Private insurers come out
Imagine this. Three hours before you are about to sign the
financing documentation for a project which you have been working
on for months, or years, and one of the key members of the
financing team decides they want to renegotiate one part of the
document. What do you do? Do you panic and set the deal back
another six months at least or do you sit down calmly and discuss
the problem, while many of the bankers, lawyers and sponsors you
have spent months working with, sit patiently outside ? sweating?
Sounds like your worst nightmare.
This is exactly the scene facing sponsors Noranda, Teck and Rio Algom just hours before they were due to sign financing for their $2 billion Antamina copper and zinc project in Peru. Despite the setback, a signing ceremony still took place at the end of June. Since then banks and sponsors involved in the deal have been extolling the benefits of a deal which managed to raise $1.32 billion of non-recourse financing for a mining project in a time of low commodity prices and in an emerging market country ? Peru.
At the heart of Antamina and many other emerging market deals like it, is the political risk cover. What is exceptional about Antamina, however, is the common insurance policy has been signed not just by state-owned export credit agencies but also by two private insurers ? Zurich US Political Risk and Sovereign.
There are two surprises here. First that this is the first time private insurers have signed up to a common insurance contract with state-owned export credit agencies ? although not the first time the two have worked together on a project. The second surprise is that the two insurers are willing to advertise the fact that they were involved in the deal. This is a small market and, until a recently, insurers have remained tight-lipped about their deals.
Private insurers are allowed to advertise their involvement in deals in which they have worked with export credit agencies because agency's usually publish reports of their activities and in this case the involvement on private insurers in a deal is also published. In deals which do not involve export credit agencies, insurers and sponsors are still bound by confidentiality clauses. But while much of their activity remains a secret, private insurers are becoming more open about what they can provide.
Keeping in line with the export credit agencies
Says Daniel Riordan, vice-president and managing director at Zurich US Political Risk in Washington DC: "There has been a dramatic change in the market in the past few years. In the past the public export credit agencies would advertise their role in projects while the private insurers were generally very hush-hush about their activities. What has changed is the level of infrastructure projects being financed."
Riordan, who was lured from US export credit agency Opic two years ago says that Zurich US has taken a much more open approach to its project finance activities. He says that Zurich has been keen to co-operate with public insurers and when this happens, as it does in Antimina, he says "it makes sense to have one policy".
By the time Rio Algom and the other sponsors appointed banks at the end of 1998, commodity prices had dropped considerably and lenders were still reeling from the effects of financial turmoil in Russia and Asia ? followed a few months later by the Brazilian devaluation. Says Brent Cochrane, treasurer at Rio Algom in Vancouver: "We decided that the total financing would stretch the capacity of the bank market too much. We were aware that commercial political risk insurers were extending the terms of their offering and possibly might be interested in supplementing the cover. We contemplated their participation."
Says Robert Dewing, managing director in the project finance department at Citicorp in New York: "When Antamina came to the market there just wasn't the depth of market to sustain a highly levareage deal. Antamina is not highly leveraged because the sponsors wanted to keep the flexibility of having a corporate structure." Nor were they deterred by a drop in copper prices. "The sponsors are in the business of taking commodity price risk," says Dewing. But banks were cautious about assuming too much Peruvian sovereign risk and felt that the export credit agencies would provide that key. The private insurers made up the difference.
With Canada's Export Development Corporation (EDC) leading the private insurance policy, the decision was taken to make all the export credit agencies sign up to the same policy. EDC had already been at the forefront of negotiations for the Alumbrera copper project in 1997 which involved four agencies and multilateral signing up to the same agreement for the first time. In the interests of simplicity, EDC was anxious that the private insurers should sign up to the same contract as the public agencies.
Says Jonathan Green, partner at law firm Milbank Tweed Hadley & McCloy in New York which advised on the Antamina project: "Private insurers have made an effort to broaden their insurance policies and put them on a more competitive basis.
So what's changed?
Antamina highlights just one aspect of the changes that have been ocurring in the private insurance market in the past three years. Private insurers have always been a part of project finance but it is only recently that a few of the leading companies have adapted their policies to suit the financing structure of non-recourse deals. Says Leigh Hollywood, vice-president and chief underwriter at Sovereign in Bermuda: "Private insurers have recognized that the market for politcal risk insurance has risen rapidly and that until three years ago there was insufficient private insurance." A drop in government aid programmes has put greater emphasis on the private sector. "There was also a realization that the risks associated with a project finance transaction were not nearly as manageable as they sounded," says Hollywood. "There was not much of history and few serious claims to analyse."
Cochrane says that Rio Algom has considered using private insurance for some of its projects in the past. "We tried but the tenor was a problem," he says. "But in recent years there has been a big change and an increase in capacity which has led to many insurers increasing their cover."
Changing the policy
Zurich US, for example, announced in May that it was doubling its political risk insurance capacity to $100 million per risk and extending its maximum tenor from 10 to 15 years. According to Zurich's Riordan: "What we found was that we were often asked for longer tenors, so we went back and decided to extend the limits. It allows us to play a much larger role." Riordan says that Zurich's decision to set up its project finance insurance division over two years ago was motivated by demands from infrastructure developers, many of whom were frustrated by the lack of cover.
But Zurich is not alone in picking up on in the increased volume of infrastructure deals. Sovereign, which also provided cover for Antamina, has taken steps to extend its cover since it was established ? six months before Zurich's new department. Like Zurich, Sovereign has secured senior underwriters from public agencies. Sovereign's Hollywood, for example, was at Opic before he was lured by the World Bank to help set up Miga.
Says Price Lowenstein, president and CEO of Sovereign in Bermuda: "Sovereign was set up to fill a number of crucial needs. Many sponsors wanted more flexibility and long-term insurance." Sovereign, like Zurich, has also recently extended its cover from $100 million to $125 million. Sovereign has also pushed up its tenor limits from 10 to 15 years.
Private insurers such as Sovereign are also considering providing cover for project bond issues. At the beginning of July, Opic announced that it would provide cover for capital markets transactions. According to Hollywood there is no reason why private insurers could not consider providing the same cover given the growth of emerging market bond issues in the past few years.
AIG also had an overhaul of its insurance products in 1996. Under the guiding hand of its president, John Salinger, AIG Global Trade & Political Risk had completely revamped its product range. AIG has broken out of the three-year time horizon for deals, which were common to many of the larger insurers three years ago, and extended its cover to 10 years. Speaking at a recent conference in London Julian Edwards, vice-president of political risk insurance at AIG Europe in London said: "In 1996 the market changed significantly. Previously, we could only insure up to three years but in 1996 we changed our strategy. We had to see the future for country risk mitigation for projects."
According to AIG, its new product is indistinguishable from government-backed investment institutions. The company has also added a board of advisers all of whom are high profile figures who carry political influence. Says Edwards: "The board of directors is particularly important. In the past we couldn't pretend that we had the same leverage as Coface has with the French government, for example. So we attempted to add protection by having people such as Henry Kissinger. That being said, AIG has been very successful and has a recovery record of 70% over the past 25 years but we do hope that the board of directors will make us even more effective."
In May 1999 AIG was elected to observer status at the Berne Union. While, it will take the company another two years to become a full member, the move is just another demonstration that the gap between public and private insurers is, at least in some respects, narrowing.
But Tony Richardson at Hiscox in London adds a word of caution. "We can go up to 10 years but if you look at project finance deal you shouldn't really need more than six years of cover," says Richardson. "If you aren't getting a return on your investment within six years, it is really debatable whether you ought to be doing the project at all. But we look at each project on a case-by-case basis and it is not really a question of the tenor but of what the client wants."
With much of the need for private insurers driven by a shortage of funding both from the banks and the export credit agencies, insurers are finding other ways to help out the agencies. Sovereign, for example, is also involved in insurance and reinsurance agreements with a number of export credit agencies. Since the joint-venture was established three years ago, it has been involved in over 60 contracts, 10 of which involve insurance agreements with five agencies ? Coface, EDC, Miga, Efic and Opic. Says Hollywood: "What we are seeing is that the large export credit agencies are making more effort to make their own portfolio more profitable or more well balanced. We insured a large part of Coface's portfolio in China."
What cost for political risk?
Over two years after the Asian financial turmoil, sponsors are keener than ever to take on private insurance cover. Some figures being circulated claim that there are over $1 billion of project and trade finance claims in Asia alone ? so far only $150 million have been paid. But using private insurance clearly leads to additional costs for sponsors. And these costs are often carried over into the pricing of the deals.
One source claims that project financiers are frustrated that their own banks will not carry more of the risks. Says the source that the actual loss from sovereign risk is not very high but the premiums are. Banks have regulations on their sovereign risk limits and with credit committees wary of emerging markets, some believe that credit committees are throwing away their chance to fill the political risk funding gap in some emerging market countries.
And the gap remains, banks will continue to advise sponsors to seek private insurance. Says a source: "You have to shop around for private insurance ? some of the policies are quite expensive." He adds: "From the sponsors' perspective you don't get very much at all. Private insurance is often as expensive as banks and it is also a cold-nose purchase in that the sponsor will have very little relationship with the insurer."
That being said, many sponsors are left with little choice. Says Zurich's Riordan: "Banks do take some political risk on their own balance sheet but they cannot go beyond their limits and credit committees are increasingly cautious about doing projects in emerging markets." And this is exactly why, even following the devaluation of the real in Brazil, Sovereign reports no drop in business in Brazil.
In the end, sponsors seem to be left with little choice. With an insurance gap that even the export credit agencies cannot always cover, private insurers will see more business in emerging markets. Some of the companies working on project finance deals in Pakistan's power sector, which are now at risk of default ? or at the very least will have to the restructured ? may have wished that they had taken the advise given by one private insurer when they first considered investing in the country. If they had, perhaps they would have avoided many of the problems that they now face.
[in box]
Compania Minera Antamina ? how to find financing for a mining deal in Peru
Following a bidding process launched by the Peruvian government for the Antamina project, Rio Algom and Inmet won the concession for the mine in 1996. A feasibility study followed, the results of which were announced in September 1998. The study showed that the size of the mine was in fact four times larger than initial estimates. Based on a financing based on a 60:40 debt-to-equity split, Inmet decided to pull out of the deal.
At this point Tech (25%) and Noranda (37.5%) entered the deal and subsequently, in March 1999, the three companies managed to persuade Mitsubishi to join the deal ? so ensuring that Jexim would participate in the deal.
By September 1998 the project was given the go-ahead and initial commitments given by some of the banks and export credit agencies. The sponsors also decided to transport concentrate from the mine through a pipe instead of carrying it by truck.
Debt: $1.32 billion
Equity: $900 million
Location: Peru
Sponsors: Noranda (33.75%), Rio Algom (33.75%), Teck (22.5%) and Mitsubishi (10%) ? Mitsubishi joins at financial close
Financial adviser: Rothschild
Financing:
$680 million is provided by a group of export credit agencies including: $245 million from Jexim, $200 million from Kreditanstalt fur Wiederaufbau (KfW) backed by the German government, $135 million from the Export Development Corporation (EDC), and a facility provided by Leonia and ABB Export Bank backed by Finnvera ($100 million).
$640 million will be provided under two syndicated bank loans arranged by ABN AMRO, ANZ, Bank of Montreal, Barclays, CIBC, Citibank, Deutsche and The Bank of Nova Scotia. Some $335 million of the loan is covered by political risk insurance provided under a common policy provided by EDC, Office National due Ducroire, Miga, Sovereign Risk Insurance and Zurich US. Tranche A is a $535 million commercial bank facility and tranche B is a $105 million Jexim co-financing facility with a political risk guarantee risk guarantee provided by Jexim. BoT-Mitsubishi and Fuji are Jexim agents.
Banks joining during syndication include: Banco de Credito del Peru, Banco Continental del Peru, Banco de Lima-Sudameris, Dai-Ichi Kangyo, Dresdner, Royal Bank of Canada, SG, Toronto Dominion and WestLB.
Description: Antamina is one of the largest copper-zinc sites in the world. The mine has estimated reserves of 494 million tonnes grading 1.3% copper, 1% zinc, 12 grams per tonne of silver and 0.03% of molybdenum. It is expected to produce 600 millin pounds of copper and 360 million pounds of zinc a year over a 20-year mine life.
Lawyers: Milbank Tweed Hadley & McCloy (lenders) and Sullivan & Cromwell (sponsors)
This is exactly the scene facing sponsors Noranda, Teck and Rio Algom just hours before they were due to sign financing for their $2 billion Antamina copper and zinc project in Peru. Despite the setback, a signing ceremony still took place at the end of June. Since then banks and sponsors involved in the deal have been extolling the benefits of a deal which managed to raise $1.32 billion of non-recourse financing for a mining project in a time of low commodity prices and in an emerging market country ? Peru.
At the heart of Antamina and many other emerging market deals like it, is the political risk cover. What is exceptional about Antamina, however, is the common insurance policy has been signed not just by state-owned export credit agencies but also by two private insurers ? Zurich US Political Risk and Sovereign.
There are two surprises here. First that this is the first time private insurers have signed up to a common insurance contract with state-owned export credit agencies ? although not the first time the two have worked together on a project. The second surprise is that the two insurers are willing to advertise the fact that they were involved in the deal. This is a small market and, until a recently, insurers have remained tight-lipped about their deals.
Private insurers are allowed to advertise their involvement in deals in which they have worked with export credit agencies because agency's usually publish reports of their activities and in this case the involvement on private insurers in a deal is also published. In deals which do not involve export credit agencies, insurers and sponsors are still bound by confidentiality clauses. But while much of their activity remains a secret, private insurers are becoming more open about what they can provide.
Keeping in line with the export credit agencies
Says Daniel Riordan, vice-president and managing director at Zurich US Political Risk in Washington DC: "There has been a dramatic change in the market in the past few years. In the past the public export credit agencies would advertise their role in projects while the private insurers were generally very hush-hush about their activities. What has changed is the level of infrastructure projects being financed."
Riordan, who was lured from US export credit agency Opic two years ago says that Zurich US has taken a much more open approach to its project finance activities. He says that Zurich has been keen to co-operate with public insurers and when this happens, as it does in Antimina, he says "it makes sense to have one policy".
By the time Rio Algom and the other sponsors appointed banks at the end of 1998, commodity prices had dropped considerably and lenders were still reeling from the effects of financial turmoil in Russia and Asia ? followed a few months later by the Brazilian devaluation. Says Brent Cochrane, treasurer at Rio Algom in Vancouver: "We decided that the total financing would stretch the capacity of the bank market too much. We were aware that commercial political risk insurers were extending the terms of their offering and possibly might be interested in supplementing the cover. We contemplated their participation."
Says Robert Dewing, managing director in the project finance department at Citicorp in New York: "When Antamina came to the market there just wasn't the depth of market to sustain a highly levareage deal. Antamina is not highly leveraged because the sponsors wanted to keep the flexibility of having a corporate structure." Nor were they deterred by a drop in copper prices. "The sponsors are in the business of taking commodity price risk," says Dewing. But banks were cautious about assuming too much Peruvian sovereign risk and felt that the export credit agencies would provide that key. The private insurers made up the difference.
With Canada's Export Development Corporation (EDC) leading the private insurance policy, the decision was taken to make all the export credit agencies sign up to the same policy. EDC had already been at the forefront of negotiations for the Alumbrera copper project in 1997 which involved four agencies and multilateral signing up to the same agreement for the first time. In the interests of simplicity, EDC was anxious that the private insurers should sign up to the same contract as the public agencies.
Says Jonathan Green, partner at law firm Milbank Tweed Hadley & McCloy in New York which advised on the Antamina project: "Private insurers have made an effort to broaden their insurance policies and put them on a more competitive basis.
So what's changed?
Antamina highlights just one aspect of the changes that have been ocurring in the private insurance market in the past three years. Private insurers have always been a part of project finance but it is only recently that a few of the leading companies have adapted their policies to suit the financing structure of non-recourse deals. Says Leigh Hollywood, vice-president and chief underwriter at Sovereign in Bermuda: "Private insurers have recognized that the market for politcal risk insurance has risen rapidly and that until three years ago there was insufficient private insurance." A drop in government aid programmes has put greater emphasis on the private sector. "There was also a realization that the risks associated with a project finance transaction were not nearly as manageable as they sounded," says Hollywood. "There was not much of history and few serious claims to analyse."
Cochrane says that Rio Algom has considered using private insurance for some of its projects in the past. "We tried but the tenor was a problem," he says. "But in recent years there has been a big change and an increase in capacity which has led to many insurers increasing their cover."
Changing the policy
Zurich US, for example, announced in May that it was doubling its political risk insurance capacity to $100 million per risk and extending its maximum tenor from 10 to 15 years. According to Zurich's Riordan: "What we found was that we were often asked for longer tenors, so we went back and decided to extend the limits. It allows us to play a much larger role." Riordan says that Zurich's decision to set up its project finance insurance division over two years ago was motivated by demands from infrastructure developers, many of whom were frustrated by the lack of cover.
But Zurich is not alone in picking up on in the increased volume of infrastructure deals. Sovereign, which also provided cover for Antamina, has taken steps to extend its cover since it was established ? six months before Zurich's new department. Like Zurich, Sovereign has secured senior underwriters from public agencies. Sovereign's Hollywood, for example, was at Opic before he was lured by the World Bank to help set up Miga.
Says Price Lowenstein, president and CEO of Sovereign in Bermuda: "Sovereign was set up to fill a number of crucial needs. Many sponsors wanted more flexibility and long-term insurance." Sovereign, like Zurich, has also recently extended its cover from $100 million to $125 million. Sovereign has also pushed up its tenor limits from 10 to 15 years.
Private insurers such as Sovereign are also considering providing cover for project bond issues. At the beginning of July, Opic announced that it would provide cover for capital markets transactions. According to Hollywood there is no reason why private insurers could not consider providing the same cover given the growth of emerging market bond issues in the past few years.
AIG also had an overhaul of its insurance products in 1996. Under the guiding hand of its president, John Salinger, AIG Global Trade & Political Risk had completely revamped its product range. AIG has broken out of the three-year time horizon for deals, which were common to many of the larger insurers three years ago, and extended its cover to 10 years. Speaking at a recent conference in London Julian Edwards, vice-president of political risk insurance at AIG Europe in London said: "In 1996 the market changed significantly. Previously, we could only insure up to three years but in 1996 we changed our strategy. We had to see the future for country risk mitigation for projects."
According to AIG, its new product is indistinguishable from government-backed investment institutions. The company has also added a board of advisers all of whom are high profile figures who carry political influence. Says Edwards: "The board of directors is particularly important. In the past we couldn't pretend that we had the same leverage as Coface has with the French government, for example. So we attempted to add protection by having people such as Henry Kissinger. That being said, AIG has been very successful and has a recovery record of 70% over the past 25 years but we do hope that the board of directors will make us even more effective."
In May 1999 AIG was elected to observer status at the Berne Union. While, it will take the company another two years to become a full member, the move is just another demonstration that the gap between public and private insurers is, at least in some respects, narrowing.
But Tony Richardson at Hiscox in London adds a word of caution. "We can go up to 10 years but if you look at project finance deal you shouldn't really need more than six years of cover," says Richardson. "If you aren't getting a return on your investment within six years, it is really debatable whether you ought to be doing the project at all. But we look at each project on a case-by-case basis and it is not really a question of the tenor but of what the client wants."
With much of the need for private insurers driven by a shortage of funding both from the banks and the export credit agencies, insurers are finding other ways to help out the agencies. Sovereign, for example, is also involved in insurance and reinsurance agreements with a number of export credit agencies. Since the joint-venture was established three years ago, it has been involved in over 60 contracts, 10 of which involve insurance agreements with five agencies ? Coface, EDC, Miga, Efic and Opic. Says Hollywood: "What we are seeing is that the large export credit agencies are making more effort to make their own portfolio more profitable or more well balanced. We insured a large part of Coface's portfolio in China."
What cost for political risk?
Over two years after the Asian financial turmoil, sponsors are keener than ever to take on private insurance cover. Some figures being circulated claim that there are over $1 billion of project and trade finance claims in Asia alone ? so far only $150 million have been paid. But using private insurance clearly leads to additional costs for sponsors. And these costs are often carried over into the pricing of the deals.
One source claims that project financiers are frustrated that their own banks will not carry more of the risks. Says the source that the actual loss from sovereign risk is not very high but the premiums are. Banks have regulations on their sovereign risk limits and with credit committees wary of emerging markets, some believe that credit committees are throwing away their chance to fill the political risk funding gap in some emerging market countries.
And the gap remains, banks will continue to advise sponsors to seek private insurance. Says a source: "You have to shop around for private insurance ? some of the policies are quite expensive." He adds: "From the sponsors' perspective you don't get very much at all. Private insurance is often as expensive as banks and it is also a cold-nose purchase in that the sponsor will have very little relationship with the insurer."
That being said, many sponsors are left with little choice. Says Zurich's Riordan: "Banks do take some political risk on their own balance sheet but they cannot go beyond their limits and credit committees are increasingly cautious about doing projects in emerging markets." And this is exactly why, even following the devaluation of the real in Brazil, Sovereign reports no drop in business in Brazil.
In the end, sponsors seem to be left with little choice. With an insurance gap that even the export credit agencies cannot always cover, private insurers will see more business in emerging markets. Some of the companies working on project finance deals in Pakistan's power sector, which are now at risk of default ? or at the very least will have to the restructured ? may have wished that they had taken the advise given by one private insurer when they first considered investing in the country. If they had, perhaps they would have avoided many of the problems that they now face.
[in box]
Compania Minera Antamina ? how to find financing for a mining deal in Peru
Following a bidding process launched by the Peruvian government for the Antamina project, Rio Algom and Inmet won the concession for the mine in 1996. A feasibility study followed, the results of which were announced in September 1998. The study showed that the size of the mine was in fact four times larger than initial estimates. Based on a financing based on a 60:40 debt-to-equity split, Inmet decided to pull out of the deal.
At this point Tech (25%) and Noranda (37.5%) entered the deal and subsequently, in March 1999, the three companies managed to persuade Mitsubishi to join the deal ? so ensuring that Jexim would participate in the deal.
By September 1998 the project was given the go-ahead and initial commitments given by some of the banks and export credit agencies. The sponsors also decided to transport concentrate from the mine through a pipe instead of carrying it by truck.
Debt: $1.32 billion
Equity: $900 million
Location: Peru
Sponsors: Noranda (33.75%), Rio Algom (33.75%), Teck (22.5%) and Mitsubishi (10%) ? Mitsubishi joins at financial close
Financial adviser: Rothschild
Financing:
$680 million is provided by a group of export credit agencies including: $245 million from Jexim, $200 million from Kreditanstalt fur Wiederaufbau (KfW) backed by the German government, $135 million from the Export Development Corporation (EDC), and a facility provided by Leonia and ABB Export Bank backed by Finnvera ($100 million).
$640 million will be provided under two syndicated bank loans arranged by ABN AMRO, ANZ, Bank of Montreal, Barclays, CIBC, Citibank, Deutsche and The Bank of Nova Scotia. Some $335 million of the loan is covered by political risk insurance provided under a common policy provided by EDC, Office National due Ducroire, Miga, Sovereign Risk Insurance and Zurich US. Tranche A is a $535 million commercial bank facility and tranche B is a $105 million Jexim co-financing facility with a political risk guarantee risk guarantee provided by Jexim. BoT-Mitsubishi and Fuji are Jexim agents.
Banks joining during syndication include: Banco de Credito del Peru, Banco Continental del Peru, Banco de Lima-Sudameris, Dai-Ichi Kangyo, Dresdner, Royal Bank of Canada, SG, Toronto Dominion and WestLB.
Description: Antamina is one of the largest copper-zinc sites in the world. The mine has estimated reserves of 494 million tonnes grading 1.3% copper, 1% zinc, 12 grams per tonne of silver and 0.03% of molybdenum. It is expected to produce 600 millin pounds of copper and 360 million pounds of zinc a year over a 20-year mine life.
Lawyers: Milbank Tweed Hadley & McCloy (lenders) and Sullivan & Cromwell (sponsors)
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