Southeast Asian power generation has a long history of cooperation between international development banks, export credit agencies (ECAs), governments and commercial banks. Until recently, the commercial banks were predominantly American and European. Today, there are fewer international banks, not to mention fewer international project sponsors, and domestic banks are filling the breach. This is particularly true in Thailand, the Philippines and Malaysia.

International lenders have access to more sources of US dollar liquidity than domestic or regional banks, and can usually offer longer tenors and lower priced debt, but they are more risk adverse, and often do not have the same long-running relationships with sponsors as domestic or regional lenders. International lenders can require more detailed due diligence and more onerous lending conditions.

“To a large extent the funding gap created by the retreat of the European banks a few years ago has been filled by a combination of the Japanese banks, the ECAs and multilaterals and the local banks,” says Ben Thompson, a consultant in Mayer Brown’s global projects group in Singapore.

“There is more risk aversion on the part of investors and their funders,” says James Harris, a partner at Hogan Lovells in Singapore. “It’s reflected in the pricing of debt, in the commitment and expectations required of government procuring authorities, agencies and off-takers, and it’s being reflected in the risk appetite and rate of return expected by equity investors. Many are saying they’re going to take less risk.”

Asia’s banks, after barely weathering the 1997 Asian financial crisis, came through the 2008 global crisis in much better shape than their international counterparts. That left them with stronger balance sheets, greater liquidity and a higher appetite for local currency risk than the retreating international competition.

“It’s inevitable that as each market grows its own pool of investors, the local banks will follow local investors. For us the competition is increasing in most markets,” says Gilles Pascual, head of power and renewables in Asia at HSBC.

Regional banks from Singapore, Malaysia and Thailand have ambitious plans to grow assets across the region. Power projects in neighbouring countries sponsored by companies they have known for decades is a good place for them to start. Japanese lenders bring international depth and a regional track record, along with close ties to dominant sponsors and equipment suppliers. And the Korean and Japanese export credit agencies are still widening their global reach.

“The local banks have more liquidity than they did a few years back, and their ability to assess credit risk is much better. PPA payments are now sometimes made in local currency, and in that case there is more opportunity for local banks to provide local currency financing for projects,” says Kazunori Ogawa, a director in JBIC’s power and water finance department. “Local banks often have a stronger relationship with local governments, so their participation can be a good point in terms of government support and other local factors,” says Ogawa.

While international banks such as HSBC, Standard Chartered, Sumitomo Mitsui Banking Corporation and Bank of Tokyo-Mitsubishi UFJ are still active in large projects, they are less likely to provide tranches with coverage from large export credit agencies such as JBIC and Kexim. Or, they will restrict their activities to corporate lending to specific project sponsors.

“The reasons for their [JBIC and Kexim] involvement may have evolved slightly, it’s a nuance really, from political risk mitigation to being more of a catalyst for liquidity,” says HSBC’s Pascual.

Thailand’s local leaders

In Thailand, perhaps more than any other country in the region, domestic sponsors and highly liquid banks dominate their home market and take a leading role in the region. Several Thai sponsors, particularly EGCO, have started looking at projects overseas, and are likely to be active players in Myanmar. This domestic strength has prompted many foreign lenders to give up on competing with Thai banks on pricing and instead focus on large, lucrative advisory mandates.

“Thai banks have an approach to risk that is generally a little more liberal than some of the international banks on projects, which is to be expected given that they are going to be more familiar with the local market and players,” says Mayer Brown’s Thompson. “Thai sponsors are aware of this and are increasingly looking more to the Thai banks for project funding.”

But international banks have not given up entirely, and Japanese banks have shown that they are willing to participate in local currency financing. Two Japanese banks – SMBC and BTMU – have local Thai Baht funding, BTMU through its recent acquisition of Bank of Ayudhya.

EGCO’s 800MW Khanom power plant expansion features a $700 million debt package split between Thai baht and US dollar tranches. The baht tranche is coming from Bangkok Bank, as well as BTMU and SMBC. The US dollar tranche features JBIC, Mizuho and Singapore’s OCBC, with JBIC providing half of the US dollar tranche.

Gulf JP UT, a subsidiary of Gulf JP, closed a Bt39 billion dual-currency financing in October 2012 with four Thai banks and four foreign banks for the 1,600MW U-Thai IPP. The Thai banks were Kasikornbank, Bangkok Bank, Siam Commercial Bank and Land and Houses Bank, while the international lenders were JBIC, Asian Development Bank, BTMU and SMBC.

While JBIC provided Thai baht corporate financing to the sponsors involved in the 1,600MW Nong Saeng GTCC power plant, it was not yet ready to extend that financing on a project finance basis. “When it comes to corporate transaction financing it is easier for us to provide local currency loan than in a large-scale, long-term project finance situation. It’s a challenge for us to do local currency project finance,” says JBIC’s Ogawa.

Thailand, along with its neighbours, has ambitious plans to add power capacity. In April Thailand’s new Private Investment in State Undertaking Act (PPP Act) took effect, streamlining the project approval process and establishing a national PPP Committee to approve projects and draft the rules set out in the act. Thailand hopes to encourage more large-scale PPP projects by creating a clearer procedure for foreign and domestic investors in infrastructure, shortening the development period to 10 to 12 months from the start of negotiations to ground breaking, down from the 20 to 30 months it now takes.

In early 2013, the Thai government announced a 7-year infrastructure investment plan, which would see Bt2.2 trillion, or $69.5 billion, worth of transport infrastructure built by 2020. That plan was put in doubt in November, when Thailand’s opposition party, the Democrat Party, launched a legal challenge to the plan. The challenge followed a Thai senate voted in favour of the Finance Ministry borrowing the money for the programme on domestic and international markets without going through the annual government budget.

Alternative sources of funds

Malaysia has taken the domestication of project financing one step further, and features a sukuk market that boasted issuance of more than $61.3 billion up to the middle of 2013, according to the Malaysia International Islamic Financial Centre. While government issued sukuk bonds are the backbone of the market, and government-linked funds constitute the bulk of investor demand, power and utility companies account for a large portion (13.6%) of corporate issuance, helping Malaysia account for about two-thirds of the global sukuk secondary market.

In May, Tenaga closed a RM1.625 billion ($508 million) sukuk issue to finance the construction of the 1,071MW Prai combined cycle gas-fired power plant in Seberang Perai Tengah, Penang. HSBC and KAF Investment Bank were the joint lead arrangers and the joint lead managers for the serial senior secured issue. The deal was nominally for an independent power project, though state-controlled Tenaga was both sponsor and offtaker.

“What you’re seeing is that international banks can still play on their specific strengths, even if it’s not in every market. Each international bank in Asia has a slightly different positioning,” says HSBC’s Pascual.

In the Philippines, remittances from overseas domestic workers, sailors and construction workers have put local banks into a strong competitive position. “They have a huge overseas expat population which remits money back to the Philippines in US dollars. Banco de Oro Universal Bank (BDO) is the biggest remittance bank in the Philippines and they’re also the most prominent project finance lender in the Philippines,” said Nathan Dodd, a partner at Mayer Brown in Singapore.

The 400MW $700 million expansion of the 735 MW Pagbilao coal-fired plant in Quezon, being developed by Aboitiz Power Corporation and TeaM Energy, will see an engineering, procurement and construction (EPC) contract awarded before the end of 2013. While financing for Phases 1 and 2 of the project was denominated in US dollar and yen, Phase 3 will probably be financed domestically in pesos. The project is targeted for completion in late 2016 or early 2017.

On 18 November, Quezon Power’s sponsors, EGCO (49%) and Meralco (51%), signed a joint venture for a new 460MW unit at the existing 460MW coal fired plant. The sponsors were understood to be close to mandating a financial adviser on that financing as Project Finance went to press.

Indonesia’s offtaker risks

The counterparty risks posed by most domestic offtakers have lessened significantly in recent decades. However, while Thailand’s Electricity Generating Authority of Thailand (EGAT) is regarded as solvent and creditworthy, Indonesia’s PLN poses challenges to international commercial banks.

Even though Indonesia’s electricity market was liberalised in 2009, most electricity generated in Indonesia is still sold to PLN, the state-owned utility. However, PLN sells electricity to consumers at less than its cost of generation – or the tariff it pays to independent power producers (IPPs). The government pays PLN the difference between the cost of generation and the retail tariff.

Traditionally, the essential enhancement of PLN’s credit risk has been an Indonesian sovereign guarantee, but guarantees are now only available for projects that fall within the Fast Track II programme, the most popular of PLN’s several procurement programmes.

“The capital markets have accepted that risk, and PLN has issued some very successful high-yield debt offerings, but the international commercial banks are still generally uncomfortable with PLN payment risk, and are therefore still insisting on some kind of government support,” says Mayer Brown’s Dodd.

Sponsors with greater tolerances for risk may be willing to close deals without government support. In July 2013, Genting (95%) and Inti Pratama (5%) closed the $730 million debt financing for the 660MW Banten coal-fired project in West Java. The $998 million project benefits from a 25-year build-operate-transfer concession, and a power purchase agreement of the same length with PLN, but no government support for PLN’s obligations. The sponsors have awarded Banten’s engineering, procurement and construction contract to Harbin Electric, a Chinese contractor.

The debt broke down into a $504 million 11.5-year commercial bank tranche, a $200 million 17-year tranche from Malaysia Ex-Im, and a $26 million one-year working capital facility from Citi. The mandated lead arrangers on the commercial tranche were Citi (coordinator, documentation, administrative, offshore security, hedging and ESRM bank), Maybank (accounts, modeling, and hedging bank) Malaysia Ex-Im (technical bank), CIMB (insurance and hedging bank) and RHB.

However, most projects continue to require the participation of international lenders with support from export credit agencies such as JBIC and Kexim. For example, Kexim was both a lender and a provider of cover for the SMBC-provided debt on the 2012 financing of the 45MW Wampu hydroelectric plant. Support form export credit agencies remains crucial on commercial lending in Indonesia, and government guarantees are essential to winning export credit agency financing and cover.

While lenders are getting more comfortable with PLN and Indonesia’s evolving development programmes, sponsors still need the land on which to build projects, and acquisition of land has been a major headache for developers. Land purchase issues have held up the 2,000MW coal-fired Central Java power project in Batang and have delayed it for a year. J-Power, Itochu and Indonesia’s Adaro Energy delayed the financing schedule on the $4 billion coal-fired power plant by one year, to October 2014, following delays in acquiring the necessary land, although they have already bought more than 80% of the land needed for the power plant. Central Java was the first power project to be procured under Indonesia’s PPP regulations and should be the first project to benefit from an Indonesia Infrastructure Guarantee Fund (IIGF) guarantee.

Indonesia’s banking market is not as liquid as other markets in the region, prompting sponsors to tap into more diverse sources of funding, from high-yield dollar debt to local and international banks, Islamic finance and export credit agencies. Although the government has enacted several new laws and introduced new initiatives to try and mitigate risks, projects continue to face delays.

However, domestic banks and regional banks are taking a more active role in financing Indonesia’s power generation projects. The $340 million refinancing in 2011 of Indonesia’s first hydro IPP, the Asahan plant, is a good example. The financing, a mix of conventional and Islamic financing in both US dollars and Indonesian rupiah, came from a syndicate of Indonesian and Malaysian lenders.

Big hopes for Myanmar

Regional lenders may come into their own in Myanmar. “There’s lots of noise about Myanmar at the moment, and we get a lot of enquiries about it. There are deals, but not a huge number, but I imagine that will increase substantially over the next few years,” says Jeff Smith, a partner at Norton Rose Fulbright in Singapore. The country has already eased foreign exchange and investment laws.

Thai developers and banks are just across one border and Chinese players are across another, and the country’s domestic financial institutions are woefully inadequate. The government has set a target of increasing capacity by 16,000MW by 2030, or about four to five times the current capacity.

Myanmar does not yet have a master plan for the development of its electricity sector, though it says it will issue one in 2014. Investors want high tariffs to compensate for the risks of investing in Myanmar, though most sponsors want to see the government of Myanmar paying a tariff that is sustainable in the long term. Myanmar Electric Power Enterprise (MEPE) has very little track record of signing offtake agreements for investors to draw comfort from.

The Dawei Special Economic Zone (SEZ) is an example of this uncertainty, because its plans to build one of Southeast Asia’s greatest industrial complexes, including a steel mill, refinery and power plant have ground to a halt. In the 1990s, under military rule, Italian-Thai Development Co, (ITD) Thailand’s biggest contractor by market value, won a 75-year concession for the project, located in eastern Myanmar.

The government created an energy minister-led special task force to try and revive the Dawei venture, when ITD was thought to be failing in its attempt to attract international investors. Now, observers say Myanmar has taken the concession away from ITD and is reviewing the plan for the complex, which is to be linked by highway to Bangkok and Thailand’s eastern seaboard industrial zone.

Smaller projects of 50MW and below are likely to be financed using private equity, high-yield investors through a mezzanine debt financing, and neighbouring China and Thailand are expected to play a prominent role.

“There’s clearly a lot of potential due to the urgent need for power in Myanmar, but project financing is currently difficult, given the absence of a clear regulatory structure and supporting documentation for the power sector, unlike, for example, the oil and gas sector. No model form of PPA has yet been released to the market and investors in the power sector are negotiating projects on an ad hoc, bilateral basis,” says Mayer Brown’s Thompson.

Toyo-Thai’s development of a 100MW gas-fired combined-cycle power project in Yangon is expected to be the front-runner in establishing a PPA structure, with expectations that it could be modified to serve as a template for future projects.

However, the challenges of planning, financing and building power generation in the country remain sizable. Myanmar charges a 15% withholding tax on interest payments to overseas lenders, and foreign lenders are unable to take security over land. Although the country has significant reserves of gas, much of it is already committed to Thailand and China, creating issues for new gas-fired power generation projects.