San Pedro: the second tier template
CDC Capital Partners (erstwhile Commonwealth Development
Corporation) and Cogentrix have closed financing on the 296MW San
Pedro de Macoris power plant. The plant is located on the banks of
the Higuano River in the south-central area of the Dominican
Republic. The total cost of the combined-cycle, oil-fired plant is
put at $318 million. Run under a 20-year build-own-operate (BOO)
concession from the country's government, it is its largest
independent power project (IPP) to date.
The project has been structured to take advantage of rapid changes in the country's electricity market. The government of the republic hopes to put 1999's blackouts behind it and bring 2GW of capacity on stream by 2015. The indications are that the Republic will move towards a merchant market using a power pool similar to the UK model. The plant is designed to be the most efficient generator when this arrives.
The domestic electricity industry has suffered from a number of difficulties, not all of them related to devaluations. Nevertheless, the Dominican Republic has one of the world's fasted growing economies, and new capacity will be required soon. CDC has already invested in two of the country's electricity concerns ? Empresa Genadora de Electricidad Haina (Haina) and Compania de Electricidad de Puerto Plata ? and has a 35% stake in San Pedro (bought from Scottish group Scotia Energy). Haina is one of the companies planning to put further capacity on-stream in the near future.
San Pedro is backed by a power purchase agreement (PPA) with the Compania Dominicana de Electricidad, a newly privatized utility carved out of the former state monopoly. The PPA has a sovereign guarantee from the Republic, the last such power plant likely to benefit in this way. The guarantee required approval from the Dominican congress.
The $233 million financing breaks down into two sections: $137.2 million placed by WestLB in the form of a note offering and bank loans ($72.2 million and $65 million respectively). The bond offering carries a spread of 400bps over US 10-year treasuries and a tenor of 17 years. It was placed with Met Life, New York Life and Siemens Financial Services (which also acted as advisor and was instrumental in obtaining reinsurance cover).
Siemens also has San Pedro's EPC contract. The turbines used are designed to be suitable for the diesel oil coming through the Island and, whilst cutting edge, are proven and have been in operation since 1997. Access to the facility has been improved by the installation of port facilities at the mouth of the Higuano.
A partial political risk wrap from the Inter-American Development Bank (IADB) covers this $137.2 million, the second time this has been given and the first for a sub-investment grade country. Triple-A rated IADB brought a project in B+ Dominican Republic up to BBB, according to Duff & Phelps Credit Rating. The Dominican Republic, suffering from the Latin crisis and pronounced instability in neighbouring Haiti, was always likely to test the appetite of both private and institutional investors.
Previous large-scale financings using political risk insurance (PRI) have by and large been confined to investment grade countries. Nevertheless, when sponsors floated the possibility to the market, they were surprised by a response indicating that up to $100 million would be possible. Lloyds syndicates are believed to have been amongst the most interested parties. The decision to go with the IADB's wrap came down to a mixture of cover size, IADB's regional importance and price.
The second section of $95 million has been advanced through Kreditanstalt fur Wiederaufbau, of which $83 million has been covered by insurance or provided as buyer's credits through the Export Credits Guarantee Department (ECGD) and Hermes, another first. This mixture of direct cover and reinsurance has not been a part of the agencies' approach to project finance in the past.
Even for the ECGD the arrangement represents something of a first. For some time it has been encouraging exporters to take advantage of the ?one-stop-shop? arrangements that it can offer through agreements with other Export Credit Agencies (ECAs). However, this is the first time that this structure has been utilised in a project financing, albeit on one section.
The ECA-backed loans have a tenor of 14 years, and are priced at the internationally agreed CIRR rate. The $83 million breaks down into $70 million of Hermes cover reinsured by the ECGD and a $13 million direct facility. This split is in part a reflection of the equipment mix between Siemens and Motherwell Bridge, a UK exporter. Of the debt on its books, the KfW has not yet decided whether to go further down into syndication.
The ECGD has co-operated with the KfW in the past, but this has largely been in support of Airbus business. The deal paves the way for an extension of this three-way financing arrangement between ECAs, the KfW and commercial lenders. The KfW believes that the structure provides a very good basis for further transactions between investors and suppliers.
The advantages are clear, given sponsors' past annoyance at needing to deal with a different set of insurers for each export finance item. Unlike many of the innovations forced upon sponsors in the aftermath of the Latin crisis, this approach has a usefulness that goes beyond the never-ending search for new sources of capital.
The structure is a considerable advance from original plans for an A/B Loan mix and is likely to be extremely useful in developing projects in second-tier markets where CDC hopes to expand its presence. It is, however, still predicated to a large extent on the extension of a sovereign PPA guarantee. The possibility of further cross-border bond financings to exploit the US institutional markets is certain to lead to further adaptations of the structure. The Asian Development Bank is said to be extremely interested in adapting the structure for the markets that it covers.
Exxon (a significant local player) supplies fuel for the plant, handled by Motherwell Bridge. Warburg Dillon Read advised financially in the initial stages, taking a back seat towards the end of 1999. The legal teams were Thelen Read & Priest for the sponsors and Simpson Thatcher & Bartlett for the lenders.
San Pedro is an interesting snapshot of transition for a number of institutions. The use of the wrap may prompt the IADB to alter the balance of its business between straightforward loan products and the more exotic types of cover becoming more prevalent in the Latin markets. For the CDC, San Pedro marks the decisive shift away from its former use of debt solutions for big-ticket power deals. When its new chief executive Alan Gillespie spoke of the leveraged returns potential in power he may have had in mind this sort of partnership with an experienced developer like Cogentrix.
At the time of going to press, CDC, alongside Cinergy and Industrial Promotion Services, were finalising financing arrangements with the International Finance Corporation on the Kipevu II power project in Kenya, in which it has a 30% stake. IFC's financing consists of an equity investment of up to $1.05 million, a subordinated loan of up to $1.4 million, and a loan of up to $15.1 million for IFC's own account. The IFC also arranged syndicated loans of up to $23.5 million for the account of participants ? the first time in over a decade that these have been provided in Kenya.
The next step for CDC will be the extension of its generating presence in Caribbean and Latin markets. Venezuela and Ecuador are possible candidates to be the next locations for this deal structure. As deregulation continues apace in the region, governments will become less inclined to serve up support of this kind. Flexible first movers in many emerging markets will find this a template with which to do business.
The project has been structured to take advantage of rapid changes in the country's electricity market. The government of the republic hopes to put 1999's blackouts behind it and bring 2GW of capacity on stream by 2015. The indications are that the Republic will move towards a merchant market using a power pool similar to the UK model. The plant is designed to be the most efficient generator when this arrives.
The domestic electricity industry has suffered from a number of difficulties, not all of them related to devaluations. Nevertheless, the Dominican Republic has one of the world's fasted growing economies, and new capacity will be required soon. CDC has already invested in two of the country's electricity concerns ? Empresa Genadora de Electricidad Haina (Haina) and Compania de Electricidad de Puerto Plata ? and has a 35% stake in San Pedro (bought from Scottish group Scotia Energy). Haina is one of the companies planning to put further capacity on-stream in the near future.
San Pedro is backed by a power purchase agreement (PPA) with the Compania Dominicana de Electricidad, a newly privatized utility carved out of the former state monopoly. The PPA has a sovereign guarantee from the Republic, the last such power plant likely to benefit in this way. The guarantee required approval from the Dominican congress.
The $233 million financing breaks down into two sections: $137.2 million placed by WestLB in the form of a note offering and bank loans ($72.2 million and $65 million respectively). The bond offering carries a spread of 400bps over US 10-year treasuries and a tenor of 17 years. It was placed with Met Life, New York Life and Siemens Financial Services (which also acted as advisor and was instrumental in obtaining reinsurance cover).
Siemens also has San Pedro's EPC contract. The turbines used are designed to be suitable for the diesel oil coming through the Island and, whilst cutting edge, are proven and have been in operation since 1997. Access to the facility has been improved by the installation of port facilities at the mouth of the Higuano.
A partial political risk wrap from the Inter-American Development Bank (IADB) covers this $137.2 million, the second time this has been given and the first for a sub-investment grade country. Triple-A rated IADB brought a project in B+ Dominican Republic up to BBB, according to Duff & Phelps Credit Rating. The Dominican Republic, suffering from the Latin crisis and pronounced instability in neighbouring Haiti, was always likely to test the appetite of both private and institutional investors.
Previous large-scale financings using political risk insurance (PRI) have by and large been confined to investment grade countries. Nevertheless, when sponsors floated the possibility to the market, they were surprised by a response indicating that up to $100 million would be possible. Lloyds syndicates are believed to have been amongst the most interested parties. The decision to go with the IADB's wrap came down to a mixture of cover size, IADB's regional importance and price.
The second section of $95 million has been advanced through Kreditanstalt fur Wiederaufbau, of which $83 million has been covered by insurance or provided as buyer's credits through the Export Credits Guarantee Department (ECGD) and Hermes, another first. This mixture of direct cover and reinsurance has not been a part of the agencies' approach to project finance in the past.
Even for the ECGD the arrangement represents something of a first. For some time it has been encouraging exporters to take advantage of the ?one-stop-shop? arrangements that it can offer through agreements with other Export Credit Agencies (ECAs). However, this is the first time that this structure has been utilised in a project financing, albeit on one section.
The ECA-backed loans have a tenor of 14 years, and are priced at the internationally agreed CIRR rate. The $83 million breaks down into $70 million of Hermes cover reinsured by the ECGD and a $13 million direct facility. This split is in part a reflection of the equipment mix between Siemens and Motherwell Bridge, a UK exporter. Of the debt on its books, the KfW has not yet decided whether to go further down into syndication.
The ECGD has co-operated with the KfW in the past, but this has largely been in support of Airbus business. The deal paves the way for an extension of this three-way financing arrangement between ECAs, the KfW and commercial lenders. The KfW believes that the structure provides a very good basis for further transactions between investors and suppliers.
The advantages are clear, given sponsors' past annoyance at needing to deal with a different set of insurers for each export finance item. Unlike many of the innovations forced upon sponsors in the aftermath of the Latin crisis, this approach has a usefulness that goes beyond the never-ending search for new sources of capital.
The structure is a considerable advance from original plans for an A/B Loan mix and is likely to be extremely useful in developing projects in second-tier markets where CDC hopes to expand its presence. It is, however, still predicated to a large extent on the extension of a sovereign PPA guarantee. The possibility of further cross-border bond financings to exploit the US institutional markets is certain to lead to further adaptations of the structure. The Asian Development Bank is said to be extremely interested in adapting the structure for the markets that it covers.
Exxon (a significant local player) supplies fuel for the plant, handled by Motherwell Bridge. Warburg Dillon Read advised financially in the initial stages, taking a back seat towards the end of 1999. The legal teams were Thelen Read & Priest for the sponsors and Simpson Thatcher & Bartlett for the lenders.
San Pedro is an interesting snapshot of transition for a number of institutions. The use of the wrap may prompt the IADB to alter the balance of its business between straightforward loan products and the more exotic types of cover becoming more prevalent in the Latin markets. For the CDC, San Pedro marks the decisive shift away from its former use of debt solutions for big-ticket power deals. When its new chief executive Alan Gillespie spoke of the leveraged returns potential in power he may have had in mind this sort of partnership with an experienced developer like Cogentrix.
At the time of going to press, CDC, alongside Cinergy and Industrial Promotion Services, were finalising financing arrangements with the International Finance Corporation on the Kipevu II power project in Kenya, in which it has a 30% stake. IFC's financing consists of an equity investment of up to $1.05 million, a subordinated loan of up to $1.4 million, and a loan of up to $15.1 million for IFC's own account. The IFC also arranged syndicated loans of up to $23.5 million for the account of participants ? the first time in over a decade that these have been provided in Kenya.
The next step for CDC will be the extension of its generating presence in Caribbean and Latin markets. Venezuela and Ecuador are possible candidates to be the next locations for this deal structure. As deregulation continues apace in the region, governments will become less inclined to serve up support of this kind. Flexible first movers in many emerging markets will find this a template with which to do business.
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