Caselets - Award Winning Deals

RECENT PROJECT FINANCE DEALS

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CASELET #1 Asia Pacific Report 2006 - Asia Acquisition Financing Deal of the Year 2005

The acquisition of the 792MW CBK hydropower plant by Japan's J-Power and Sumitomo Corp for $250 million continues a history of innovation associated with the project. The latest CBK financing brings a new debt instrument to the market – an ECA version of mezzanine debt.

J-Power and Sumitomo Corp acquired CBK Power Co Ltd from Edison Mission Energy (EME) and Argentina's Industrias Metalurgicas Pescarmona SA (IMPSA) through an SPV called CBK Netherlands Holdings BV. The original project financing remains in place, with the Japanese duo simply replacing the original sponsors of the project.

The debt consists of a $100 million loan, lead arranged by Japanese Bank for International Cooperation (JBIC), of which $60 million comes directly from JBIC's books, while $40 million is funded by Mizuho, the agent bank, and ING. JBIC is providing full political cover for the commercial banks' segment of the loan, as well as guaranteeing against non-payment by the Phillipines' National Power Corporation, the plant's long-term offtaker under a 25-year PPA.

The facility is unusual, not least because JBIC had never previously loaned funds for an acquisition. More than that, the deal features an export credit agency lending in a structurally subordinated capacity.

The acquisition debt is structurally subordinate to the original project debt, which was signed in 2000. BNP Paribas, Dai-Ichi Kangyo Bank, Industrial Bank of Japan and Societe Generale were the mandated lead arrangers for that facility, which featured a $351 million senior loan and $32 million of liquidity facilities. The original project also contained $150 million of equity.

The CBK project, which was first conceived in 1994, involved the rehabilitation of the Caliraya-Botocan-Kalayaan power complex in Laguna, 110km southeast of Manila, which included hydroelectric generation and pump storage facilities. The project, awarded to EME and IMPSA in 1999 under a 25-year build-rehabilitate-operate-transfer (BROT) concession, has a history of pioneering innovative financing.

The original project was notable for the scale of political risk insurance it encompassed. The original financing package featured the largest ever political risk insurance policy for a project finance transaction. The risk was underwritten by an AIG-led group that included Zurich Financial Services and Lloyds of London.

The project has sound economic fundamentals: a strong concession framework is in place with the government guaranteeing the BROT agreement; and the plant is of important strategic importance as the only pumped-hydro facility capable of providing ancillary facilities to stabilize the Luzon electricity grid in the event of blackouts.

Despite these strong fundamentals, however, other factors contrived to ensure that the transaction would still be a complex one.

When EME, which had been hit hard by California's energy crisis, announced in 2004 that it was to sell all of its overseas energy assets, IMPSA spotted an opportunity. Under the terms of the joint venture, IMPSA had right of first refusal to EME's 50% stake in the project. IMPSA, which had suffered during Argentina's economic crisis, figured that by exercising that right, it could negotiate a premium for its stake in the project, as the buyer would get 100% control.

This came as something of a shock for EME, which was kept in the dark as to IMPSA's intentions until after it had negotiated the sale of its global portfolio to IPM Eagle, a consortium of International Power and Mitsui. The IPM Eagle sale then had to be renegotiated without CBK, which was sold to IMPSA on 10 January 2005, and in turn sold on to J-Power and Sumitomo later the same day. After that, IMPSA had itself to obtain permission from the original transaction's counterparties before it could sell its half of the venture, which it did on 22 April 2005.

Along the way, a further complication arose when AIG, the political risk insurer on the original debt, was downgraded from its AAA status in March, putting the project into technical default. This required a waiver from the lenders.

Since J-Power and Sumitomo replaced the original sponsors, project revenues continue to be used to repay the original lenders first. The JBIC, Mizuho and ING facilities will amortise over up to seven years with cash sweeps in place, subject to dividend availability. The structurally subordinate role of the new lenders, coupled with the link between dividends and amortisation, give the new debt the characteristics of mezzanine finance.

The debt is priced at 270bp over Libor, with JBIC charging the other lenders a guarantee fee somewhere between 50bp and 100bp. The pricing is very tight for structurally subordinate debt, a reflection of the fact that JBIC is a government agency committed to supporting Japanese companies abroad. By way of contrast, the senior debt, which has a 12.6-year tenor, is priced at 215bp over Libor.

The structure was actually devised before the CBK acquisition: it was to be used to fund J-Power's proposed acquisition of a stake in the Titan II petrochemicals project in Indonesia in 2004, which ultimately came to nothing. Milbank, which acted as legal counsel to JBIC in structuring the untapped Titan II facility, also acted as legal counsel to the lender in this transaction.

Although not technically mezzanine, JBIC is marketing the debt as such, making the transaction the first of its kind for an ECA. The debt is not a one-off solution to a specific set of problems, but rather a tool that JBIC plans to continue making available to Japanese companies in the coming years.

CBK Acquisition FinancingStatus: Closed 22 April 2005Size: $100 millionLocation: PhilippinesDescription: Facility to support the acquisition of equity stakes in an existing IPP projectBuyers: J-Power; SumitomoVendors: Edison Mission Energy; IMPSALead arranger and PRI provider: JBICLenders: JBIC; Mizuho (agent); INGLegal counsel to the lenders: Milbank, Tweed, Hadley & McCloyLegal counsel to the buyers: Latham & WatkinsLegal counsel to the vendors: Coudert Brothers; SyCip Salazar Hernandez & Gatmaitan (IMPSA); Munger, Tolles & Olson (EME)

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CASELET #2

Asia-Pacific Leisure Deal of the Year 2005

That Macanese gaming operations are the fizziest of investment prospects is rarely now disputed. From the Hong Kong Stock Exchange, to US developers, to hedge fund buyers of casino debt, interest in the sector is high. Wynn Macau, while still at least seven months from opening, is a relatively old hand in this market.

Wynn's achievement, recognised here, is to exploit the enthusiasm on the part of lenders for casino assets, while at the same time putting together a solidly structured deal that would survive a potential downturn in gaming. It builds upon Wynn's 2004 construction financing, and attracted a much wider, and more flexible, universe of investors.

Wynn Macau is a casino and hotel with 600 rooms and 175,000 square feet of gaming space, located in the Macau Special Administrative Region. It is a subsidiary of Wynn Resorts, which was formed by casino entrepreneur Steve Wynn to build a property in Las Vegas. Wynn won a concession to operate a casino in Macau in 2002, as part of the first wave of Western-style operators to arrive in the SAR.

The original financing anticipated a 600-room, 100,000 square-foot operation, and took from roughly June 2003 to June 2004 to put together. It closed in September of that year, and consisted of $397 million in dollar and HK dollar debt, buttressed with $234 million in hard equity, $222 million in subordinated loan commitments from Wynn Resorts, and $30 million in contingent debt.

The original financing was put together at a time when gambling assets were much more exotic. Deutsche Bank and SG, the former from a high-yield background, the latter a project finance operation, put together a deal with the security and distribution restrictions necessary to sell down the SAR's first syndicated financing.

Phase two, the expansion of the gaming operations by 75,000 square feet, was already included in the design of the facility, and its preliminary work was included in the phase one work. The decision on when to expand the facility came down to the growth of the Macanese gaming market, and this has been explosive.

Rather than raise a new facility for the expansion, the sponsor opted to refinance the entire package. Market conditions encouraged the route, although several US-based lenders might have been able to offer Wynn a B loan at reasonably competitive rates. However the continued presence of construction risk, as well as the liquidity of the dollar bank market, provided banks with a competitive edge.

The total cost of the project has increased from $704 million to $1.1 billion, and the gearing on the project has also increased. While the project's working capital facility has decreased from HK$156 million ($20 million) to HK$117 million, the term loan has jumped in size to $729 million, split between dollar and HK dollar and hotel and non-hotel tranches. While lender interest in gaming is strong, many institutions are still unable to lend to the industry.

The senior debt consists of a $110.3 million base hotel facility, a $546 million base gaming facility, $12.1 million contingent hotel facility, and $59.9 million contingent gaming facility. Thus, since the original hotel facility and gaming facilities were, at $169 million and $182 million respectively, the new debt is overwhelmingly gaming-related.

Nevertheless, the arrangers, SG and Deutsche, joined by Bank of America, still felt that separate facilities, and the accompanying structuring, were worthwhile.

In other respects, though, the financing drew heavily on the documentation from the first deal. However, there have been several sponsor-friendly relaxations. The gearing on the project has increased from around 50% to over 60%. But the most important change is that revenues from holders of subconcessions, say operators that will run gaming operations within the scope of Wynn's licence, can now to distributed to the sponsor rather than remain as lenders' security.

As a quick idea of the significance of this provision, on 7 March 2006 Wynn sold a subconcession to a joint venture of Melco International, headed by old-line Macau casino magnate Stanley Ho's son Lawrence, and PBL, headed by Kerry Packer's son James. The subconcession fetched $900 million, easily enough to prepay the debt facility, and still allows Wynn room to expand in its footprint.

Lenders face the continuing complexities of lending to a project in Macau, and thus being subject to the SAR's civil code-based Basic Law. The ability of the lenders to step in, as well as the rights of the territory's authority to alter concession terms, had to be well understood, and in some cases the SAR provides limited undertakings. Nevertheless, the deal achieved a 30% oversubscription rate.

Moreover, the margin on the debt, set at 350bp over Libor for the 2004 vintage, was reduced to 300bp. In the face of strong demand, the lead arrangers went back to syndicate lenders, and asked them to accept a margin of 300bp during construction, and post-completion, between 200bp and 275bp, according to Debt/Ebitda ratios. However, not all lenders could accept, and such a reverse flex is considered a novelty in Asian syndication markets.

But Wynn is still considered a step apart from other and earlier operators, in part by developing a brand slightly less dependent on gaming than its peers. Part of the expansion is believed to be a secret water feature that would pull in as many viewers as its equivalent in Las Vegas. The Vegas operation, which has been open since April 2005, when the Macau refinancing mandated, has been a success. Bringing Wynn's style of high-end aspirational gambling to visitors from mainland China could be enormously profitable.

In the meantime, borrowers such as the MGM Grand Paradise, which closed a remarkably similar, albeit slightly cheaper, financing package in December, have benefited from its work in softening the market. Meanwhile, the lead arrangers of a loosely-structured $2.5 billion B loan for the Venetian Macau are pitching the paper aggressively to US lenders. Macau mania is far from over.

Wynn Macau RefinancingStatus: Signed 14 September 2005Size: $1.1 billionLocation: Macau SAR, ChinaDescription: Expanded casino and hotel complexSponsor: Wynn ResortsDebt: $764 millionArrangers: Banc of America Securities, Deutsche Bank, SGLender counsel: Clifford ChanceSponsor counsel: Skadden Arps Slate Meagher & Flom


CASELET #3

Asia Mining Deal of the Year 2005

Closed on 26 August 2005, Lihir Gold's $266 million refinancing is the first loan of gold to an Australian borrower since 1999. It also gives Lihir the chance to achieve its two principal financial objectives – project financing for its mine and a restructuring of its hedge-book, all while making friends with some key financial institutions along the way.

Lihir Island is 900km north-east of Papua New Guinea's capital, Port Moresby. It boasts one of the world's largest known gold reserves, the Luise Caldera reserve, located on the east coast of the island. Lihir is the owner and developer of the mine. Gold was first identified at the site in 1982, and exploration began in 1983. Construction commenced in 1995, and the mine was operational by 1997. The amount of production has increased from 244,258 ounces in 1997 to over 700,000 in 2005.

ABN Amro is lead arranger of the deal, which consists of a 480,000-ounces (equivalent to $216 million, the day the loan closed) gold loan due 2011. Repayments are due in physical gold, beginning in 2007, with an interest rate of 2.1%.

The deal goes back to 2003 when the company decided to expand its existing facility with a view to increasing production by 20%. After a nine-month period of analysis, Lihir decided to raise debt through the bank market. Paul Fulton, Lihir's CFO, says that Lihir considered the full range of options for financing the project, from equity to US dollar loans to other currency loans.

Lihir's decision to borrow in physical gold stems mainly from its view that the interest rate available on gold lending is attractive. The interest rate, at 2.1%, is approximately half of the current rate on dollar loans. Gold loans were used frequently in the 1980s and 1990s, although they later became much less competitive. The decision to return to this form of funding now reflects the favourable gold market, as well as the interest rate on the gold.

Lihir will use the loan to refinance and extend its existing bank facility. $100 million of the proceeds will be used to partly fund the company's expansion. This incorporates the installation of a flotation circuit, which is designed to improve yields, estimated to cost $160 million. The remainder of the funding for that installation will come from operating cash flows. Following the expansion, the mine's gold production will increase by 140,000 ounces per year. Another $50 million in proceeds will retire the company's drawn revolving credit. The remainder, $66 million, will finance the restructuring of the company's hedge book. Lihir is also raising a further $50 million revolver from the bank but does not plan to draw it.

The restructuring of the hedge book is of major importance to Lihir. The company wants to enhance shareholder return by managing the book over time. Lihir sees the loan as a gold hedge, in that it has a contract to sell at a set price. However, rather than adding on top of the hedge, Lihir decided to reinvest and retire part of it. In this way, the company can expand the mine, restructure the hedge book and 'still have some gold change on the table', says Fulton.

Lihir is therefore investing in cancelling out of the money hedges and also in raising strike prices for the majority of the hedge book. Even in the current high gold price environment, Lihir, whose resource is long-life, is rare among its peers in being able to complete such a restructuring.

The syndicate consists of twelve banks, including four Australian, and eight international. ABN Amro is lending Lihir 42,084 ounces of gold, while participants ANZ Investment Bank, Bank of Scotland, BNP Paribas, Commonwealth Bank of Australia, HVB, Macquarie Bank, SG Australia and WestLB are each providing 42,108 ounces of gold. Lead managers in the deal are Natexis, National Australia Bank and Westpac, which each take 33,684 ounces of gold.

According to Joe Dowling, manager of investor relations at Lihir, "We wanted to have a strong banking syndicate to enhance the growth of the company". Lihir was looking to establish a relationship with the banks, since it was likely to embark on several new projects in the coming months. The reception to the refinancing was extremely favourable, says Dowling, pointing to the fact that the deal was heavily oversubscribed.

The deal benefits from political risk insurance coverage from AIG, Axis Specialty, Chubb, Zurich Insurance and Sovereign (for its owners ACE and XL Capital). The PRI demonstrates that while many mine owners and lenders have abandoned the use of PRI in regions such as Latin America, for a jurisdiction such as Papua New Guinea the option is still very attractive.

Fulton says that gold should be perceived as a unique commodity, that is easily placed on the market. Daily production of this commodity is declining with the global decline in gold reserves. The current expansion of Lihir's mine and subsequent increase in its production therefore places the company in a very favourable market position. Its own predictions show it producing well over twice as much as would be necessary to meet both the gold loan and the hedge commitments.

Moreover the deal cements the independence of Lihir from Rio Tinto, the mine's original developer. Rio Tinto has since its shares in Lihir in October, and the producer gained an independent CEO, Arthur Hood, formerly of Placer Dome, two days after the refinancing closed.

Lihir GoldStatus: Closed 26 August 2005Size: $276 millionLocation: Lihir Island, northeast of Papua New GuineaDescription: Refinancing and expansion of gold mine projectSponsor: Lihir GoldLead arranger: ABN AmroParticipating banks: ANZ Investment Bank, Bank of Scotland, BNP Paribas, Commonwealth Bank of Australia, HVB, Macquarie Bank, Natexis, National Australia Bank SG Australia, WestLB, and Westpac Bank.Debt: $266 millionLegal counsel to the sponsors: Blake Dawson WaldronLegal counsel to the lenders: Mallesons Stephens Jacques


CASELET #4

Asia Oil and Gas Deal of the Year 2005

The Horizon Terminal project is notable in two respects: it is the first terminalling facility in Asia to be funded through a project financing, and the deal was completed in record time. The total project cost is estimated at S$343 million ($207 million). The financing takes the form of a simple S$240 million 12-year project loan, and the remaining 30% of funding is provided by equity.

Horizon Singapore Terminals Private Limited (HSTPL) is in the process of developing an independent petroleum terminal storage facility in Singapore. HSBC is mandated sole lead arranger, sole underwriter and sole bookrunner on the deal, which closed on 14 July 2005. HSTPL is a joint venture established by Horizon Terminal Ltd (HTL), a wholly-owned subsidiary of Emirates National

Oil Company (ENOC) and majority shareholder of HSTPL. This project is part of HTL's strategy to establish a presence in the terminalling industry in Asia within the next five years.

HSTPL is a greenfield bulk liquid terminalling facility, located on Jurong Island. It encompasses 30 petrol tanks with a capacity of 840,000 cubic metres. The tanks will store both clean and dirty petroleum, in accordance with the varying needs of Horizon customers. In addition, the project includes construction of four jetties in which up to seven ships can load or unload simultaneously.

The project is ENOC's debut in Singapore. Similarly this deal is the first step in the region for HSTPL's other shareholders; Independent Petroleum Group (15%), SK Energy Asia (15%), Martank (10%) and Boreh International (8%). Initial talks with lenders began late in 2004, with the winning bid mandated in the first quarter of 2005. HSBC was appointed on the strength of competitive proposal and its long-standing relationship with ENOC, which wished to gain from HSBC's Asian footprint. The financing was put in place at the end of the second quarter in 2005 with financial close shortly afterwards, in July 2005.

Lenders' risk analysis and credit structuring made them comfortable with greenfield project financing at near-corporate pricing, even though the project does not benefit from long-term terminalling contracts. In addition the deal encompasses a multi-level cash deficiency support structure (CDS), a joint and several obligation of the sponsors.The CDS stands somewhere between a sponsor-supplied series of long-term agreements and the banks taking on, and charging for, market risk. It is a capped obligation on the part of the sponsors, which would be called upon in the event that cashflows cannot meet debt service. The CDS reduces over the life of the loan, and any sponsor that does not meet its CDS obligation loses its shareholding to the sponsor that makes up the defaulted amount.

The project is ENOC's debut in the project finance market. Hussain Sultan, ENOC's chairman, said that after reviewing a range of financing options bank debt project financing was considered the optimal choice. A key benefit in choosing this financing structure is the involvement of several banks as one of the sponsors' main objectives is to raise their profiles. A large spectrum of institutions was appointed -12 in total. The banks are diverse in terms of their nationalities (one Japanese, one UK, two Singaporean, two Belgian, three French, and three German) and also in that they are primarily non-relationship banks.

The project attained 100% positive response during general syndication, and the syndication was more than three times over-subscribed. The facility agreement was signed less than a month after the banks were invited to participate. For a deal encompassing limited recourse financing, this level of response and time-span is unusual.

The loan is based on Singapore swap offered rate (SOR). It is priced at 105bp over SOR during construction, decreasing to 98.5bp in the first three years, and then increasing to 112.5bp during years four to six, and 125bp in year seven.

The Singapore Government is solidly behind the project, which represents a diversification in financing opportunities for Singapore. In addition the government sees terminalling as a logistic hub for the whole region. Singapore's strategic place in the petroleum market is likely to continue; its geographical position gives it prime access to diesel products from both the Arabian Gulf and Atlantic Basin.

Construction on the terminal began in April 2005 and is expected to be complete by the end of 2006. Sultan says that ENOC sees Asia an 'area of strategic importance.' Competing projects in the region, as well as ENOC's plans for expansion overseas, will benefit from the experience.

Horizon Singapore Terminals Private LimitedStatus: Closed 14 July 2005Size: S$343 million ($207 million)Location: SingaporeDescription: Project financing for a greenfield terminalling facility on Jurong Island, SingaporeSponsors: Sponsors: Emirates National Oil Company (52%), Independent Petroleum Group (15%), SK Corporation (15%), Martank (10%), Boreh (8%)Lead arranger: HSBCParticipating banks: BoTM, Credit Industrial et Commercial, OCBC, UOB, HVB, DZ Bank, Fortis, Nord/LB, BNP ParibasDebt: S$240 million ($145 million), 12 year project loanLegal counsel to sponsors: In-house counsel onlyLegal counsel to lenders: Shearman & Sterling (international), Rajah & Tann (local)Market study: Purvin & Gertz


CASELET #5

Asia Petrochemicals Deal of the Year 2005

Titan Chemicals is the case study in how to structure and market petrochemicals debt. Two refinancings and an IPO in one year have lowered Titan Chemicals' cost of funding by 140bp-plus on the first refinancing alone – and all against a backdrop of scepticism over how long the uptick in the petrochemicals cycle would last, given the increase in cost of oil and co-extensively raw materials.

Titan's initial Phase II expansion financing closed in 1997 – a $840 million term loan with RHB Bank, Bank of Nova Scotia, Maybank and JP Morgan Chase. The loan was to finance an additional cracker, three polyethylene/polypropylene plants and an aromatics facility – a move designed to take advantage of increasing petrochemical demand at the time. The Asian financial crisis followed and so began a five-year downturn in the petrochemicals sector.

Titan restructured its debt accordingly and waited for the upturn. The rise in petrochemicals prices in 2004 prompted an attempt at a high yield bond to reduce leverage. But deterred by the size of yield demanded, Titan returned to the bank debt market and mandated financial adviser Standard Chartered to structure a refinancing that would enable Titan to better match amortization schedules to cashflows and fulfil its capex needs in a growth market.

The first refinancing signed in January 2005 – a $700 million two-tranche limited recourse facility lead arranged by Standard Chartered, Maybank and RHB, with WestLB and DBS expanding the original MLA group.

Tranche A was a 7-year floating rate $500 million amortizing term loan, and Tranche B was an 18-month floating rate $200 million bullet bridge designed to be repaid by the proceeds from an IPO later in the year. Pricing averaged around 250bp.

Repayments on tranche A were back-ended, with 50% of the principal to be repaid in the last three years and a cash sweep mechanism to prepay the loan from excess cash – this both shortens loan life and takes advantage of any upturn in the petrochemicals market.

Tranche B was structured as a bullet, due upon the completion of the IPO, or within 18 months from the drawdown date, thus enabling Titan to list at any given moment. To reduce the IPO risk to lenders, Tranche B was priced with margin step-ups and a cash sweep mechanism to reduce its outstanding amount.

The excess cash calculation in the cash sweep mechanism also took into account Titan's capex needs, although lenders took comfort from the fact that these capital expenditure programs would be limited to a pre-approved level. In addition, the cash sweep mechanism allowed Titan to pay out dividends in the event of a successful IPO, as the lenders recognized the need for dividend distribution for a successful listing.

The deal closed oversubscribed with SMBC, KBC, BNP Paribas, Calyon, Chinatrust Commercial Bank, Shanghai Commercial and Savings Bank, Bumiputra Commerce Bank and Aozora Bank participating.

Titan's IPO followed in June – raising $208 million and upping Titan's rating to BB – and almost immediately the sponsor returned to the bank debt market for a second refinancing.

Despite high oil prices, Titan is posting strong operating performance, has significant cashflow generation, and, by the time of the second refinancing, had paid down a significant portion of its debt – pushing down its debt-to-equity ratio from 70:30 to 55:45. Consequently Titan could demand cheaper debt.

The second deal – a $446 million limited recourse loan – was again lead arranged by Standard Chartered, WestLB and RHB. In addition Standard Chartered, Maybank and Bank Muamalat provided a $309.5 million 2-year local currency working capital facility.

The dollar loan comprises two international tranches: Tranche A is a $251.3 million 5 year term floating rate loan at a margin of 80bp; and Tranche B is a 7 year $195 million floating rate revolving credit priced at 105bp.

The Tranche A amortization schedule is based on expected cashflow generation and allows Titan to better match debt repayments with operating performance. Due to Titan's improved credit profile, the cash sweep mechanism in the first refinancing has been removed, allowing Titan's shareholders greater access to cashflow generated from operations.

The Tranche B revolver is specifically designed to meet any future Titan expansion plans, but is also stepped down over its 7-year tenor to provide comfort to banks.

The structure also provides Titan with more flexibility by relaxing restrictions on dividend distributions, capital and investment expenditure, and removing the debt service reserve account.

Syndication of the second refinancing signed on 21 February 2006, but was underwritten in November 2005. Banks that joined the MLAs are: HVB as an arranger and SMBC as co-arranger; Calyon, Overseas-Chinese Banking Corp, Shanghai Commercial & Savings Bank, Chang Hwa Commercial Bank, First Commercial Bank, Hua Nan Commercial Bank, Bank of East Asia and Cathay United Bank as participants.

Titan Chemicals 1 & 2Status: Titan 1 Financial close January 2005; Titan 2 Financial close November 2005Sponsor: Titan ChemicalsDescription: Two refinancings in same year for same project creating 140bp plus cost of funding savings.

Titan 1Size: $700 millionFinancial adviser: Standard Chartered BankMandated lead arrangers: Standard Chartered, Maybank, RHB Bank, WestLB, DBSParticipants: KBC, BNP Paribas, Shanghai Commercial & Savings Bank, Chinatrust Commercial Bank, Calyon, Aozora Bank, Bumiputra Commerce Bank, SMBCSponsor legal counsel: Clifford Chance, KadirLender legal counsel: Linklaters Allen & Gledhill, Adnan Sundra & LowConsultants: Chemical Market Associates Inc (CMAI)

Titan 2Size: $755 million including working capital facility; $446 million excluding working capitalFinancial adviser: Standard Chartered BankMandated lead arrangers: Standard Chartered, RHB Bank, WestLBParticipants: HVB, SMBC, Calyon, Overseas-Chinese Banking Corp, Shanghai Commercial & Savings Bank, Chang Hwa Commercial Bank, First Commercial Bank, Hua Nan Commercial Bank, Bank of East Asia, Cathay United BankWorking capital facility: Standard Chartered, Maybank, Bank Muamalat

Sponsor legal counsel: Clifford Chance, KadirLender legal counsel: Milbank Tweed Hadley & McCloy, Adnan Sundra & LowConsultants: Chemical Market Associates Inc (CMAI)


CASELET #6

Asia PPP Deal of the Year 2005

India's first public-private-partnership (PPP) greenfield airport financing, the Rs14.12 billion ($325 million) 30-year Bangalore International Airport concession, has set the template for future airport projects in India – notably the Bombay and Delhi expansion projects.

Bangalore International Airport Limited (BIAL) – a consortium comprising Siemens Project Ventures (40%), Unique (Flughafen Zürich) (17%), Larsen & Toubro (17%) Karnataka state government through Karnataka Industrial Development Corporation (13%) and the central government through Airports Authority of India (AAI) (13%) – was awarded the 30-year BOT concession (extendible to 60 years) in July 2001.

The first phase of the airport consists of a 4km runway, taxiways and an apron area with aircraft stands and a terminal building to be built on 3,800 acre site at Devanahalli. The airport can be expanded in the future up to around 40 million passengers per year from the initial 4.5 million expected.

The project had a long and politically difficult passage from drawing board to financing: Bangalore had groundbreaking ceremonies in both 2002 and 2004 for example, and a change of government officials in 2004 delayed signings of both the land lease for the project and the state support package – at one stage Unique was rumoured to have threatened to pull out of the deal because of the endless politicking.

The concession agreement alone took three years to negotiate. One of the main hurdles was that the central government was initially reluctant to grant a PPP concession, and although the state government was pro-PPP, it did not have the legal authority to grant the concession.

Furthermore, the Airports Authority Act did not sufficiently empower the private sector to run an airport and had to be amended before the project could proceed.

The economic reasons behind the airport development at Bangalore are very strong. Aviation demand in India is rising by 25% each year, and since nearly 65% of Bangalore's population consists of people from other parts of India as well as foreign nationals, the region is on the high point of the growth curve.

Bangalore is also a software and biotech centre. The state government is considering setting up an information technology corridor linking Electronics City and Whitefield, two IT hotspots where many software majors have set up shop. Bangalore is also a biotechnology hotspot with more than 240 biotech firms including Biocon – India's leading biotechnology firm and ranked 16th in the world in revenues.

But despite the strong economic logic behind the deal, the airport will not initially be large enough – 4.5 million passengers a year are forecast for 2008 when it opens – to make the economics strong enough for a fully private sector deal, and the financing needed the comfort of a $80 million soft loan from Karnataka state government.

The complete financial package comprises a $180 million 12-year term loan sole arranged and underwritten by ICICI Bank, the $80 million soft loan provided by the state government of Karnataka and $65 million in equity.

Stripping out the $80 million equivalent state loan, project gearing is very conservative compared with a typical project finance debt-to-equity ratio of 70:30. The financing is fully non-recourse and there are no completion guarantees during construction and no other written commitments from the sponsors, except those relating to their respective equity investments.

International lenders to Indian projects – of which there are none on Bangalore – have long been uncomfortable about the reliability of state government guarantees. Given that the $80 million loan from Karnataka is not provided in full on day one, sources close to the financing say ICICI wanted a state bank to guarantee the regional government's commitment. This was duly provided by the State Bank of India in the form of a 15-year letter of credit and highlights the fact that even domestic commercial finance houses remain unwilling to take direct risk on certain regional governments in India.

The repayment profile on the state loan depends on the airport's financial performance. Surplus cash in the company (calculated after taking account of a number of factors set out in the loan agreement) will be used to accelerate the repayment of the state loan. The loan is otherwise repayable in 30 years, in 20 equal instalments commencing only from eleventh year after financial close.

Pricing on the BIAL debt has never been disclosed. One indicator is that when the sponsors first began to look at a funding strategy for the airport, a combination of both onshore and offshore debt was considered, but there was so little to choose between the two in terms of pricing that they opted for the ease of a 100% local financing.

Despite all the political hurdles, Bangalore has achieved a lot of the groundwork that will make future airport PPPs in India quicker and easier to negotiate. The project is not backed by a particularly sophisticated financial package, but the fact that it has closed at all is an achievement in itself.

Bangalore International AirportStatus: Financial close 23 June 2005Size: Rs14.12 billionDebt: Rs7.36 billion (commercial loan), Rs3.50 billion (state loan)Description: Project financing for the first PPP greenfield airport project in IndiaSponsors: Siemens Project Ventures, Unique (Flughafen Zürich), Larsen & Toubro, Karnataka state, Airports Authority of IndiaLead arranger: ICICI BankLegal counsel to private sponsors: Linklaters (international), Crawford Bayley (India)Legal counsel to state sponsors: Jyoti Sagar & AssociatesLegal counsel to the Government of India: Amarchand MangaldasLegal counsel to the lender: AZB & Partners


CASELET #7

Asia Power Deal of the Year 2005

The $1.582 billion 1070MW Nam Theun 2 hydropower project in Lao PDR is as big as it is complex. The largest private sector hydropower project to date; the largest ever cross-border power project in Asia; the largest internationally financed power project in Asia since the Asian crisis; the longest

tenor ever raised for a Lao-domiciled borrower (17 years); the largest amount ever raised in the Thai bank market for a non-Thai domiciled borrower – the largest number of claims to largeness by bank PR machines to date.

But size is not the most outstanding aspect of the Nam Theun 2 financing. More significant is the diversity of funding and a previously unseen degree of innovation at the ECA and multilateral level that enabled the government of Lao PDR to put together an equity stake in the project. In short, Nam Theun 2 is the most diverse financing in the Asian project market to date.

Sponsored by EDF International (35%), EGCO (25%), Electricité du Laos (25%) and Italian-Thai Development (15%) under a 25-year BOT concession from the Laos government, the challenges to structuring the deal were numerous. The proposed financing was more than seven times larger than any previous project in Lao PDR and more than 10 times larger than Lao PDR's foreign exchange reserves.

Financing Nam Theun 2 was also always going to be contentious. It was first major hydro project to get World Bank backing in 10 years, featured a number of signatories to the sustainable lending pact, the Equator Principles, and has been slated by many NGOs.

The socio-environmental impact of the project on the local community – 93% of the Nam Theun River's flow will be diverted into the adjacent Xe Bang Fai River basin and nearly 40% of the Nakai Plateau will vanish beneath a reservoir covering 450 square kilometres – is enormous.

But the rationale for the project is a compelling compromise – much-needed foreign currency for Laos to improve rural infrastructure offset against the environmental impact. And although neighbouring Thailand – the main offtaker and a major sponsor through various Thai entities – will get the most benefit from the project, conservative estimates predict Nam Theun 2 will produce the equivalent of 10% of Lao GDP and the World Bank has circulated a figure of $1.9 billion in foreign exchange earnings for Lao PDR over the 25-year operating period.

The project is backed by a 25-year take-or-pay power purchase agreement (PPA) with Thai state generator EGAT that covers 95% (995MW) of output. Nam Theun 2 will export about 5,354 gigawatt-hours (GWh) of electricity annually to Thailand with the remaining 5% of output sold to Electricite de Laos.

The $1 billion multi-sourced debt (comprising 50% US dollar debt fully hedged and 50% Thai baht) is split into 12 tranches – a $126 million three-tranche political risk guarantee (PRG) loan, a $200 million three-tranche export credit agency loan, a $174 million five-tranche direct loan, and a Bt20 billion ($500 million) loan. Tenor on the Baht loan is 15.5 years with US dollar debt running for 17 years – both tenors include a six-month caution for construction delay.

Offshore commercial lenders for the US dollar PRG and export credit agency financing are ANZ (technical and insurance), Bank of Tokyo-Mitsubishi, BNP Paribas (documentation), Calyon, Fortis (PRG/PRI Coordinator), ING, KBC Bank (modelling), SG CIB (ECA coordinator) and Standard Chartered Bank. PRG providers for the loans are the Asian Development Bank (ADB), the World Bank/IDA (International Development Association) and the Multilateral Investment Guarantee Agency (MIGA).

Pricing on the three $42 million PRG tranches varies. The World Bank/IDA tranche is 200bp over Libor during pre-completion, and post-completion is on a step-up basis. Years one to four is 200bp, years five to eight is 215bp and years nine to 12 is 230bp.

The MIGA and ADB PRG loans are priced at 180bp over Libor during pre-completion, with post-completion step-ups of 155bp for years one to four, 167.5bp for years five to eight and 180bp for

years nine to 12. The MIGA and ADB guarantees cover both Laos and Thailand and are the first dual country PRGS in Asia.

The $200 million export credit agency support is led by Coface and then reinsured with EKN and GIEK. The support includes construction risk – a first for Coface. The fronting structure also features an innovative fixed-rate lending mechanism via stabilised rates provided by Natexis.

The export credit agency facilities feature a spread of 100bp over Libor during construction, with post-completion step-ups of 80bp for years one to four, 85bp for years five to eight and 90bp for years nine to 12.

The five direct loans came from: ADB with a $50 million contribution, Nordic Investment Bank (NIB) with a $34 million commitment, and Proparco, Agence Francaise de Developpement (AFD) and Export Import Bank of Thailand (Thai Exim) with a $30 million pledge apiece. The loans are priced at 300bp over Libor during pre-completion and 275bp post-completion. Thai Exim's portion is at 325bp for pre-completion and 300bp for post-completion.

The local Bt20 billion tranche was arranged by seven Thai banks – Bangkok Bank, Bank of Ayudhya, Kasikornbank, Krung Thai Bank, Siam Commercial Bank, Thai Military Bank and Siam City Bank. The loan has two pricing features. The first Bht9 billion to be drawn down is at a fixed rate of 8.25%, while the second Bht9 billion is at 150bp over the minimum lending rate (MLR) during construction and 125bp after completion. The remaining Bht2 billion is to be used for contingency measures.

The Laos government equity contribution – up to 25% of the project company NTPC – is backed by loans and grants from the EIB ($55 million over 30 years with a six year grace period), the ADB ($20 million long-term loan), the World Bank/IDA ($20 million) and AFD ($6 million). The equity was structured to provide comfort to lenders that it would be injected as required without any conditions or drawstops being imposed. The government of Laos contingent equity is contributed from the final drawdown of the sponsors' equity and placed in an escrow account under the control of NTPC.

Despite the controversy over Nam Theun 2 the project has some obvious financial benefits for Laos and Thailand. The project is a BOT and will therefore be transferred to the government of Laos at no cost at the end of the concession – enabling Laos to continue to export significant amounts of electricity to Thailand. For Thailand, Nam Theun 2 is a cheap source of reliable power for a market with limited power generation alternatives and capacity shortfalls, and a much-needed diversification away from gas.

Nam Theun II Power CoStatus: Financial close 3 May 2005Description: $1.45 billion hydroelectric project in LaosSponsors: EDF International; EGCO; Electricité du Laos; Italian-Thai DevelopmentFinancial advisers to the sponsors: ANZ; KasikornbankEquity loan participants: EIB; ADB; AFDMultilateral direct loan participants: ADB; Nordic Investment Bank; Proparco; AFD; Thai EximPRG providers: ADB; MIGA; World Bank/IDAMandated lead arrangers US dollar debt: ANZ; Bank of Tokyo-Mitsubishi; BNP Paribas; Calyon; Fortis; KBC Bank; SG; Standard Chartered Bank; ING BankMandated lead arrangers Thai baht debt: Bangkok Bank, Bank of Ayudhya, Kasikornbank, Krung Thai Bank, Siam Commercial Bank, Thai Military Bank and Siam City BankLegal counsel to sponsors: Clifford ChanceLegal counsel to lenders: Allen & Overy; Chandler & Tong-Ek; Mekong Law Group

Technical adviser: PB PowerEPC contractor: EDF


CASELET #8

Asia Project Bond Deal of the Year 2005

The RM6.1 billion ($1.6 billion) Jimah Energy Ventures (JEV) financing illustrated the enterprise of Malaysia's capital markets in project finance and lender confidence in IPP projects. The 1400MW coal-fired power plant achieved an astonishing debt-equity split of 96:4 by securitising the equity upfront.

An Islamic bond issue was arranged and underwritten by AmMerchant Bank, RHB Sakura Merchant Bankers, Malaysian International Merchant Bankers and Bank Muamalat Malaysia. The deal they structured comprised three classes of notes: a senior issue, rated AA3(s) by Rating Agency Malaysia (RAM); and two junior notes rated A1(s) and C1(s), taking the traditional role of equity. The total value of the debt is RM5.865 billion.

Jimah's owners, mostly members of the royal family of Negeri Sembilan, subscribed to the C1(s) notes, worth RM215 million, which corresponds to the riskiest element of the financing. This supplements the 4% of equity they injected into the project, but allows them to share the cost with those investors hungry for high-risk, high-yield assets.

JEV has a 25-year BOO concession for a 1400MW coal-fired power plant in Port Dickson, Negeri Sembilan. The facility is made up of two power-generating units, each with a nominal net capacity of 700MW. The plant is due to come on-stream in 2009.

Malaysia has financed over 15 IPPs since the early 1990s, mostly in the bond market. None of these projects have defaulted, which gave the arrangers the confidence to present the market with a new benchmark for project gearing.

Key to this was that the vast number of IPP's preceding Jimah provided plenty of data with which to analyse cash flows. This enabled the project's architects to structure a deal with elements that could satisfy different investors' risk needs.

The AA3(s)-rated senior debt consists of Islamic Medium Term Notes (IMTN), issued under the Istisna principle of Shariah law, worth a total of RM4.85 million. These have varying maturities and are issued in nine separate tranches at six-monthly intervals. The first tranche, raised RM930 million when it was sold in May 2005, with more notes issued in November.

Tenors ranged from eight years to 12.5 years. Pricing on the notes varied according to tenor, with the eight-year bonds fetching 6.3% and the 12.5-year notes giving a margin of 7.2%.

A notable aspect of the deal is that the final two tranches, to be issued in 2009, will be floating rate notes pegged against Libor. This will be the first time a floating-rate project bond is issued in Malaysia.

The arrangers established an SPV to issue the junior bonds under the Bai' Inah principle of Islamic law. These bonds comprise a RM800 million Class A note and a RM215 million Class B note, rated A1(s) and C1(s) respectively.

The SPV issued RM405 million of the Class A notes in May 2005, with the remaining RM395 million to be issued in May 2006. Maturities range from six years to 16.5 years, the latter being the longest deferred issuance Islamic debt instrument done to date in Malaysian capital markets. These notes yield a 3% profit rate in years one to six, and a 22.1% profit rate thereafter.

The Class B notes are the most junior of all three and carry the largest amount of risk. They were issued in just one tranche in May 2005 and have tenors of 25 years, after when they amortise in a single bullet payment. The profit rate on these is 0% until 2010, but 100% after that.

Holders of the Class B notes cannot declare a default ahead of the Class A note holders.

Despite the staggered nature of the bond issues, there is no interest rate risk for the sponsors as the notes are all fully underwritten by the lead arrangers, which have made swap arrangements to mitigate this risk.

A large part of the reason investors were prepared to accept such an aggressive financing was that the project is underpinned by extremely strong economic fundamentals. A 25-year PPA with generous terms is in place with state-owned utility Tenaga Nasional Berhad (TNB). Coal will be supplied to the plant by a subsidiary of TNB under terms matching the PPA.

The Jimah plant is being built under a fixed-price turnkey EPC contract by a consortium of contractors led by Sumitomo, and also including Ishikawajima-Harima Heavy Industries and Toshiba. Construction risk is low due to the strength of the EPC contractor, and a generous construction timetable.

The lead arrangers are providing some additional debt in the form of a RM285 million cost-overrun liquidity facility. Together with a RM101.83 million contingency sum, the sponsors have RM386.83 million available to cover cost overruns, equivalent to 10% of the EPC contract price, giving additional protection to the bondholders.

The sponsor does bear some demand risk under the terms of the PPA. Only 80% to 85% of the tariff is guaranteed by TNB, with the remainder paid according to despatch.

Base case annual DSCR for the senior debt, excluding cash reserves, ranges between 1.26x and 4.96x – similar to other Malaysian IPPs. The plant is projected to generate an annual net operating cashflow of about RM800 million.

It is unlikely that such an aggressive deal will be repeated soon. Jimah will help ensure the country's energy needs are mostly met; consequently, the pipeline for future IPP deals is drying up. Other sectors, such as toll road financings, would be unable to match the JEV financing because Malaysians have less experience of such projects.

Jimah Energy Ventures FinancingStatus: Closed 5 May 2005Size: RM6.1 billion ($1.6 billion)Location: MalaysiaDescription: Structured Islamic financing to fund the construction of a 1,400MW greenfield IPPDebt: RM4.85 billion in senior Islamic bonds, RM1.015 billion in subordinated Islamic bondsFinancial advisers: Babcock & Brown, Bumiwerks Capital ManagementArrangers: AmMerchant Bank, RHB Sakura Merchant Bankers, Malaysian International Merchant Bankers, Bank Muamalat MalaysiaEPC: Sumitomo CorpLegal counsel to sponsor: Zaid IbrahimLegal counsel to lenders: Adnan Sundra & Low


CASELET #9

Asia-Pacific Transport Deal of the Year 2005

The W1.45 trillion ($1.4 billion) Incheon Bridge deal may mark the beginning of the end of the clubby and lucrative world of Korean PPI. It marks the first time that an outside strategic developer, rather than a financial institution or domestic chaebol, has taken the lead in pursuing a large Private Participation in Investment (PPI) project. But the deal ultimately took place after established player Macquarie stepped in to provide equity for the deal.

Moreover, the Incheon Bridge, which benefits from a generous revenue guarantee from the South Korean government, is unlikely to be the model for the next wave of Korean concessions. But it stands as a landmark in the market, and as a landmark piece of engineering. As competition for concessions, both from within Korea and outside, intensifies, the discipline of the sponsors of Incheon would be worth emulating.

The Incheon Grand Bridge is a 12.3km, dual three-lane tolled bridge the connects the city of Incheon with the Sondo New Town Economic Zone. It will include a cable-stayed section with a 800 meter-long span, and its total span will be the fifth longest in the world and the longest one in Korea, knocking the Seohae Bridge off its perch.

UK civil engineering firm AMEC won the right develop the bridge in 2001, and signed a formal 30-year design, build, finance and operate concession in June 2003. The awarder was the South Korean Ministry of Communications and Transportation, and the project company, Koda, was a 51% AMEC and 49% Incheon City joint venture. The technical scale of the project, as well as its size, made it a challenging prospect.

When the concession agreement first signed, the developer was working towards a financial close in 2004, and, advised by HSBC, brought in Kookmin Bank to provide equity, debt and financial advice, and Industrial Bank of Korea as an arranger and shareholder. The two Korean institutions have the experience, and almost the size, to bring PPI projects to completion.

The sponsors approached National Pension Fund of Korea (NPFK), probably the largest such institution in the country, to round out the project's equity requirement. But NPFK balked at the requirement, leaving the sponsors with a hole in their equity requirement. Macquarie Bank, which had been assiduously funnelling assets into its Korean Road Infrastructure Fund, was a natural home for the missing equity, and had been interested in the assets.

Macquarie moved fast after it was first approached in June 2005, and lined up its KRW 277.4 billion in debt, subdebt and equity funding. The Macquarie Incheon Bridge Investment Company, formed to buy a 41% stake in Koda, reached an agreement on 13 July. The final shareholdings are Macquarie Bank (41.02%) Kookmin Bank (14.99%), Industrial Bank of Korea (14.99%), AMEC (23%) and Incheon Metropolitan City (6%).

The project benefits from government grants of W770 billion, and a minimum guarantee for 15 years of 80% of the revenue set out in the concession, although the sponsors will also toll the bridge. The minimum revenue guarantee (MRG), at 80%, is less than the 90% that featured on the earliest PPI deals, but it is far above the typical 60%-70% common on more recent concessions.

But the concession fundamentals are strong, and the bridge will be a useful way for travelers from the southern end of the Korean peninsular, the residents expected to settle in Sondo, and even some residents of the southern edges of Seoul to reach the airport and 3 million strong greater Incheon area.

Tolls are set by the government but raises are linked to the consumer price index. A large part of the reason for the speed with which the IBIC could sign up for a stake in the bridge was Macquarie's knowledge of the other transport assets located nearby – it owns a quarter of the Incheon International Airport Expressway.

While the slightly lower MRG level may have been too low for the more conservative end of the equity spectrum, it certainly sufficed for debt providers. Senior debt, totalling W578 billion, has a tenor of 19 years, a five-year grace period, and is priced at 8.0% during construction and post-completion 190bp over the three year AA- rated, non-guaranteed corporate bond. The W154.7 billion subdebt has a 21-year tenor, a 14.5-year grace period, and is priced at 12% during the construction phase, and flips to 600bp over the three-year AA- rated, non-guaranteed corporate during the operational phase.

Kookmin and IBK provided W150 billion of the senior loan amount, while IBIC committed to W188 billion. The leads also brought in W30 billion apiece from three Korean life insurance companies – Kyobo Life Insurance, Samsung Life Insurance and Korea Life Insurance. Of the subdebt. Kookmin and IBK provided W32.7 billion, while IBIC put in W89.4 billion.

The engineering, procurement and construction contractor is Samsung, which does not have an equity stake, and has to complete the construction of the bridge in five years – Seohae took seven. Samsung and its subcontractors have provided joint and several guarantees of their work on the bridge. AMEC, as project manager, also has an incentive, in the form of a contingent equity commitment, to bring the project in on time.

Such arrangements will be more common if developers with a construction background gain more of a foothold in the PPI market. But financial sponsors are still competing seriously for the latest slate of projects. KRIF is presently in the process of an initial public offering, which priced at the low end of its expected range but still raised W940 billion. It will be renamed the Macquarie Korea Infrastructure Fund, and the IBIC shareholding will likely be among its early acquisitions.

Incheon Grand BridgeStatus: Closed 16 June 2005Size: $1.4 billionLocation: South KoreaDescription: PPI project for 12.3km, dual three-lane tolled bridge in the city of IncheonSponsors: Macquarie Bank, Kookmin Bank, Industrial Bank of Korea, AMEC and Incheon Metropolitan CityEPC: Samsung CorporationLead arrangers: Kookmin Bank, Industrial Bank of KoreaFinancial adviser to AMEC: HSBCFinancial adviser to IBIC: Shinhan Macquarie Financial AdvisoryEquity: W164.6 billionDebt: W732.7 billion: senior debt W578 billion, subordinated debt W154.7 billionIndependent engineer: Buckland & TaylorOperations and management: Parsons BrinckerhoffTax and accounting: PwCInsurance: MarshLegal counsel to AMEC: Kim & CoLegal counsel to Macquarie: Lee & Ko, FreehillsLegal counsel to the lenders: Lee & Ko


CASELET #10

BIAC: Runway success

Abstract (Document Summary)

Macquarie's acquisition of a 70% stake in the Brussels International Airport Company (BIAC) offered further proof that the Australian bank is one of the canniest investors operating in the infrastructure market. Bought in a Eu735 million ($873 million) BBB-rated transaction mainly funded through equity, BIAC was almost immediately refinanced in the project market for Eu1.135 billion. Lenders were able to get comfortable with an aggressive debt structure because of Macquarie Airports' proven track record - it already operated high profile airports including Sydney, Rome, Birmingham and Bristol, making it the world's second largest non-government owned airport operator. Since BIAC, it has further strengthened its position with the acquisition of Copenhagen Airports for Dkr5.237 billion ($836 million, Eu702 million).

Full Text (923 words)

Copyright Euromoney Institutional Investor PLC Mar 2006

Macquarie's acquisition of a 70% stake in the Brussels International Airport Company (BIAC) offered further proof that the Australian bank is one of the canniest investors operating in the infrastructure market. Bought in a Eu735 million ($873 million) BBB-rated transaction mainly funded through equity, BIAC was almost immediately refinanced in the project market for Eu1.135 billion.

Lenders were able to get comfortable with an aggressive debt structure because of Macquarie Airports' proven track record - it already operated high profile airports including Sydney, Rome, Birmingham and Bristol, making it the world's second largest non-government owned airport operator. Since BIAC, it has further strengthened its position with the acquisition of Copenhagen Airports for Dkr5.237 billion ($836 million, Eu702 million).

Macquarie beat competition from Vinci, Copenhagen Airports, 3i, Schiphol, Fraport and Ferrovial to win the privatisation concession: Ferrovial and Vinci made the strongest rival bids. The bank's MABSA consortium acquired 70% of the airport on 29 December 2004, while the Belgian state retained the other 30%.

The MABSA consortium comprised Macquarie Airports (Eu491.9 million), Macquarie European Infrastructure Fund (Eu100 million), Macquarie Global Infrastructure Fund (Eu30 million) and Macquarie Bank (Eu51.1 million). At this point, the mandated lead arrangers - Royal Bank of Canada (RBC) and Societe General (SG) - provided just a Eu62 million bridge facility.

Macquarie Airports' funded the acquisition by way of an equity placement worth A$510.2 million ($377 million, Eu316.5 million) and raised a further A$465 million through a hybrid debt/equity issue. The tradable, interest-bearing, convertible to equity trust securities (TICKETS), also rated BBB by Standard & Poor's (S&P), yield 6.475% per annum, but can be exchanged after five years for shares in Macquarie Airports. The remaining equity came from cash reserves.

Parallel to this, RBC and SG were busy structuring the project debt package to refinance the initial acquisition and yield Macquarie a quick return on its investment.

The Eu1.135 billion debt that was arranged comprised five tranches: a Eu917.5 million mini-perm amortising in two equal instalments in 2009 and 2011, a Eu100 million capital and expenditure facility, a Eu50 million credit facility, a Eu55 million letter of credit and a Eu12.5 million loan to a Macquarie subsidiary. All the loans had a five year tenor, except for the mini-perm, which was for seven years. However, the mini-perm's repayment schedule and margins - 65bp over Euribor for the first five years, 80bp in year six, stepping up to 95bp in the final year - are conducive to a capital market refinancing before the fifth year.

BIAC improved on the private rating for the acquisition when it received a corporate rating of BBB+ from S&P, which gave the airport a recovery rating of two (meaning 80% to 100% of the principal would likely be recovered in the event of a default).

The refinancing closed on 25 February 2005 with the signing of a club deal that saw 13 banks joining the MLAs. The club participants were: Caja Madrid, Calyon, Commonwealth Bank of Australia, Dexia, HSH, HVB, KfW, ING, Ixis, Lloyds TSB, RBC, RBS, SG, SMBC and WestLB. Fees to sub-underwriters totalled 45bp, including a 7.5bp sub-underwriting fee and a 37.5bp participation fee.

The debt was popular enough in syndication that tickets were pared down from the Eu100 million the banks were initially invited to underwrite to Eu75 million.

High demand also meant they could finance the deal ahead of schedule; before deciding on a club deal, RBC and SG had planned to roadshow the deal before going to a general syndication, with final signatures to be collected at the end of April.

The debt leaves BIAC highly leveraged and carries a refinancing risk. On top of the profit Macquarie made from the refinancing, ordinary dividend distribution policy is also aggressive, according to the S&P report. An aggressive financial profile is a characteristic that BIAC shares with Macquarie's other airport servicing a major international airport, the Aeroporti di Roma.

However, bankers who underwrote part of the debt say that the on close inspection of the company's cash flows, the deal is not so aggressive as it looks at first glance. The Belgian government invested Eu700 million into BIAC prior to the privatisation, between 1999 and 2003. This corresponds to a period when the airport's performance was below average, partly on account of the collapse of Belgium's national carrier, Sabena. Moreover, there are relatively few investment requirements through to 2014.

Lenders could draw additional comfort from the fact that agreements are in place with the state locking in dividend distributions if BIAC is in danger of losing its investment grade rating, and from the importance of the airport's location at the political and geographic centre of the European Union.

Ultimately the deal was highly successful because lenders were comfortable with the underlying, yield-driven equity and bought into Macquarie's investment philosophy. The bank was able to extend its run of extracting value from airports because it could support its keen eye for financial investment opportunities with expertise as a long-term asset operator. This was reinforced by 2005 results for BIAC that show EBITDA growth of 18.7%.

Brussels International Airport Company (BIAC)

Status: Closed 25 February 2005

Description: Refinancing of MABSA's acquisition of 70% of Brussels Airport

Size: Eu1.135 billion ($1.35 billion)

Location: Brussels, Belgium

Equity: Macquarie Airports; Macquarie European Infrastructure Fund; Macquarie Global Infrastructure Fund; Macquarie Bank

Mandated lead arrangers: RBC; SG

Financial adviser to the consortium: Macquarie Bank

Consortium legal counsel: Allen & Overy

Lenders' legal counsel: Clifford Chance

Government legal counsel: Cleary, Gottlieb, Steen and Hamilton

Government financial adviser: ING

CASELET #11

Petronas plans US$800m project finance coup

Petronas looks set to take advantage of its status as a credible sponsor and of the rarity of project financing in South-East Asia to convince banks to swallow less-than-generous terms on a planned US$800m PF loan.

The Malaysian oil giant is planning to raise funds through subsidiary Petronas Carigali. Proceeds will fund exploration in the gas fields in the Gulf of Thailand.

The two countries manage three blocks of hydrocarbon resources – Block A-18, Block B-17 and Block C-19 – in the Gulf of Thailand. The blocks are jointly administered by the Malaysia-Thailand Joint Authority, of which Malaysia and Thailand each own 50%.

The money raised is believed to have been earmarked for work on Block A-18, where the production sharing contractors are Petronas Carigali (JDA), a wholly-owned subsidiary of Petronas Carigali, and Hess Oil & Gas, formerly known as Amerada Hess.

Covering approximately 295,000 hectares and located in the northern Malay Basin approximately 450km from Kuala Lumpur and 750km from Bangkok, Block A-18 is the site of one of the world’s largest gas discoveries in recent years. A gas sales agreement for the purchase of all of Block A-18’s natural gas resource base, estimated to be approximately 10trn cubic feet, was signed in 1999.

The buyers of the gas on a 50:50 basis were the Petroleum Authority of Thailand and Petronas, while the sellers were Hess Oil & Gas, Petronas Carigali (JDA), and the Malaysia-Thailand Joint Authority.

Petronas is said to be assessing several financing proposals and is likely to decide on the mandate by the end of February.

Some speculated that the loan will have a tenor of eight to 10 years and is likely to be priced around 40bp–50bp over Libor, if not lower. That level would be extremely tight for a PF loan, even one with such a respected sponsor.

The major banks – with Asian PF teams to keep busy and very few deals to do – are unlikely to be put off even by those numbers. Those believed to have submitted proposals include Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank, SMBC, Barclays, Calyon, Fortis Bank, HSBC and Maybank.

A couple of other Malaysian banks could not pitch because the pricing on offer would not meet the banks’ internal pricing guidelines.

However, anyone doubting that the deal will end up being sold down would do well to look at the success of the recent MDFT FPSO Kikeh transaction sole-led by Fortis Bank. That seven-year PF deal had an all-in pricing in the high 30s and interest margins of 30bp–35bp. At the outset, critics of the deal said syndication would be challenging, and when it succeeded some argued that it was because the deal was being treated as vessel financing and not a pure PF offer.

Bankers close to the deal, however, could not disagree more. They confirmed that, everything else being equal, the loan’s pricing should have been substantially higher. However, they said the transaction was successful even at such a tight level because of its sound structure and because of the quality of the sponsor – Petronas.

The MDFT deal closed oversubscribed, with nine banks joining Fortis: ING, Standard Chartered, OCBC Bank, BNP Paribas, Bank of Nova Scotia, LB Lux, Maybank, SG and Mizuho Corporate Bank.

MDFT is a JV between Malaysia’s MISC and Single Buoy Moorings (SBM) of the Netherlands. MISC is 60%-owned by Petronas. The FPSO is also on a long-term charter to the BBB (S&P) rated Murphy Oil Corp, an Arkansas-based corporation.

CASELET #12

Casino financing detailed

Details of the financing arrangements carried out by Las Vegas Sands Corp to fund its integrated resort (IR) in Marina Bay have been released in an SEC filing. After a development agreement with the Singapore Tourism Board (STB), Marina Bay Sands (MBS), an indirect wholly owned subsidiary of Sands, will design, develop, construct and operate the IR project, to be called the Marina Bay Sands. The agreement requires MBS to invest at least S$3.85bn (US$2.45bn) in the project.

On August 18, Sands and MBS entered into a land purchase agreement funded by a S$1.1bn floating-rate note facility with Goldman Sachs (Singapore) and DBS Bank as lead managers. Goldman Sachs International, Lehman Brothers, Citicorp Investment Bank (Singapore), Merrill Lynch Capital Corporation and Morgan Stanley Bank are joint bookrunning managers and initial purchasers, and DBS is funding agent.

The financing consists of a funded S$788.6m facility and a S$315.44m delayed draw facility, of which S$59.15m may be used to fund accrued interest on amounts outstanding under the floating-rate note facility. The floating-rate note facility is guaranteed by Sands on an unsecured basis.

The funded S$788.6m facility was drawn at the closing on August 22. A portion of the proceeds was used to make certain payments associated with agreements with and obligations to the STB and other agencies in Singapore.

Specifically, the money was used to pay some of the balance of the land premium payment, to pay stamp duty tax and goods and services tax payable on the land premium payment, to make a contribution payment to the Urban Redevelopment Authority in Singapore for an electrical substation at the proposed site, to pay for the cadastral survey, technical, legal and professional fees payable to the STB, to repay certain loans or advances previously made by Sands and its subsidiaries to MBS and to pay certain fees and expenses related to the floating-rate note facility and the term loan facility.

On August 18, MBS also entered into an agreement for its S$1.1bn term loan facility with Goldman and DBS, as co-ordinators; Goldman, DBS, UOB Asia and Oversea-Chinese Banking Corporation, as mandated lead arrangers; DBS, UOB and OCBC, as original lenders; and DBS, as agent and security trustee.

The term loan includes a S$852.23m Facility A, of which S$256.23m is available on a delayed draw basis; a S$59.15m Facility B, which is also available on a delayed draw basis and may be used solely to fund accrued interest on amounts outstanding under the term loan; and a S$192.6m Facility C to provide bank guarantees in favour of the STB on behalf of MBS's obligation to provide a security deposit. The obligations of MBS under the term loan are secured by a first-priority security interest in substantially all of MBS's assets, other than capital stock and certain other assets.

Under Facility A, S$596m was drawn at the closing on August 22. The full S$192.6m was drawn under Facility C on August 23. The net proceeds from the funded Facility A were used to pay a portion of the balance of the land premium payment, to pay fees related to the bank guarantees and to pay certain fees to DBS in its capacity as agent and security trustee.

Borrowings under the two-year floating-rate notes and the term loan pay a spread of 135bp over the Singapore swap offer rate during the first 12 months that amounts are outstanding under the facilities and a spread of 160bp during the second 12 months that amounts are outstanding. MBS will also pay a standby interest fee of 37.5bp on the undrawn amounts.

Amounts drawn under the floating-rate notes and the term loan on a delayed draw basis are required to be drawn pro rata between the two facilities.

Syndication of Singapore Telecommunications' S$650m three-year loan has closed, through bookrunners Citigroup and DBS Bank.

MLAs are BNP Paribas, Calyon, Citigroup, DBS Bank, OCBC and RBS. Lead arrangers are HSBC and Westpac, while CBA and UOB came in as arrangers. Participating banks can expect their initial commitments to be scaled back by at least 50%.

http://www.ifre.com/ifr_searchresults.asp?compid=C000013759&STF=company&ssname=tomCompanySearch

CASELET #13

Liquid assets

Barclays, Dresdner Kleinwort, HSBC and RBC have won the mandate to arrange a £4bn loan to back Macquarie's acquisition of Thames Water in what will be the largest buyout in UK history. The deal is expected to come as a typical Macquarie deal, heavily structured in keeping with the bank's unique financing strategy. Victoria Pennington reports.

Kemble Water, the Macquarie-led team including Alberta Pension Fund and Dutch pension fund ABP, saw off bids from Guy Hands' Terra Firma, Alinta and a joint bid from the Qatar Investment Authority and UBS's global infrastructure fund to win the bid for RWE's Thames Water. Macquarie cleared any takeover issues from the deal a couple of weeks ago by selling its South East Water asset to the Hastings Infrastructure Fund for £665m but the deal is still subject to regulatory approval.

At £8bn, this deal is the largest buyout in UK history. It will not feature an LBO financing but will be heavily structured in keeping with this year's trend of structured financings for infrastructure acquisitions. This method of financing is also in keeping with UK water regulator Ofwat's demand that any buyer of Thames Water maintain the company's investment grade debt-to-equity ratio of 45%, thus preventing the company being saddled with high levels of debt that would then be passed on to customers.

Although the financing mandate has been awarded, regulatory approval is not expected to be granted until December, meaning the loan will not be launched to market until very late this year at the earliest and quite possibly early next year.

The deal again brings into focus the incredible force that Macquarie has become in infrastructure as it has been buying up assets across Europe through its Macquarie Infrastructure Group (MIG) fund and the Macquarie European Infrastructure Fund (MEIF), which was launched in April 2004. The bank is planning to launch MEIF II shortly to satisfy investor demand for infrastructure assets. The deal also highlights Macquarie's unusual approach to financing.

MIG is in the market at the moment with the £1bn refinancing of the M6 Toll Road through MLAs Calyon, Dresdner Kleinwort, Espirito Santo and Santander. As sponsor, MIG made a £392m gain on the refinancing through management fees and the accretion on the swap also gets near that figure.

The accretion swap is a recent feature of Macquarie infrastructure deals. The US$4.1bn project financing for Indiana Toll Road, which is wrapping up its general phase at the moment, and the £1bn project financing for the Birmingham Northern Relief Road (BNRR) through MLAs Calyon and Espirito Santo, also used this structure.

The use of accretion swaps is essentially a way of creating more debt. An accreting swap is an interest rate swap in which the notional principal amount increases over time. In the early years of the life of the loan, the interest payable is reduced and then rolled up and increased and then repaid in the later years of the debt's tenor. Cash sweeps also build up on the loan that encourage refinancing. The swap overlays the senior debt structure but ranks as pari passu to the senior debt.

The Indiana Toll Road is a nine-year loan priced from 95bp up to 125bp, with an accretion swap that starts at 3%, moves to 3.15% in 2010, hits market interest rates in 2016 and increases to 11.3% in 2023. The deal for BNRR is more aggressive. The senior loans carry a margin of 90bp over Libor in year one, 80bp over Libor to year five, 95bp over Libor to year seven and 110bp over Libor to year nine.



The interest rate starts at 1% for five years and increases 25bp every year until it reaches 8%. There is a cash sweep on the swap in the first five years to reduce the accretion slightly. But given the 6% fixed rate of interest and senior nine-year debt on the project of £1bn, by the end of the senior debt term the accretion could reach £400m.

The swap runs for 30 years but the four MLAs on the BNRR deal are believed to have a break clause on the swap as it is considered too high-risk for banks to have such a long-term swap on their books and moreover the likely refinancing of the senior debt would also impact the swap providers.

For accretion swaps to be a viable structure, the deal has to have real revenue risk and a long concession period and is more suited for use with construction project deals. As a heavily regulated asset, the debt backing the acquisition of Thames Water is unlikely to feature a swap as Ofwat would probably not allow it because of the higher end costs involved, which could then be passed on to customers.

The £4bn Thames Water loan is almost certain to have a bridge-to-securitisation component, which would be in keeping with this year's trend of large-scale M&A transactions being funded with short-term debt, which is then taken out in other capital markets. The £8.97bn debt package backing Ferrovial's acquisition of UK listed airport operator BAA, through bookrunners Citigroup, RBS and Santander, and MLAs Calyon and HSBC, will almost certainly also be taken out with a securitisation soon.

Macquarie is a slick operator concerning infrastructure assets and will continue to lead sector growth. However, the bank has been experiencing some problems with its infrastructure funds and has been criticised recently for its high management and performance fees.

Macquarie has been forced to transfer some of its assets between its sister funds under the Macquarie umbrella to shore up losses in its flagship fund MIG. And some European banks are beginning to pull away from supporting Macquarie due to their treatment during the competitive bidding process and the Australian bank is being forced to make new agreements with European banks such as Dresdner Kleinwort, which is a relatively new Macquarie partner and with which it worked on the Moto service station deal.

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