Fukuoka
Asia Pacific Municipal Finance
Deal of the Year 2002
Fukuoka Waste
The Japanese PFI market is gradually starting to take off, and at the forefront of the sector's growth is the municipal waste sector. Buoyed by unfamiliar fiscal discipline at the government level, the country's industrial corporates look set to increase thee volume of projects closed substantially in 2003. The most encouraging sign yet comes from the ¥48 billion ($406 million) Fukuoka waste-to-energy project.
Fukuoka builds upon the success of 2001's Omuta waste-to-energy project, considered something of a template for waste-to-energy deals in Japan. That deal, which closed in March of that year, had a cost of ¥10.4 billion, and was also located in the Kyushu region. Its sponsors were Fukuoka Prefecture, J-Power and Omuta City. Omuta's lead arrangers were Mizuho Corporate Bank and Development Bank of Japan.
This deal also added to the experience of sponsors and arrangers when dealing with sub-sovereign governments. For the Fukuoka project the structure waas cleaner. With Omuta, a series of 28 small municipalities form seven unions to pay tipping fees to the project company. Here the sole offtaker is Fukuoka City, a large city on the north of Kyushu island with a population of roughly 1.4 million.
Municipal issuers' ratings are under a degree of pressure, or at least those of municipalities that issue public bonds. Domestic agency R&I rates Fukuoka at AA, but assigns it a D+ financial strength rating. In this context the city would like to pass on more of the immediate capital cost and risk of its waste disposal onto the private sector.
It negotiated a concession with Kyushu Electric, the dominant local utility, to form a project company to dispose of solid waste. Kyushu Electric took a 49% stake in the project company Fukuoka Clean Energy, with the City taking the remaining 51% controlling stake. This meant that the lenders had to analyse clearly the potential issues arising from a city signing a contract with its majority-owned subsidiary. Nevertheless,
The project company will construct a 900-tonnes-per-day waste incineration facility that will produce power for local consumption. The plant's EPC contractor is Kawasaki Heavy Industries. The plant will sell power to Kyushu, and is at roughly the same production price as existing Kyushu facilities, although power sales do not account for the bulk of the project's revenue streams.
These come in large part from the tipping fee that the project will receive from the municipality for taking on the waste. This takes the form of a tip-or-pay agreement that has much in common with an availability payment. All costs incurred under the contract, however, will be compensated. The main credit consideration for lenders, therefore, is that of the city.
While Fukuoka is an entity that is highly-rated, and is a credit that is well-understood, at least to domestic institutions, there are lingering issues for an arranger to understand. One of these is appropriation risk ? the risk that the city assembly will not allocate the necessary funds to honour the contract. While the municipality has tax-raising and bond-issuing powers, the lenders need to know that funds will be available over the life of the contract.
The deal is therefore tailored to strip out most risk factors, with the exception of a small level of completion risk (which can be mitigated by Kawasaki's strength and the proven nature of the technology), and appropriation risk. For the last an intense lobbying of the local assembly was required, assisted by the leads. Moreover, the central government has the ability to step in and taker over the finances of a troubled municipality, usually before a formal declaration of insolvency.
The lead arrangers are Mizuho Corporate Bank and Development Bank of Japan. These took half each of the ¥26 billion in debt, and syndicated it down to a number of institutions. These were Fukuoka (which took an arranging slot), Sumitomo-Mitsui Banking Corporation, Nishinippon, Yamaguchi, Fukuoka City Bank and Sumitomo Trust & Banking. The three regional banks accounted for about 40% of the DBJ tranche ? a clear sign of the support that these institutions can offer Japanese municipal finance.
The debt has a tenor of 15 years, comfortably within the 25-year concession agreement. It is priced off the Fukuoka municipal credit, with a premium that reflects the small completion and appropriation risks. A final layer of comfort came from the government grants that took the form of quasi-equity in the deal's capital structure. Despite being thee times the size of the earlier Omuta deal, the financing sold on without any problems.
The market is set for a slew of other waste-to-energy deals, partly as a result of the need to shore up local government finances, but also as a result of the need for tighter environmental regulations. These are part of anti-dioxin rules that came into effect at the end of 2002. This, coupled with a rapidly maturing project finance market, will ensure solid dealflow in coming years.
Fukuoka Clean Energy
Status: Closed March 2002
Size: ¥48 billion
Location: Kyushu, Japan
Description: 27MW waste-to-energy plant
Sponsors: City of Fukuoka, Kyushu Electric
Debt: ¥26 billion
Arrangers: Development Bank of Japan, Mizuho Corporate Banking
Tenor: 15 years
Lawyers to the lenders: Tokyo Aoyama Aoki Law Office/
Baker & McKenzie
Lawyers to the sponsors: Asahi & Koma, government counsel
Engineer: E2 Engineering
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Deal of the Year 2002
Fukuoka Waste
The Japanese PFI market is gradually starting to take off, and at the forefront of the sector's growth is the municipal waste sector. Buoyed by unfamiliar fiscal discipline at the government level, the country's industrial corporates look set to increase thee volume of projects closed substantially in 2003. The most encouraging sign yet comes from the ¥48 billion ($406 million) Fukuoka waste-to-energy project.
Fukuoka builds upon the success of 2001's Omuta waste-to-energy project, considered something of a template for waste-to-energy deals in Japan. That deal, which closed in March of that year, had a cost of ¥10.4 billion, and was also located in the Kyushu region. Its sponsors were Fukuoka Prefecture, J-Power and Omuta City. Omuta's lead arrangers were Mizuho Corporate Bank and Development Bank of Japan.
This deal also added to the experience of sponsors and arrangers when dealing with sub-sovereign governments. For the Fukuoka project the structure waas cleaner. With Omuta, a series of 28 small municipalities form seven unions to pay tipping fees to the project company. Here the sole offtaker is Fukuoka City, a large city on the north of Kyushu island with a population of roughly 1.4 million.
Municipal issuers' ratings are under a degree of pressure, or at least those of municipalities that issue public bonds. Domestic agency R&I rates Fukuoka at AA, but assigns it a D+ financial strength rating. In this context the city would like to pass on more of the immediate capital cost and risk of its waste disposal onto the private sector.
It negotiated a concession with Kyushu Electric, the dominant local utility, to form a project company to dispose of solid waste. Kyushu Electric took a 49% stake in the project company Fukuoka Clean Energy, with the City taking the remaining 51% controlling stake. This meant that the lenders had to analyse clearly the potential issues arising from a city signing a contract with its majority-owned subsidiary. Nevertheless,
The project company will construct a 900-tonnes-per-day waste incineration facility that will produce power for local consumption. The plant's EPC contractor is Kawasaki Heavy Industries. The plant will sell power to Kyushu, and is at roughly the same production price as existing Kyushu facilities, although power sales do not account for the bulk of the project's revenue streams.
These come in large part from the tipping fee that the project will receive from the municipality for taking on the waste. This takes the form of a tip-or-pay agreement that has much in common with an availability payment. All costs incurred under the contract, however, will be compensated. The main credit consideration for lenders, therefore, is that of the city.
While Fukuoka is an entity that is highly-rated, and is a credit that is well-understood, at least to domestic institutions, there are lingering issues for an arranger to understand. One of these is appropriation risk ? the risk that the city assembly will not allocate the necessary funds to honour the contract. While the municipality has tax-raising and bond-issuing powers, the lenders need to know that funds will be available over the life of the contract.
The deal is therefore tailored to strip out most risk factors, with the exception of a small level of completion risk (which can be mitigated by Kawasaki's strength and the proven nature of the technology), and appropriation risk. For the last an intense lobbying of the local assembly was required, assisted by the leads. Moreover, the central government has the ability to step in and taker over the finances of a troubled municipality, usually before a formal declaration of insolvency.
The lead arrangers are Mizuho Corporate Bank and Development Bank of Japan. These took half each of the ¥26 billion in debt, and syndicated it down to a number of institutions. These were Fukuoka (which took an arranging slot), Sumitomo-Mitsui Banking Corporation, Nishinippon, Yamaguchi, Fukuoka City Bank and Sumitomo Trust & Banking. The three regional banks accounted for about 40% of the DBJ tranche ? a clear sign of the support that these institutions can offer Japanese municipal finance.
The debt has a tenor of 15 years, comfortably within the 25-year concession agreement. It is priced off the Fukuoka municipal credit, with a premium that reflects the small completion and appropriation risks. A final layer of comfort came from the government grants that took the form of quasi-equity in the deal's capital structure. Despite being thee times the size of the earlier Omuta deal, the financing sold on without any problems.
The market is set for a slew of other waste-to-energy deals, partly as a result of the need to shore up local government finances, but also as a result of the need for tighter environmental regulations. These are part of anti-dioxin rules that came into effect at the end of 2002. This, coupled with a rapidly maturing project finance market, will ensure solid dealflow in coming years.
Fukuoka Clean Energy
Status: Closed March 2002
Size: ¥48 billion
Location: Kyushu, Japan
Description: 27MW waste-to-energy plant
Sponsors: City of Fukuoka, Kyushu Electric
Debt: ¥26 billion
Arrangers: Development Bank of Japan, Mizuho Corporate Banking
Tenor: 15 years
Lawyers to the lenders: Tokyo Aoyama Aoki Law Office/
Baker & McKenzie
Lawyers to the sponsors: Asahi & Koma, government counsel
Engineer: E2 Engineering
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