Domestic debt markets in the Philippines today are vastly more liquid than they were six years ago. The Philippines was not immune to the global fiscal crisis, but its banks were ready to take greater steps in project finance – any steps. In 2006, local banks had only begun to make meaningful efforts in project finance.

That year, a joint venture of Marubeni and Tokyo Electric Power Corporation (TEPCO) was looking to buy 100% of Mirant Asia-Pacific, an independent power producer in the Philippines, from Mirant, which had emerged from bankruptcy earlier in the year. At the time, the Marubeni-TEPCO venture was known as Crimson Power Holdings, but soon changed its name to TeaM Energy.

The Marubeni-TEPCO venture needed a large debt package to finance its purchase, which ultimately was the largest acquisition of Asia-Pacific power assets in 2007. It agreed a $2.8 billion one-year uncovered bridge loan in 2006, but did not have to draw on it, because in 2007 it closed on a similarly sized long-term senior financing.

But the 2007 financing was not ideal for the sponsors. The senior lenders required a conservative debt service coverage ratio, which limited the size of the commercial bank tranche to $2.7 billion. So the Marubeni-TEPCO venture, seeking to minimise its equity commitment, settled on a slice of subordinated mezzanine debt at the holding company level, as well. The deal closed in June 2007.

Nomura Philippines Power Funding Company, an affiliate of the Japanese investment bank, provided the $220 million in mezzanine debt. The presence of that mezzanine lender, now called PPF Company, only heightened the Japan-heavy composition of the group of lenders on the $3.43 billion acquisition financing. Given the nationality of the sponsors and the limited track record of local banks in project finance, this was a pragmatic decision.

On the 2007 debt package, the Japan Bank for International Cooperation provided a $1.62 billion 17-year direct loan, as well as political risk insurance on the 15-year $1.08 billion commercial bank tranche. Mizuho, Sumitomo Mitsui Banking Corporation, Shinsei Bank, Sumitomo Trust & Banking, Shinkin Central Bank, Aozora Bank, Mitsubishi UFJ Trust & Banking, Chuo Mitsui Trust & Banking and Mizuho Trust & Banking were the Japanese lenders, on the commercial bank tranche, alongside Calyon (now Credit Agricole), ANZ, ING and Royal Bank of Scotland.

The commercial bank portion of the 2007 financing was priced very cheaply, at about 100bp over Libor. The subordinated debt at the holding company is understood to have been vastly more expensive.

Five years later, the sponsors noted that the local bank market had evolved. Philippine banks had become credible and consistent project lenders, were much more liquid, and their spreads were falling. They looked like being a viable source to refinance that pricey subordinated piece.

TeaM Energy theoretically could have closed a larger refinancing than the $220 million in outstanding mezzanine debt. But the commercial bank piece remains attractively priced, and has a distant maturity. The sponsor also could have changed the nature of the initial acquisition financing, but decided that would have required obtaining consents from the senior lenders – a laborious and probably unnecessary effort. The sponsors, in any case had little interest in increasing the gearing on the assets with a larger mezzanine, and didn’t need to extend the tenor.

TeaM Energy and ING, the sponsor’s financial adviser, issued a request for proposals for the refinancing of the subordinated piece. TeaM mandated SB Capital as lead arranger on a refinancing that priced about 200bp beneath the pricing on the 2007 mezzanine. SB affiliate Security Bank and Metropolitan Bank and Trust (Metrobank) are the main providers of the 12-year mezz facility, alongside East West Banking Corporation. The lenders were able to complete due diligence quickly because the structure was the same as the initial acquisition financing, and the refinancing closed on 20 June 2012.

While the refinancing is essentially a repricing, given that it has the same size and borrower, it remains noteworthy. It is one of the first times a fully foreign sponsor closed a project financing in the local market – and is believed to be the first instance in which Philippine banks have approved providing subordinated debt that benefited a project financing.

TeaM Energy’s portfolio consists of: the 1,218MW coal-fired Sual power plant in Sual, Pangasinan; the 735MW coal-fired Pagbilao power plant in Pagbilao, Quezon; and a 20% interest in the 1,251 MW natural gas-fired Ilijan power plant. Both Sual and Pagbilao have large power purchase agreements with National Power Corporation (NPC). 

TeaM Energy Corporation
STATUS
Closed 20 June 2012
SIZE
$220 million
DESCRIPTION
Refinancing of THE subordinated debt financing for the acquisition of a 2,203MW power portfolio in Luzon, Philippines
DEBT
$220 million in subordinated debt at the holding company level
SPONSORS
Marubeni (50%), Tokyo Electric Power Corporation (50%)
LENDERS
SB Capital (sole issue manager and lead arranger), Security Bank (mezzanine facility agent and mezzanine security trustee), Metropolitan Bank & Trust (participant), and East West Banking Corporation (participant)
SPONSORS’ FINANCIAL ADVISER
ING Bank
SPONSORS’ LEGAL ADVISER
Latham & Watkins
LENDER LEGAL ADVISER
Tamayao & Affiliates