Bangladesh’s first 15-year project financing – almost double the typical eight-year maximum tenor for the South Asian country’s infrastructure projects – crossed the finish line last week (10 May 2019). The role of guarantor GuarantCo, which is backed by IFC and European and Australian governments, was crucial to achieving the long tenor by mitigating payment default and liquidity risks on the Tk3 billion ($35.6 million) Teknaf solar power project.
"I love talking about this project, as this is very close to my heart," GuarantCo regional director of South Asia Nishant Kumar told IJGlobal.
It was July 2017 and a barren, 116-acre remote part of Cox’s Bazar, Bangladesh glistened with potential off the waters of nearby Naf River. Some 22 months later, special purpose vehicle Teknaf Solartech Energy (TSEL) reached financial close on the $25 million debt financing with liquidity support for the 28MW Teknaf solar farm – the first step towards the government's target of 2GW installed solar capacity by 2021.
Dhaka-based independent power producer Joules Power (JPL) and an undisclosed Chinese supplier own TSEL. In turn, three well-respected Bangladeshi business people, including Nuher Latif Khan, own JPL, which has a 80% equity interest in the project SPV.
The Teknaf solar power plant had its commercial operation date in October 2018, with Proinso UK as engineering, procurement and construction lead. It is the first ever grid-connected, utility-scale solar plant in Bangladesh.
First kids on the block
“When Teknaf was being developed or constructed, there weren’t many solar projects – not even two or three projects under construction. Even the government was not really willing to roll out additional tenders,” reminisced Kumar. “Because, at the end of the day, everyone wants to see the first kids on the block be successful in crossing the finish line. And now you go to BPDB's [Bangladesh Power Development Board] office, you will definitely find one solar developer or the other sitting outside the chairman’s chambers to discuss his solar project.”
When GuarantCo – a member of London-based Private Infrastructure Development Group (PIDG) – started scouting opportunities in Bangladesh in 2016 and 2017, identifying local partners was paramount. The task was difficult as most of the renewable projects were foreign-owned.
“That was one of the things that we really wanted for this project,” emphasised Kumar. “It’s important to build capability in the local market by helping local players rise up the value chain.”
After making the rounds with the banking community in Dhaka, Kumar also realised that bankers were questioning whether solar would even be a reliable source of energy in Bangladesh. Fortunately, science was on his side, and so he thoroughly educated the bankers on the south Asia country’s strong solar irradiance qualities.
Before that market development could happen, however, Kumar’s team had Advisian undertake technical and health, safety, environmental and social (HSES) due diligence aligned with IFC performance standards for the Teknaf solar project. Under GuarantCo's guidance, the independent consulting division of WorleyParsons also prepared an environmental and social (E&S) action plan for implementation.
Credit enhancement with a twist of liquid(ity) support
Acting as a quasi-financial adviser, GuarantCo then was able to approach banks armed not only with the technical and HSES reports and E&S plan, but also with a “bankable PPA signed by [state-owned] BPDB”, according to Kumar.
The 20-year PPA has TSEL supplying power to offtaker BPDB at $0.13 per KWh – “one of the strongest PPAs in the region,” insisted Kumar.
This groundwork culminated in four banks joining GuarantCo on the $25 million debt financing as follows:
- $15 million Standard Chartered dual currency:
- $11.5 million US dollar tranche
- $3.5 million taka equivalent tranche
- $10 million taka equivalent (Tk824 million) by local banks:
- One Bank – Tk458 million
- Saudi-Bangladesh Industrial & Agricultural Investment (Sabinco) – Tk183 million
- Shahjalal Islami Bank – Tk183 million
The Standard Chartered tranches are each 15-years. The local bank tranches are each 11-year tenures including a one-year grace period, according to TSEL managing director Nuher Latif Khan.
GuarantCo provided Standard Chartered with 90% coverage of “unconditional, irrevocable, on-demand guarantee”.
GuarantCo also provided a liquidity extension guarantee, a novel solution to de-risk challenges around refinancing. It allows Standard Chartered to exit the transaction after eight years – Bangladesh’s typical maximum tenor for infrastructure projects – if liquidity constraints arise.
The liquidity support mitigates the risk TSEL would encounter if it had difficulty finding a new financier during its refinancing negotiations. GuarantCo soaks up the refinancing risk while the SPV continues to enjoy the entire 15-year tenor.
TSEL managing director Nuher Latif Khan confirmed with IJGlobal that the project was not leveraged up.
Bangladesh Bank, the country’s central bank, and the Bangladesh Investment Development Authority have encouraged GuarantCo to work with other local financial institutions on similar structures to crowd-in private investment in infrastructure financing.
The floating-rate debt priced at a margin above six-month Libor (US dollar tranche) and the six-month Bangladesh Bank equivalent (taka tranche).
"Rates are higher with the local bank tranches, which reflects on why GuarantCo coverage adds value as we can avail the 'risk-free' rates from the banks at a longer tenure," Khan said. "SCB's pricing was very efficient as their spread tends to be lower than the local banks."
GuarantCo's Kumar added: "The price of debt was very, very competitive and more competitive than existing USD and taka loans."
Bangladesh’s interest rate swap market is very underdeveloped, thus project financing tends to be floating interest rate. However, swaps are developing piecemeal. Eastern Bank has agreed on some $71 million in swaps with Summit Group’s SPVs Summit Barisal Power and Summit Narayanganj Power Unit II. BRAC Bank also has assisted Ace Alliance Power – owned by Summit Corporation and Summit Power – on a nearly $70 million, 10-plus year swap.
Insurance advisers take a bow
The project with a roughly 70:30 debt-to-equity ratio has had the following advisers:
- Eversheds Sutherland – lenders’ and guarantor’s international legal
- Lex Juris – sponsor’s legal
- Advisian Worley Parsons – guarantor's technical and E&S
- Green Delta – local insurance
- Mandy McNeil International (MMI) – guarantor's international insurance
Insurance advisers on project financings typically do not get much ink. Kumar, however, lauded the work by Green Delta and MMI, noting standard insurance policies were not bankable: “Mandy, especially, helped change the policies to protect the banks”.