The first non-recourse financing for an industrial project in Bhutan, and the first time the Reserve Bank of India has allowed rupee debt to finance a foreign project, the $91.5 million dollar equivalent dual-tranche deal for the 1.34 million tonnes-per-year greenfield Dungsam Cement project in Nganglam, Bhutan, is a significant project for the small Himalayan country and will provide much of the building material for Bhutan’s hydroelectric programme and an export stream to northern India.

The project sponsor is Druk Holding Investments, which was created in 2007 by King Jigme Khesar Namgyel Wangchuck to hold and manage existing and future state investments. Druk Holding then set up Dungsam Cement Corporation as the project company for the plant.

The demand for the project’s output is solid. The Bhutanese gov­ern­ment plans to increase installed generation capacity to 10,000MW by the end of 2020, all from hydroelectric power stations.

The project also benefits from the absence of any import duty in India, the local availability of limestone and low rates for power under a 24MW power purchase agreement with Bhutan Power Corporation. Limestone and phyllite will be sourced from mines in Marung Ri and Kangrizhe, around 6km from the plant site. Proven limestone reserves are estimated to be 40.96 million tonnes, enough for at least 20 years of operation.

Gypsum is to be procured from Druk Satair Corporation mines in Pemagatshel district of Bhutan, about 260km away. Dungsam will source fly ash, coal and slag from India.

The project funding comprises $68.5 million of equity (includ­ing an Indian government grant of Rs3 billion) and $91.5 million of debt. The debt is split between a $45 million equivalent 9.5-year rupee tranche from Indian lenders – State Bank of India $20.3 million, Punjab National Bank $9 million, EXIM Bank of India $9 million and Union Bank of India $6.7 million – and a 13.5-year $46.5 million ngultrum equivalent local tranche pro­vided by National Pension and Provident Fund $22.4 million, Bank of Bhutan $10.6 million, Bhutan National Bank $10.6 million, Druk PNB Bank Limited $1.8 million and Royal Insurance Corp. of Bhutan $1.1 million.

SBI Capital was financial adviser and debt arranger. Bank of Bhutan was lenders’ agent and account bank and National Pension and Provident Fund is security trustee. The rupee tranche is priced at 375bp over the SBI base rate while the ngultrum debt is a fixed 10% per year.

Although Indian banks are allowed to lend in rupees to Bhutan and Nepal under the Foreign Exchange Management Act 1999, the deal nonetheless also got approval from the Reserve Bank of lndia, the first time it has allowed rupee lending to a foreign project.

Dungsam Cement

Status: Financial close 10 November 2010
Description: Rupee and Ngultrum denominated debt backing development of a 1.34 mtpa greenfield cement plant.
Sponsor: Druk Holding and Investments
Lead arranger and financial adviser: SBI Capital
Participant banks: Export-Import Bank of India, Punjab National Bank, State Bank of India, Union Bank of India, Bank of Bhutan, Bhutan National Bank, Druk PNB Bank, National Pension & Provident Fund, Royal Insurance Corp of Bhutan
Sponsor legal counsel: In-house
Lender legal counsel: Sayang Law Chambers; India Law Services
Technical consultant: Holtec Consulting Private Limited