The financial crisis has mobilised greater volumes of official financing to help Asian markets address their electricity needs, writes Kevin Godier.
As Asian markets such as China, India and Indonesia begin to shrug off the global downturn, and other governments in the region have been actively launching economic stimulus packages, the continent’s ongoing need for new power generation is picking up new pace. “Asia seems to be recovering much faster than other regions. In the past two to three months, a number of pending power projects have been re-activated and are in the process of seeking financing, more noticeably in India, Indonesia and Vietnam,” says Michelle Ling, managing director and regional head, export finance, Asia, Société Générale (SG), one of a number of international banks that have been working to mobilise much-needed export credit agency (ECA) facilities to finance power generation deals in Asia.
Transaction flows were interrupted during the first few months of 2009, when “we saw declining sponsor activities in the region – and many projects were pending in view of the difficult financial market situation,” observes Ling, who says SG is now seeing power deals again across Asia.
Sumanta Panigrahi, Citi’s director, regional head of export and agency finance, Asia Pacific, points to Vietnam, where state utilities and the ministry of finance are discussing long-tenor financing for two large power projects with banks. “Similarly in Indonesia, there are fast track project financings,” he says, noting a combination of ministry of finance and Chinese ECA guarantee support for banks providing long-term financing. “And in India, a large number of power project-related capital expenditure is being put in place through both the private and public sectors.”
Pent-up demand for fresh power drives this paradigm, according to Mike Barrow, director infrastructure finance within the private sector operations department at the Asian Development Bank (ADB), a key player in financing Asian power projects. “In most of our countries there has been a slowdown in investment post the Asia crisis, especially in the private sector power – it has almost been a lost decade for many countries,” argues Barrow, whose division covers South and Central Asia.
He continues: “Asian economies have picked up and boomed and power consumption rises have often overtaken GDP growth rates. So the continent has gone from surplus to shortages, and now has a very acute power crisis in some countries.”
The ADB is eyeing wind, hydro and thermal power schemes in Pakistan, which may be up to 6,000MW short of power at peak times, despite the bank’s participation in three private sector financings over the last couple of years. India is “very busy and moving quickly”, Barrow notes, pointing to one 4,000MW ‘ultra-mega’ power project and two wind power projects that the bank financed in 2008 and hydro, wind and thermal projects being processed this year. In Nepal, “we have already financed a medium-size hydro project and have been working for some time on a very large hydro export project”, he says, adding that Sri Lanka has wind, biomass and energy from waste schemes under consideration.
In its division covering eastern Asia, the ADB is busy in the power sectors in the Philippines, Vietnam and Cambodia, is financing energy efficiency and renewable power projects in China, and is “looking hard” at structures in Indonesia, Barrow highlights.
At the other major multilateral working in the sector, the International Finance Corporation (IFC), “power is one of the Asian infrastructure sectors that we have invested the most in”, emphasises Ali Naqvi, senior manager for infrastructure in East Asia and Pacific.
While China builds an average of one new coal or nuclear-fired power station every three to four weeks, the IFC’s focus on the potential impacts of climate change has limited its power investments to areas such as hydropower, wind power and solar photovoltaics manufacturing in China.
“In the Philippines we have supported the government in a big way to advance their privatisation efforts, beginning around two years ago, when IFC lent to one of the first privatised projects,” says Naqvi. He explains that “this market is a little more complex than traditional independent power projects (IPPs), as the power is sold in a spot market but works due to the supply and demand factors in what is an under-served market”.
He continues: “IFC has come in with other multilaterals, such as the ADB, and financed a few projects where the private sector has come in and improved facilities. For example, a coal-fired project producing 350MW one year ago is now generating more than 600MW.”
IFC has invested more than US$1bn from its own account in the Philippines and Indian power sectors. “India is a big market, with three or four ultra-mega plants. IFC invested US$450mn in one of these, and has also supported wind, biomass and hydro schemes,” says Naqvi.
“In the Philippines, we have supported the government in a big way, starting from around two years ago, when IFC lent to one of the first privatised projects,” says Naqvi. He explains that “this market is a little more risky than traditional IPPs, but works due to the supply and demand factors in what is an under-served market”.
This financing activity represents part of what Ian Mathews, ANZ Bank’s executive director, project and structured finance, Asia, perceives as nearly eight years of milestone power financings in Asia. “From 2001 to the end of the third quarter of 2008 will be seen as one of the high points for internationally financed power transactions in Asia. There were a number of landmark transactions – including the first IPPs in Bangladesh, Sri Lanka and Vietnam – significant M&A activity in the Philippines and Singapore, and rapid growth in the Indian power project finance market,” he underlines.
The theme is echoed by Masahiro Goda, Singapore-based head of the global trade finance division, Asia, at Mizuho Corporate Bank, which has recently financed a Vietnamese power plant and is a mandated lead arranger for a forthcoming acquisition finance for Senoko Power in Singapore. “From the mid-1990s until 2007, except for the Asian crisis in the late 1990s, security packages have been getting looser and governments have been reluctant to issue full guarantees to power plant projects,” he says.
“There have not been a lot of deals done in the last 12 months,” stresses Conor McCoole, head of project and export finance, Asia, at Standard Chartered Bank. “For developing counties, the need to build new power plants remains critical, but new capacity addition have been delayed or slowed down due to the liquidity constraints in the financial markets,” he remarks. “Hard currency financing remains critical in countries with less developed financial markets, such as Indonesia, Vietnam, the Philippines and so on.”
Standard Chartered has nonetheless been involved in completed deals including the Seng Kang gas-fired expansion project financing in Indonesia, the Gheco-One green-field coal-fired project financing in Thailand, a gas-fired project refinancing in the Philippines, and a waste-to-power project financing in China. Deals in the pipeline, says McCoole, include a range of gas-fired, coal-fired, hydro, waste-to-power and wind power transactions in Indonesia, the Philippines and China.
The market direction throughout the rest of 2009 will include new power plants in Indonesia, Laos and Vietnam, which are “the subject of substantial discussion, planning and activity”, says Mathews. ANZ financed the Theun Hinboun expansion project in Laos in late 2008 and has been acting as financial advisor to consortiums developing a hydropower project in Laos and an IPP in Vietnam.
Another trend, Mathews says, is “a rise in the local or Asia-regional sponsor and the withdrawal of a number of international sponsors”, pointing to winning bidders for Singapore’s 2008 generation company privatisations, which came from China, Japan (albeit with one European partner) and Malaysia. “We expect this trend to continue with financing available from Japan Bank for International Cooperation (JBIC) and the Chinese state-owned policy banks,” he forecasts.
To put in place Asian power deals still undoubtedly requires considerable risk mitigation, as illustrated by Goda’s comment that since the late 1990s Asian crisis it is only in lower-risk countries such as Singapore and Thailand that banks have been able to structure limited recourse project finance structures for the power sector.
With the onset of the ongoing financial crisis – bringing an evaporating access to significant commercial long-tenor financing plus heightened sovereign risk issues – “the involvement of development finance institutions and other public agencies has increased”, notes Mathews.
“Even in the more developed countries like Korea and Australia, there is strong demand for official risk mitigation in order to obtain long-term financing which may not be otherwise available,” stresses SG’s Ling. “We are seeing at least 50% more enquiries on ECA and multilateral-supported power projects than in the past.”
“There is demand for our services, including our political risk guarantees, as commercial financing is becoming very scarce or risk averse in most markets,” says the ADB’s Barrow, highlighting that the bank’s financing partners in Asia’s power sector now increasingly consist of “other multilateral development banks like the IFC and Islamic Development Bank, bilaterals such as Proparco, FMO, DEG, and ECAs from the major Asian countries such as Japan, China and Korea that are supporting their national equipment providers”.
Mathews adds that debt margin pricing has increased due to liquidity constraints and the recognition that risks should be properly reflected in the cost of capital. “It is increasingly rare to see proposed final holds amongst international commercial banks much above US$50mn,” he says, underscoring that the commercial bank market, outside Singapore, India and China, “currently caps out at about US$500mn per project”.
Even in Singapore, some six months after sole underwriter DBS launched a S$2.25bn (US$1.5bn) three-year bridge loan for YTL Power’s acquisition of Power Seraya from Temasek into syndication, commitments had still to reach S$1bn by early August.
In the case of a couple of multi-billion dollar Asian power projects, “we are now waiting for long-term financing from the market to improve”, says the IFC’s Naqvi. “The ADB and IFC can provide around US$500mn-US$600mn together, but we need the rest to come from other sources.”
Ling says that in 2008, SG was aware that some official agencies had reached their limit for certain Asian countries, making new transactions more difficult. “However, a number have increased their country limit for different Asian countries so this is no longer an issue for the time being.” Mizuho’s Goda highlights that JBIC mainly operates without sectoral ceilings but adds that “some ECAs such as Sinosure have a country ceiling”.
Private insurers involved in the sector also inevitably face country capacity constraints, says David Anderson, Zurich’s head of surety, credit and political risk, Asia. “Until late 2008, economic growth and high commodity prices put a strain on the insurance market’s capacity for some countries, and this can become a factor for power projects, which typically require insurance lines running into the hundreds of millions of US dollars, if not billions. In Asia, we are seeing demand for power particularly in Indonesia, Laos and Vietnam. One key factor is that projects generally require 10 to 15-year cover, and the number of insurers who can extend terms over 10 years can be counted on one hand.”
Of course these questions are immaterial in those Asian countries where local banking sectors are liquid enough to provide long-tenor financing. “Markets including China, India, Malaysia and Thailand, rely on domestic banks that can provide long-tenor local currency denominated financing in large amounts,” comments Panigrahi. Mathews adds Korea and Taiwan to this list, also highlighting an increased Thai banking market interest in Lao-Thai cross-border transactions.
Chinese banks “were very aggressive in China in the first half of 2009 so there was less demand for ECA supported financing”, says Ling, but she notes that ECA/multilateral-supported financing remains an option for “large-scale strategic power projects”, such as the Taishan nuclear plant, for which Coface backed a €2.4bn financing in 2008.
Mathews contends that the China Huaneng Group’s quest to refinance a S$2.25bn loan it obtained in March 2008 to fund its S$4.24bn purchase of Singapore’s Tuas Power “indicates that the Chinese banks will support key clients going overseas, whether as owners or contractors”.
Whether local or international money is used, all Asian power financiers report concern about the financial condition of many of Asia’s usually state-owned and often heavily subsidised electricity offtakers. “Apart from exceptions such as Thailand, where Egat is more commercially oriented and the tariffs are quite high, these entities are often not creditworthy, and are dependent on support from the ministry of finance or the government,” says Naqvi.
India provides “a mixed picture” in this respect, with some state electricity boards (SEBs) “better rated and known than others although with the number continuing to increase”, he emphasises. “We have taken offtaker risk in several states and are trying to work with the SEBs in some frontier areas, but most international banks have yet to wade in.” And with the ultra-mega projects, which often involve a handful of offtakers, “if one were theoretically to default, the project can sell more to another”, he points out.
Pakistan has “quite aggressively increased its power tariffs, but offtaker risk remains a major consideration for lenders”, who are supported by full government guarantees for the obligations contained in power purchase agreements, Barrow adds.
In this regard, Indonesia’s parastatal power company PLN has been under a credit spotlight since the late 1990s. The long-awaited financings for the Paiton 3 expansion and Cirebon power projects – which together will tap nearly US$2bn – will be closely watched by the market, given the letter of comfort from the Indonesian government sitting behind PLN’s offtake agreement.
Anderson notes that banks taking risk on Asian offtakers regularly approach Zurich not only for traditional political risk covers but also for arbitration award default, which covers the risk that state-owned offtakers refuse to honour arbitration awards that go against them. “It’s an efficient form of cover – and it is quite clear when it’s triggered,” says Anderson.
Another trend he highlights is an emerging use by sponsors of carbon credits. “For most projects, this is not a big issue yet, but carbon credits are often required to make the financing viable for smaller projects,” concludes Anderson.