BNP Paribas, DKB, IBJ, SG Asia

The CBK power project in the Philippines is a fine example of how to finance a project which has a strong rationale but is hampered by external factors. The $383 million deal is the first project financing in Asia completed based almost entirely on extended political risk coverage from the private insurance market. In the process, the deal became the largest private political risk covered project financing in the world with nearly $580 million of insurance covering both principal and interest.

CBK is a build-rehabilitate-operate-transfer power project developed as an unsolicited project under the Philippine BOT law. Edison Mission Energy and Industrias Metalurgicas Pescarmona of Argentina are the sponsors.

It involves the construction of one new 350MW hydroelectric plant (Kalayaan II) and the rehabilitation of three existing hydroelectric plants (Caliraya, Botocan and Kalayaan I, hence CBK). The project will provide stable power for the notoriously infallible Luzon grid ending such events as the famous jellyfish blackout of 1999, where jellyfish blocked the Sual II plant causing 18 hours of power failure.

The overall financing coordinator of the deal was SG Asia, which also coordinated the political risk insurance and ran the books on the financing. BNP Paribas was instrumental in technical and insurance matters, while DKB ran the modeling and IBJ helped lead the bookrunning. International legal advice came from Milbank, Tweed, Hadley and McCloy and local legal advice came from Picazo, Buyco, Tan Fider & Santos.

Total debt came to $383 million and comprised a $351 million political risk insured facility, with a $20 million debt service reserve and a $12 million performance security facility. The sponsors provided $137 million in equity.

The groundbreaking aspect of the financing was the level of private sector political risk cover that the arrangers managed to take out. It covered the usual political risks of appropriation and war and so forth but also covered the risk of Napocor not paying the off take agreements and in turn the Republic of the Philippines not paying Napocor's debt if they did not pay. AIG, Zurich and ACE Syndicate from Lloyds of London led the insurance syndicate. It was the most comprehensive private insurance package ever assembled.

Remarkably, for a deal where the defining feature was the level of political risk insurance, the financing was syndicated at a time when confidence in the administration of the Philippine Government fell apart, both at home and abroad. Spreads on Philippine bonds were ballooning and the peso was sliding headfirst to its lowest level in years. In the end syndication closed 30% oversubscribed with 14 other institutions coming into the fully underwritten transaction. It took little over six weeks from launch to closing of the financing, showing that with a strong project rationale, strong risk mitigation and strong support from the sponsors, ground-breaking projects can still be financed in Asia.

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