The recapitalisation of the 220MW Bhola II gas-fired power plant in June 2022 was another step in the maturation of Bangladesh’s project finance market. The multi-prong transaction involved London-based investment manager Actis’ investment in the project company. It also had refinancing that saw a syndicate of commercial lenders replace development finance institutions (DFIs) as debt providers.

Bangladesh Power Development Board (BPDB) in April 2016 issued a letter of intent for the build-own-operate (BOO) project to Indian conglomerate Shapoorji Pallonji’s Nutan Bidyut (Bangladesh) as the special purpose vehicle to develop the $272 million gas-fired combined cycle power plant on Bhola Island adjacent to BPDB’s existing Bhola I power plant in Kutuba, Burhanuddin. The project company has been selling electricity under a 22-year PPA with BPDB since its commissioning in June 2021.

Bhola II was not the first time an all-commercial-bank club took over the debt financing of an IPP in Bangladesh. That distinction went to Clifford Capital and SMBC’s $140m 10-year refinancing debt package to Summit Gazipur II – the project company of the 300MW heavy fuel oil (HFO) power plant in Kodda, about 30km from the capital city of Dhaka. Clifford Capital provided more than 50% of the US dollar financing. Its tranche had a fixed interest rate of slightly more than 3%, with SMBC’s floating interest rate roughly comparable.

Bhola II’s recapitalisation innovated the domestic project finance market for power by bringing in a larger club of commercial banks, including two first-time participants in Bangladesh’s project finance market, and a new international equity holder.

Refinancing Bhola II

Bhola II has 2 gas turbine generators, 2 heat recovery steam generators and one steam turbine generator along with facilities for fuel gas transportation, compression and conditioning system, high-speed diesel storage, cooling water system and water treatment facility. Nutan Bidyut evacuates power through a gas-insulated switchyard of the plant to the existing 230kV air-insulated switchyard to Barisal substation through the existing 230kV transmission line. A roughly 5km gas pipeline from the Shahbazpur gas field connects to the project site.

DFIs were seriously considering providing primary financing for the power plant by November 2017 and financing approvals started arriving by February 2018. Shapoorji Palloonji brought in 2 DFIs from abroad and one domestic non-banking financial institution to finance the power plant.

The primary financing was on a 52:48 debt-to-equity ratio, far less levered than the average of 80:20 for Bangladesh’s power finance market, according to IJGlobal data.

The original financiers were:

• debt:
  • Asian Infrastructure Investment Bank (AIIB) – $60m (22%)
  • Islamic Development Bank (IsDB) – $60m (22%)
  • IDCOL Bangladesh (IDCOL) – $22m (8%)
• equity:
  • Shapoorji Pallonji – $130m (48%)

The new commercial lending syndicate that replaced the DFIs with a $200m loan was:

• SMBC
• ING
• DBS
• Bank of China
• Mizuho – MIGA coordinating bank
• Société Générale

The group included 2 commercial lenders that participated for the first time in a project finance transaction in Bangladesh.

IJGlobal understands the tenor was 18 years.

The refinancing gave Shapoorji Pallonji and Actis $58m more headway in debt than the original loan package.

“The refinancing was a multi-jurisdictional transaction with a bespoke refinancing structure to meet the requirements of the existing and new lenders, and was completed on an accelerated timeline,” lenders’ legal adviser Shearman & Sterling said.

Actis' investment

Actis’ acquisition of a nearly controlling equity interest in the project company and Multilateral Investment Guarantee Agency’s (MIGA) substantial guarantee package added other important facets to the deal.

The London-headquartered investment manager recently established a new $400m gas-fired power generation business called Bridgin Power that will invest in South Asia and Southeast Asia.

Actis Energy Fund 5’s Bridgin Power in June (2022) acquired a 49% equity stake in Nutan Bidyut from Bhola II’s original sponsor Shapoorji Pallonji Infrastructure Capital.

“We believe natural gas is an essential fuel for the medium term offering flexible low emission power as the region gradually transitions to more green energy sources,” said Sanjiv Aggarwal, partner at Actis energy infrastructure. “Investing from our US$6bn Actis Energy 5 Fund, in partnership with Bridgin’s management team, we aim to deliver up to 1.2GW of power capacity by 2028.”

Singapore-based Dennis Foo is group chief executive at Bridgin Power, which targets $1.6 billion AUM. The platform's opportunity set includes gas-fired power plants in Vietnam, Indonesia, Thailand, Philippines, Malaysia, Bangladesh and Sri Lanka. IJGlobal data shows 146 gas-fired assets worth more than $106 billion in those 7 markets.

Shami Nissan, Actis partner and head of sustainability, and Mukundan Srinivasan, managing director for Shapoorji Pallonji Infra, also worked on Bhola II’s recapitalisation.

MIGA’s $407m guarantee package was a critical component of the transaction. The assistance covered non-shareholder loans from the 6 international banks for 18 years against the risks of transfer restriction, expropriation, war and civil disturbance, and breach of contract-arbitral award default.

The World Bank Group member also covered equity investments by Bridgin Power against the risk of breach of contract-arbitral award default for 20 years.

Advisers included:

• Standard Chartered – Shapoorji Pallonji's financial
• Riverstone Capital – financial (local)
• Clifford Chance – Actis' legal (international), led by Melissa Ng, Hans Menski, Paul Landless, and Matthew Buchanan
• Shearman & Sterling – lenders’ legal (international), led by Jean-Louis Neves Mandelli
• Farooq & Associates – sponsors' legal (local)
• DFDL – lenders’ legal (local)
• PMC Treasury

Boosting Bangladesh's renewables capacity

Bangladesh has been vocal about becoming a middle-income country, which requires boosting its energy capacity to support the government’s goal of development.

The power sector has witnessed large investments being made by multilateral agencies, DFIs, and bilateral agreements with strategic investors and commercial lenders, which is evident through the refinancing of Bhola II. The Bhola II recapitalisation serves as an example that displays a consortium of commercial lenders replacing existing DFIs for the refinancing of the plant.

Meanwhile, Bangladesh's development of renewable energy continues to be outpaced by fossil-fueled power projects. The non-renewable forms of energy threaten Bangladesh’s ability to meet its commitment to reduce greenhouse gas emissions under the Paris Agreement and its goal under the UN Sustainable Development Goals.

Despite that, the Bhola IPP project usefully serves as a transitionary deal, with more commercial banks likely appearing in future primary financings. The transaction serves as a pivotal reminder to implement more renewable-friendly energy infrastructure projects in the future and pivot away from non-renewable forms of energy such as coal and gas-fired plants in Bangladesh.