteed by one of the principal shareholders, Total Fina Elf.
The political risk insurance in these deals is, admittedly, mostly standard stuff. In the Bowin financing, ERG's extended political risk insurance provides for the standard confiscation, expropriation, nationalization, currency inconvertibility, political violence, and war risks. But it does also extend to cover for breach of contract by Electricity Generating Authority of Thailand (EGAT) and Petroleum Authority of Thailand (PTT). The ERG insurance commitment also provides cover for swap breakage costs, says one Singapore financier, allowing the borrower to get much more attractive pricing for swaps than would otherwise have been the case. The financier also notes, ?the breach of contract cover from OND can fall away if Thailand fails to control EGAT or PTT ? at this point a higher margin kicks in to compensate for the additional commercial risk.?
What is also noteworthy about Bowin, say bankers involved in the financing, is that the ECAs have agreed in writing that they will not necessarily ask for an arbitration award or court decision in the borrower's favour before making a breach of contract payment under their respective policies. The ECAs have instead agreed to consider other forms of proof for breach of contract, such as an independent expert's opinion. ?This reduces the added political risks of obtaining an award or court decision in the host country against government owned entities like EGAT and PTT. Therefore avoiding the sort of situation that arose vis a vis PLN in Indonesia,? adds the Singapore banker.
So far untested, (the million dollar questions as one banker puts it) is what the international project finance market's reaction would be to a sizeable unsupported US dollar tranche as opposed to the limited unsupported elements included in the Bowin transaction.
None of the bankers interviewed by Project Finance believe that an unsupported tranche would have been possible in the original timetable of either the Bowin or Eastern deals. ?An uncovered tranche might be something to try if the deals were being launched today but there would even now only be a handful of international takers, even if the pricing was set at a very high premium to the covered financing,? says a second banker in Singapore.
The Philippine project finance market, which in many ways is similar to the Thai market, is distinct in this respect. ?We have seen sponsors try and get projects away in the Philippine market with up to 25% of the debt package uninsured, but so far bankers have not been willing to consider making a similar bite in Thailand,? says Christopher Thieme, Director, global project finance at BNP Paribas in Singapore.
The single most interesting feature of the Bowin transaction is the second stage financing which, Thieme says, ?will ensure Bowin is one of the first projects anywhere in the world to fully exploit capital structuring possibilities.?
The second stage, scheduled to close in the fourth quarter, will see banks in the existing deal transfer their commitments to a standby letter of credit in support of an issue of preference shares by Bowin. Banks will therefore eventually be tied to the deal on an unfunded rather than funded basis, while retaining funding risk. Depending on take up, approximately $200 million of preference shares in Bowin will be sold to investors in Europe. BNP Paribas is expected to be lead arranger of the issue.
Heavy research and development costs have meant that project sponsors have been reluctant to mandate similar schemes in the past, except on a far smaller scale, says Thieme. Once closed, the Bowin deal should demonstrate, however, that there is a clear payoff. Thieme says that Bowin's cost of funding will be substantially reduced by the capital structuring exercise, by between 100 and 200 basis points.
Ratchaburi goes local
Although the recently signed Ratchaburi Electricity Generating Holding Company (REGHC) financing was structured as a commercial loan with no insurance or guarantees, it is unlikely that international banks will draw any significant conclusions from the deal. Earlier in the year REGHC were working on a financing plan that included a foreign currency tranche of approximately $300 million, but the deal was finally signed at the end of August as a wholly on-shore, Baht denominated transaction.
For the record, eight banks are providing the Bht44 billion ($1.1 billion) to enable REGHC to buy the Ratchaburi power complex from EGAT. The banks are: Krung Thai Bank ? taking Bht10.4 billion, Siam Commercial Bank (Bht8.9 billion), Bangkok Bank (Bht8.4 billion), Bank of Ayudhya (Bht5.23 billion), BankThai (Bht4.3 billion), ABN Amro (Bht3 billion), Citibank (Bht2 billion) and Thai Military Bank (Bht1.8 billion).
Although there are other international banks with the ability to lend in Baht, notably Standard Chartered and HSBC, ABN Amro and Citibank are the only Baht lenders who also have the ambition to be major project finance players in the Thai local currency market, notes one banking source.
The Bht44 billion in funds pay for the transfer of assets from EGAT to Ratchaburi Electricity Generating, a process which bankers and Thai officials expect by to be completed by 2002. A first installment of Bht18.76 billion is due in October this year and will finance the turbine and steam generating thermal plants as well as land and additional facilities. A second installment of Bht18.7 billion is due in July 2001 and will finance two combined cycle thermal generators. The remaining Bht5.3 billion will purchase an additional combined cycle thermal generator in April 2002.
According to Thieme at BNP Paribas, under the original financing plan, 25% of the transaction was to be financed off-shore. Citibank, Tokai, BoTM, Dai-Ichi Kangyo and BNP Paribas (as coordinating bank) clubbed together to underwrite the prospective foreign currency portion. ?It was anticipated that MITI would also step in to provide the foreign tranche with extended political risk insurance,? adds one banker.
International bankers admit the decision to go all-Baht makes sense ? REGHC's and EGAT's revenues are also almost exclusively Baht denominated. And while Albert van Welderen Rengers, vice-president, power and infrastructure finance, at ABN Amro in Singapore, notes that local currency financing costs are greater than Libor funding, REGHC would have incurred additional and substantial hedging costs on the proposed foreign tranche. According to Boonchoo Direksathapon, the company's acting managing director, ultimately it was foreign currency hedging costs which deterred EGAT from approving an off-shore facility.
One curious feature of the Ratchaburi deal is the principal repayment schedule. The size of the repayments in the Ratchaburi financing decrease slightly over time running contrary to the now standard market practice of levelised debt service coverage ratios (neither significantly decreasing or increasing during the repayment term). ?The holding company probably had one eye on the upcoming privatization when it opted for this repayment profile ? as it will allow the newly privatized entity to show increasing equity ratios over time,? the source adds. Ratchaburi Electricity Generating Holding is scheduled to be listed on the Stock Exchange of Thailand in October, with the floatation of 1.6 billion new shares.
Thai officials have eagerly held up the Ratchaburi deal as evidence of recovery in the local banking sector. More cynical western observers argue that the strong appetite displayed by local banks indicates something quite different ? a weak economy providing very few other good lending opportunities for the domestic finance sector.
A more important issue for the international project finance market is whether Ratchaburi sets a financing precedent in the Asian region generally. ?I think international banks will worry that more and more privatizations will go the way of Ratchaburi and opt for 100% local currency debt,? says a banker in Hong Kong.
Deregulation dynamics
According to one of the advisers to the Thai government on energy sector liberalization, Thailand's deregulation policy is based on a series of resolutions issued since 1997. The two key resolutions are the 1 September 1998 Cabinet resolution which approved the ?Master Plan for State Enterprise Sector Reform?, and the Cabinet resolution on 16 February 1999 which endorsed both the privatization of the Ratchaburi power plant and the natural gas deregulation program.
In the first of three stages of deregulation (at the same time as the Ratchaburi power plant is privatized) EGAT is to be corporatized under the State Enterprise Corporatisation Act into autonomous business units.
During this first stage of deregulation, EGAT will retain its pre-eminent position in bulk purchase and supply of power and therefore it is anticipated that regulatory controls will also be established to ensure non-discriminatory treatment of all generators by the transmission body, says the adviser.
The key characteristics of Stage One are:
? Limited private sector participation in generation.
? Long-term central power planning under EGAT's control.
? Limited accountability or incentives to gain productivity efficiencies, due to a lack of competition between the generators.
? Commercial risk shared by the private sector and the government-owned entities.
? No direct customer access to competitive power, except through small-scale power producers.
If the government sticks to its guns, Stage Two, originally slated for the period from 2001 to 2003, will see the gradual introduction of wheeling while EGAT will remain the central supplier of power.
?The privatization of the Ratchaburi power facility sends a firm signal to the market that deregulation and liberalization is still on course, particularly as, at 3,000MW, Ratchaburi is one of EGAT's biggest power assets,? says one project financier. Nevertheless observers do detect that there is less urgency in the government's current efforts to liberalize the power market compared to a year ago. As Thailand has moved from crisis into recovery the pressure that the IMF has been able to exert over the Thai government has reduced. ?The heat is off,? says Silas Wong, vice-president, project finance at Credit Agricole Indosuez, ?and for the energy market that is probably a good thing. Pushing the deregulation timetable back allows more time for electricity demand to improve and for the energy market to get back in shape.?
Although the final structure and the timetable for the completion of energy sector reforms are uncertain, banking appraisals of the regulatory risks for IPPs aren't overly negative. ?EGAT has honored its obligations during the difficult last three years and this should be positively recognized by the financial markets,? says Albert Rengers at ABN Amro. Najeeb Haider director, project finance at Citibank, Hong Kong agrees: ?the Thai power market has traditionally been responsive to the needs of IPPs. Unlike other power markets, IPPs are allowed to pass on increased costs of electricity production directly to the consumers.?
Erring on the side of caution, however, the finance community has been particularly anxious to ensure the cost competitiveness of the Thai power plants they have lent to. ?For Bowin we completed a detailed study to ensure the plant was cost competitive and would enjoy a high level of dispatch irrespective of the PPA,? says Haider.
While Bowin's cost competitiveness relative to other existing power plants in Thailand is a closely guarded secret, it is thought to be the lowest marginal cost producer of electricity in the country outside hydroelectric power production. Both the Eastern Power and Bowin facilities use state of the art, ABB GT26 generator technology. However, with two turbines rather than one, Bowin enjoys additional economies of scale.
The project finance community will have to wait some time before the lessons learnt from Bowin, Ratchaburi, and Eastern can be usefully employed in the Thai market. Two other IPP projects are under discussion; Gulf Power, sponsored by Edison Mission and Gulf Electric, and Union Power Development, sponsored by a group including Union Energy. However, neither project is expected to come to market within 12 months. According to industry rumours the two proposed developments have been delayed not just for environmental reasons (both developments are envisaged as coal-fired ventures). There is also behind the scenes opposition from EGAT which does not want to be in the position of having to buy additional power while the supply and demand balance is still weak.
Nevertheless, for international lenders caution is still the watchword. Of the major project finance deals for Thai power assets concluded this year, all have included blanket cover or finance from ECAs, or extensive corporate guarantees combined with political risk insurance (PRI), a reflection of the difficulties of raising finance on a clean (unsupported) basis.
The $284 million debt financing for Bowin Power's 741MW Chonburi power plant is a case in point. The three tranche debt package includes political risk insurance cover from three export credit and supranational organizations: ERG (covering a $150 million tranche), EIB (directly funding a $70.9 million facility) and OND providing cover for the third, $62.75 million tranche. The OND and ERG tranches do include clean portions but they are limited ? ERG's PRI cover extends to 95% of the ERG tranche, OND's to 90% of its tranche.
Similarly, earlier in the year, the Eastern Power and Electric Company financing for the 350MW Bang Bo IPP (arranged by BNP Paribas, Citicorp, and Tokai Bank on a club basis) included a $115 million offshore facility fully backed by political risk insurance from MITI and a second tranche of $45 million facility guaranteed by one of the principal shareholders, Total Fina Elf.
The political risk insurance in these deals is, admittedly, mostly standard stuff. In the Bowin financing, ERG's extended political risk insurance provides for the standard confiscation, expropriation, nationalization, currency inconvertibility, political violence, and war risks. But it does also extend to cover for breach of contract by Electricity Generating Authority of Thailand (EGAT) and Petroleum Authority of Thailand (PTT). The ERG insurance commitment also provides cover for swap breakage costs, says one Singapore financier, allowing the borrower to get much more attractive pricing for swaps than would otherwise have been the case. The financier also notes, ?the breach of contract cover from OND can fall away if Thailand fails to control EGAT or PTT ? at this point a higher margin kicks in to compensate for the additional commercial risk.?
What is also noteworthy about Bowin, say bankers involved in the financing, is that the ECAs have agreed in writing that they will not necessarily ask for an arbitration award or court decision in the borrower's favour before making a breach of contract payment under their respective policies. The ECAs have instead agreed to consider other forms of proof for breach of contract, such as an independent expert's opinion. ?This reduces the added political risks of obtaining an award or court decision in the host country against government owned entities like EGAT and PTT. Therefore avoiding the sort of situation that arose vis a vis PLN in Indonesia,? adds the Singapore banker.
So far untested, (the million dollar questions as one banker puts it) is what the international project finance market's reaction would be to a sizeable unsupported US dollar tranche as opposed to the limited unsupported elements included in the Bowin transaction.
None of the bankers interviewed by Project Finance believe that an unsupported tranche would have been possible in the original timetable of either the Bowin or Eastern deals. ?An uncovered tranche might be something to try if the deals were being launched today but there would even now only be a handful of international takers, even if the pricing was set at a very high premium to the covered financing,? says a second banker in Singapore.
The Philippine project finance market, which in many ways is similar to the Thai market, is distinct in this respect. ?We have seen sponsors try and get projects away in the Philippine market with up to 25% of the debt package uninsured, but so far bankers have not been willing to consider making a similar bite in Thailand,? says Christopher Thieme, Director, global project finance at BNP Paribas in Singapore.
The single most interesting feature of the Bowin transaction is the second stage financing which, Thieme says, ?will ensure Bowin is one of the first projects anywhere in the world to fully exploit capital structuring possibilities.?
The second stage, scheduled to close in the fourth quarter, will see banks in the existing deal transfer their commitments to a standby letter of credit in support of an issue of preference shares by Bowin. Banks will therefore eventually be tied to the deal on an unfunded rather than funded basis, while retaining funding risk. Depending on take up, approximately $200 million of preference shares in Bowin will be sold to investors in Europe. BNP Paribas is expected to be lead arranger of the issue.
Heavy research and development costs have meant that project sponsors have been reluctant to mandate similar schemes in the past, except on a far smaller scale, says Thieme. Once closed, the Bowin deal should demonstrate, however, that there is a clear payoff. Thieme says that Bowin's cost of funding will be substantially reduced by the capital structuring exercise, by between 100 and 200 basis points.
Ratchaburi goes local
Although the recently signed Ratchaburi Electricity Generating Holding Company (REGHC) financing was structured as a commercial loan with no insurance or guarantees, it is unlikely that international banks will draw any significant conclusions from the deal. Earlier in the year REGHC were working on a financing plan that included a foreign currency tranche of approximately $300 million, but the deal was finally signed at the end of August as a wholly on-shore, Baht denominated transaction.
For the record, eight banks are providing the Bht44 billion ($1.1 billion) to enable REGHC to buy the Ratchaburi power complex from EGAT. The banks are: Krung Thai Bank ? taking Bht10.4 billion, Siam Commercial Bank (Bht8.9 billion), Bangkok Bank (Bht8.4 billion), Bank of Ayudhya (Bht5.23 billion), BankThai (Bht4.3 billion), ABN Amro (Bht3 billion), Citibank (Bht2 billion) and Thai Military Bank (Bht1.8 billion).
Although there are other international banks with the ability to lend in Baht, notably Standard Chartered and HSBC, ABN Amro and Citibank are the only Baht lenders who also have the ambition to be major project finance players in the Thai local currency market, notes one banking source.
The Bht44 billion in funds pay for the transfer of assets from EGAT to Ratchaburi Electricity Generating, a process which bankers and Thai officials expect by to be completed by 2002. A first installment of Bht18.76 billion is due in October this year and will finance the turbine and steam generating thermal plants as well as land and additional facilities. A second installment of Bht18.7 billion is due in July 2001 and will finance two combined cycle thermal generators. The remaining Bht5.3 billion will purchase an additional combined cycle thermal generator in April 2002.
According to Thieme at BNP Paribas, under the original financing plan, 25% of the transaction was to be financed off-shore. Citibank, Tokai, BoTM, Dai-Ichi Kangyo and BNP Paribas (as coordinating bank) clubbed together to underwrite the prospective foreign currency portion. ?It was anticipated that MITI would also step in to provide the foreign tranche with extended political risk insurance,? adds one banker.
International bankers admit the decision to go all-Baht makes sense ? REGHC's and EGAT's revenues are also almost exclusively Baht denominated. And while Albert van Welderen Rengers, vice-president, power and infrastructure finance, at ABN Amro in Singapore, notes that local currency financing costs are greater than Libor funding, REGHC would have incurred additional and substantial hedging costs on the proposed foreign tranche. According to Boonchoo Direksathapon, the company's acting managing director, ultimately it was foreign currency hedging costs which deterred EGAT from approving an off-shore facility.
One curious feature of the Ratchaburi deal is the principal repayment schedule. The size of the repayments in the Ratchaburi financing decrease slightly over time running contrary to the now standard market practice of levelised debt service coverage ratios (neither significantly decreasing or increasing during the repayment term). ?The holding company probably had one eye on the upcoming privatization when it opted for this repayment profile ? as it will allow the newly privatized entity to show increasing equity ratios over time,? the source adds. Ratchaburi Electricity Generating Holding is scheduled to be listed on the Stock Exchange of Thailand in October, with the floatation of 1.6 billion new shares.
Thai officials have eagerly held up the Ratchaburi deal as evidence of recovery in the local banking sector. More cynical western observers argue that the strong appetite displayed by local banks indicates something quite different ? a weak economy providing very few other good lending opportunities for the domestic finance sector.
A more important issue for the international project finance market is whether Ratchaburi sets a financing precedent in the Asian region generally. ?I think international banks will worry that more and more privatizations will go the way of Ratchaburi and opt for 100% local currency debt,? says a banker in Hong Kong.
Deregulation dynamics
According to one of the advisers to the Thai government on energy sector liberalization, Thailand's deregulation policy is based on a series of resolutions issued since 1997. The two key resolutions are the 1 September 1998 Cabinet resolution which approved the ?Master Plan for State Enterprise Sector Reform?, and the Cabinet resolution on 16 February 1999 which endorsed both the privatization of the Ratchaburi power plant and the natural gas deregulation program.
In the first of three stages of deregulation (at the same time as the Ratchaburi power plant is privatized) EGAT is to be corporatized under the State Enterprise Corporatisation Act into autonomous business units.
During this first stage of deregulation, EGAT will retain its pre-eminent position in bulk purchase and supply of power and therefore it is anticipated that regulatory controls will also be established to ensure non-discriminatory treatment of all generators by the transmission body, says the adviser.
The key characteristics of Stage One are:
? Limited private sector participation in generation.
? Long-term central power planning under EGAT's control.
? Limited accountability or incentives to gain productivity efficiencies, due to a lack of competition between the generators.
? Commercial risk shared by the private sector and the government-owned entities.
? No direct customer access to competitive power, except through small-scale power producers.
If the government sticks to its guns, Stage Two, originally slated for the period from 2001 to 2003, will see the gradual introduction of wheeling while EGAT will remain the central supplier of power.
?The privatization of the Ratchaburi power facility sends a firm signal to the market that deregulation and liberalization is still on course, particularly as, at 3,000MW, Ratchaburi is one of EGAT's biggest power assets,? says one project financier. Nevertheless observers do detect that there is less urgency in the government's current efforts to liberalize the power market compared to a year ago. As Thailand has moved from crisis into recovery the pressure that the IMF has been able to exert over the Thai government has reduced. ?The heat is off,? says Silas Wong, vice-president, project finance at Credit Agricole Indosuez, ?and for the energy market that is probably a good thing. Pushing the deregulation timetable back allows more time for electricity demand to improve and for the energy market to get back in shape.?
Although the final structure and the timetable for the completion of energy sector reforms are uncertain, banking appraisals of the regulatory risks for IPPs aren't overly negative. ?EGAT has honored its obligations during the difficult last three years and this should be positively recognized by the financial markets,? says Albert Rengers at ABN Amro. Najeeb Haider director, project finance at Citibank, Hong Kong agrees: ?the Thai power market has traditionally been responsive to the needs of IPPs. Unlike other power markets, IPPs are allowed to pass on increased costs of electricity production directly to the consumers.?
Erring on the side of caution, however, the finance community has been particularly anxious to ensure the cost competitiveness of the Thai power plants they have lent to. ?For Bowin we completed a detailed study to ensure the plant was cost competitive and would enjoy a high level of dispatch irrespective of the PPA,? says Haider.
While Bowin's cost competitiveness relative to other existing power plants in Thailand is a closely guarded secret, it is thought to be the lowest marginal cost producer of electricity in the country outside hydroelectric power production. Both the Eastern Power and Bowin facilities use state of the art, ABB GT26 generator technology. However, with two turbines rather than one, Bowin enjoys additional economies of scale.
The project finance community will have to wait some time before the lessons learnt from Bowin, Ratchaburi, and Eastern can be usefully employed in the Thai market. Two other IPP projects are under discussion; Gulf Power, sponsored by Edison Mission and Gulf Electric, and Union Power Development, sponsored by a group including Union Energy. However, neither project is expected to come to market within 12 months. According to industry rumours the two proposed developments have been delayed not just for environmental reasons (both developments are envisaged as coal-fired ventures). There is also behind the scenes opposition from EGAT which does not want to be in the position of having to buy additional power while the supply and demand balance is still weak.
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