Pu Qi's limited recourse
PuQi, a little known corner of China's Hubei province may not be a
tourist destination like the nearby Yangzi, but it has found a
place on the global project finance map. The reason for this
new-found fame; a power station financing involving a 2x300MW
coal-fired co-generation plant sponsored by Sithe and Marubeni. ANZ
Bank, KBC and Barclays are lead arrangers of the financing.
While Chinese power sector financings are not new to the international banking industry, the PuQi deal is noteworthy for being the first wholly foreign owned enterprise (WFOE) development to have secured limited recourse renminbi funding.
Of the total cost (approximately $500 million), $150 million will come from Sithe and Marubeni equity, say sources involved in the fundraising effort. Between $350 million and $390 million will be debt financed. It is expected that the bulk of the debt will come from the Chinese banking sector as the power station will run on equipment, manufactured and purchased in the domestic market. Only $90 million of the debt portion will come from international lenders, says one banker close to the deal.
Meanwhile, Bank of China (BoC), has been signed up to provide the equivalent of Rmb960 million ($120 million) of renminbi loans which will help hedge the project against foreign exchange risk. A renminbi debt tranche is considered a prudent move as, in the China market, long term hedging instruments are not generally available. BoC is expected to syndicated the loan amongst the BoC Group only.
Project Finance understands that BoC's decision to provide limited recourse funds to the project is part and parcel of the general restructuring of the banking sector on the mainland. As part of the restructuring, China's banking sector is now expected to assume more commercial credit risks, as in the PuQi deal, rather than simply engaging in policy driven loans. ?Both international lenders and the Chinese bankers are also drawing comfort from seeing each other in the deal,? says one financier involved.
The balance of the debt portion is expected to come from another US dollar loan provided by an, as yet, unnamed Chinese bank.
The project and subsequent financing have been a long time in the making and the funding agreements are not expected to be wrapped up until sometime between the third quarter and December this year. ?Negotiations on the financing have been going on for almost two years,? says one Hong Kong based source.
The length of time the deal is taking to close may have something to do with the fact that the State Development Planning Commission (SDPC) is not going to provide any sort of support letter for the project, which it did in the case of the Laibin power deal in 1997, as well as the novel limited recourse renminbi tranche. Parties involved do stress, however, that the project has appropriate state sanction, both at the provincial (Hubei Province) and central government level.
?The project will in fact have all sorts of comfort at the provincial level,? says the Hong Kong source. The exact details aren't, however, being revealed, partly because the state support mechanisms are still under discussion.
China watchers say the rise of the WFOE concept in China is testament to China's gradual liberalization of infrastructure procedures, the obvious need for more foreign investment and the fact that foreign sponsors have been loath to enter into partnership agreements with Chinese counterparts. China has seen three major WFOE forerunners prior to PuQi; the Chengdu water deal last year, the Meizhouwan power project in 1998 and Laibin B Power Station in 1997.
For the record, the PuQi power plant will dispatch to Hubei Electric Power Bureau, under a power purchase agreement that is said to be almost as long as the length of the BOT concession. ANZ is acting as documentation bank, KBC as technical bank and Barclays will act as syndication bank. Linklaters & Alliance is acting for the banks for the project financing, while Latham & Watkins is legal counsel to the sponsors. Deutsche Morgan Grenfell, Citibank and Chadbourne & Parke were advisers to the sponsors. EPC contractors are Hubei Provincial Power Construction Bureau and Shanghai Advanced Power Projects.
The deal is expected to be syndicated sometime over the next six months.
While Chinese power sector financings are not new to the international banking industry, the PuQi deal is noteworthy for being the first wholly foreign owned enterprise (WFOE) development to have secured limited recourse renminbi funding.
Of the total cost (approximately $500 million), $150 million will come from Sithe and Marubeni equity, say sources involved in the fundraising effort. Between $350 million and $390 million will be debt financed. It is expected that the bulk of the debt will come from the Chinese banking sector as the power station will run on equipment, manufactured and purchased in the domestic market. Only $90 million of the debt portion will come from international lenders, says one banker close to the deal.
Meanwhile, Bank of China (BoC), has been signed up to provide the equivalent of Rmb960 million ($120 million) of renminbi loans which will help hedge the project against foreign exchange risk. A renminbi debt tranche is considered a prudent move as, in the China market, long term hedging instruments are not generally available. BoC is expected to syndicated the loan amongst the BoC Group only.
Project Finance understands that BoC's decision to provide limited recourse funds to the project is part and parcel of the general restructuring of the banking sector on the mainland. As part of the restructuring, China's banking sector is now expected to assume more commercial credit risks, as in the PuQi deal, rather than simply engaging in policy driven loans. ?Both international lenders and the Chinese bankers are also drawing comfort from seeing each other in the deal,? says one financier involved.
The balance of the debt portion is expected to come from another US dollar loan provided by an, as yet, unnamed Chinese bank.
The project and subsequent financing have been a long time in the making and the funding agreements are not expected to be wrapped up until sometime between the third quarter and December this year. ?Negotiations on the financing have been going on for almost two years,? says one Hong Kong based source.
The length of time the deal is taking to close may have something to do with the fact that the State Development Planning Commission (SDPC) is not going to provide any sort of support letter for the project, which it did in the case of the Laibin power deal in 1997, as well as the novel limited recourse renminbi tranche. Parties involved do stress, however, that the project has appropriate state sanction, both at the provincial (Hubei Province) and central government level.
?The project will in fact have all sorts of comfort at the provincial level,? says the Hong Kong source. The exact details aren't, however, being revealed, partly because the state support mechanisms are still under discussion.
China watchers say the rise of the WFOE concept in China is testament to China's gradual liberalization of infrastructure procedures, the obvious need for more foreign investment and the fact that foreign sponsors have been loath to enter into partnership agreements with Chinese counterparts. China has seen three major WFOE forerunners prior to PuQi; the Chengdu water deal last year, the Meizhouwan power project in 1998 and Laibin B Power Station in 1997.
For the record, the PuQi power plant will dispatch to Hubei Electric Power Bureau, under a power purchase agreement that is said to be almost as long as the length of the BOT concession. ANZ is acting as documentation bank, KBC as technical bank and Barclays will act as syndication bank. Linklaters & Alliance is acting for the banks for the project financing, while Latham & Watkins is legal counsel to the sponsors. Deutsche Morgan Grenfell, Citibank and Chadbourne & Parke were advisers to the sponsors. EPC contractors are Hubei Provincial Power Construction Bureau and Shanghai Advanced Power Projects.
The deal is expected to be syndicated sometime over the next six months.
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