Thursday, 17 January 2019

Keys to Kelar – Nimble flexibility

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The financing of the 517MW Kelar project in Chile highlights the importance of being nimble and flexible in a putting together a successful deal in Latin America. By Nic Stone.

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BHP Billiton first proposed the Kelar power plant in Chile’s mining-rich Antofagasta region in 2007 to provide energy for its Escondida mine, the largest copper mine in the world. Back then, it was a coal-fired project with an estimated cost of US$400m. Now, the project is a natural gas-fired combined-cycle power plant and it saw a debt package signed for US$477m.

The switch from coal to natural gas was just one of the many examples of the commissioning company BHP Billiton, the sponsor group of Korea Southern Power Corporation (Kospo) and Samsung C&T Corporation as well as the group of lenders deftly altering their strategy as the project travelled from conception to financial close.

The project financing was ultimately finalised on November 5, with first disbursement coming on November 26. The US$602m gas‐fired project, which will also use diesel as a backup option, is due to come online in October 2016. Utility company Kospo makes up 65% of the consortium while Samsung C&T Corporation makes up the remaining 35%.

The debt package featured US$477m of senior secured credit facilities, including a US$196m, 17-year direct loan from Kexim, a US$160m, 17-year commercial bank tranche guaranteed by Kexim, a US$89m, 17-year tranche in uncovered commercial bank debt and a US$32m letter of credit and working capital facility. This represents a leveraging of roughly 80% and rather long tenors that could only be achieved in a mature market such as Chile. Standard & Poor’s rates the country AA–, Moody’s Investors Service puts it at Aa3, while Fitch Rating’s gives the country an A+ rating.

Natixis was financial adviser to Kospo and Samsung C&T and mandated lead arranger, Kexim was another MLA, SMBC was sole co-ordinating lead arranger for the banks, and MUFG and Mizuho the other commercial bank lenders. The deal also featured a US$40m VAT facility provided by Banco Santander Chile. Pricing on the commercial bank tranche came in at a similar rate to other commensurate deals in the market at around the Libor plus 200bp–250bp mark.

Of the covered US$160m tranche, the four commercial banks provided equal tickets of US$40m. Similarly, of the uncovered US$89m tranche, the four banks came in with equal tickets of US$22.25m. The US$32m facility featured a seven-year US$12m revolver provided in equal tickets of US$3m and a seven-year US$20m revolver provided in equal tickets of US$5m.

Kelar is a landmark deal as it is the first ever 100% South Korean consortium to penetrate the Chilean power market. It is also the maiden BHP captive power project and the first-ever IPP in Chile in which Kexim was the sole export credit agency on the deal. It also represents a push into the region by the sponsors Kospo and Samsung C&T.

How did the deal come about?

BHP owns a number of mines in northern Chile. Chief among them are the two open-pit mines in the Atacama Desert known as Minera Escondida. Production at the mine began in 1990. It is the highest producing copper mine in the world and produces copper concentrate and copper cathodes. Output at the mine grew by 2% to 1.2m tons per annum in financial year 2014.

Following a multi-billion dollar expansion, the mine is set to produce 1.3m tons per year and stay at that level for the rest of the decade. BHP also owns and operates the Cerro Colorado and Spence mines in the region, which would also benefit from the generation from Kelar. Chile has approximately 24% of the world’s known copper reserves.

But BHP’s vast operations in the region have been plagued by poor energy supply. A series of setbacks to other generation projects, droughts and an unreliable transmission grid strained energy supply to the country’s large mining operations.

For BHP, Kelar was one of the answers to those issues.

BHP carried out an international tender process to find a company to build, own, operate and maintain the project. It was at this point in early 2013 that Kospo and Samsung C&T appointed Natixis as financial adviser to both guide them through the bidding process and then to develop a financing strategy.

“I believe one of the primary reasons why we were approached was because Natixis has a very active project finance franchise worldwide,” Olivier Delay, head of aviation, export and infrastructure in the Americas at Natixis, told PFI from the bank’s New York offices. “We have a platform in Asia that covers the sponsors with whom we have a historical relationship. We have capabilities both in the Americas at large, and in Chile in particular.

“So our selection as the financial advisor was the result of a tender process. We were selected on merit and the pricing of our proposal. No more magic to it. In hindsight one of the key factors for our selection was our multi-platform setup. I think having the ability to be very close to the client with our team in Asia, as well as covering locally the needs for the transaction, helped the client pick Natixis.”

The consortium won the concession in a private bidding process held by the Australian mining giant in 2013. The concession was awarded at the end of November that same year. Later on in that year the financing process began, with the joint project and export finance teams from Natixis in the Americas and Asia-Pacific assisting the consortium in financing the project.

“We had adequate time under the concession to close the real project financing,” says Delay. “Since BHP had requested early start of construction, we first went ahead with helping the sponsors arrange an equity bridge loan, which kick-started the construction process.”

The equity bridge loan (EBL) was provided by Mizuho and SMBC and was worth US$160m. The EBL was made to the sponsors and allowed construction to begin.

The lead bank had already shortlisted the banks that would be coming into the project financing, so it was a logical step to mandate two of those banks to provide the EBL. Mizuho and SMBC were chosen as they had the best rates, according to Delay.

In terms of mandating the lenders for the debt package, initial discussions circled around the advantages and disadvantages of local players. Despite the project financing featuring only international commercial banks, local Chilean banks had been considered by the sponsors. Appetite in the Chilean banking market is robust and a number of banks were considered as part of the deal.

“When we initially started the process of seeking interest from banks, we also sought interest from local Chilean banks,” says Amit Roy, an executive director at Natixis. “But the local banks, as their cost of dollar financing is generally higher, could not compete in this market. Given the size of the loan itself, and given the strong interest from international banks, the need to include local banks went away”.

The selection of the four commercial lenders eventually came down to pricing and relationships with the sponsors. Given the size of the transaction, the sponsors had a large group of banks to choose from, with many prominent international commercial lenders pitching for a mandate. Ultimately, those that had worked with Kospo and Samsung C&T were able to win the mandates, as the sponsors felt most comfortable with them. The importance of relationship lending came to the fore in this transaction.

Once Natixis was joined by SMBC, Mizuho and MUFG, the due diligence process began for the banks. SMBC was sole lead arranger on that front and worked closely with Kexim.

The involvement of Kexim was also key in a number of ways.

“As part of our setup, we also have the capability of arranging an export credit tranche,” says Delay. “In this case, it was kind of a logical step. Indeed, it was a critical element to getting an optimized financing structure. The market would have supported a transaction without the Kexim tranche, as there was sufficient appetite and this year has seen a very buoyant market for project financing. ‎Regardless, the debt commitment from Kexim as part of the deal was significant and helpful in structuring the best financial deal for the clients.”

“The market would have supported a transaction without the Kexim tranche, as there was sufficient appetite and this year has seen a very buoyant market for project financing. But I think it was a critical element to getting an optimised financing structure.”

ECA debt still features quite prominently in Latin America. It is often a key element in getting commercial banks comfortable with lending to projects. Due diligence processes with ECAs can take longer than purely commercial bank transactions and this had to be factored into the deal-making process.

“Since the Kelar power plant project is the first IPP project in Chile both for Samsung C&T and Kospo, the due diligence process had taken longer than expected,” said a spokesperson for Samsung C&T in a statement emailed to PFI. “Kexim decided on such a large portion of support, because the EPC contractor, O&M contractor and sponsors are all South Korean entities.”

With the lender group set and the due diligence process in motion, there were a number of issues that the financiers had to address on the road to financial close. The most notable among them was a tax reform bill that was passed by President Michelle Bachelet’s government. It was initially presented to the Chilean Congress in March and passed in early September, in many ways unfolding alongside the transaction.

The reform is likely to increase the cost of doing business in Chile by raising corporate taxes and closing some tax exemptions. When a deal is bid and tariffs are fixed and there is no change in law provision in the contract, it can prove difficult in the deal-making process.

“We had to assume a conservative tax scene assumption in the financial model to deal with the uncertain outcome of the tax reform which was being debated in the Chilean congress at the same time,” says Ivan Oliveros, director and sector head of power and renewables project finance in Latin America at SMBC. “In the end we compromised through over funding Base Equity and designing a true-up mechanism that would kick at completion.”

Part of the debt financing was also a roughly US$40m VAT facility provided in Chilean pesos by Banco Santander Chile. The project has to make VAT payments to the government. Companies have to apply for reimbursements from the government. The VAT facility was sized in such a way so that the local bank could provide it.

It works more like a revolver, according to Natixis’ Roy. “They draw on the facility and make payments to the Chilean IRS. As the project gets built, the borrower seeks reimbursements and pays the VAT lenders back. So it is a short-term facility that does not share security with the project,” he says.

It could have been included as part of the overall commercial bank debt, but it would have been more expensive for the sponsors. The financiers were able to optimise the structure by having that funded separately in Chilean pesos.

“It is not unusual and it does not penalize the rest of the financing. It is more about improving the return for the liquidity,” says Delay.

Other issues that cropped up in the deal – and indeed have been prevalent in Latin America this past year – were surrounding land rights. Most of the challenges have been related to local permits and tying up when the permits would be obtained. That was the most challenging part, according to Delay.

The sponsors also have a strong commitment to minimising the social and environmental impacts associated with their projects. As a result, the project was designed to be compliant with the lenders’ sustainability standards.

The fuel supply and off-take issues were also present, but with a strong company like BHP, many of those concerns were successfully mitigated in the financing process. BHP is rated A+ and A1 by Standard & Poor’s and Moody’s Investors Service respectively. The project has a tolling agreement and that relied on BHP’s credit to supply the gas to Kelar. In case of termination of any of the contracts, the asset becomes stranded with no contracts to supply power. But the strength of BHP and its plans for the region helped to assuage those concerns.

Ultimately, the sponsors achieved financial closure successfully with competitive financial conditions a year after the PPA execution date.

Hiring local tax firms, local project firms, local legal firms and international legal firms was also important for the deal, proving a real global effort is possible in these financings. All this, along with international financial advisers such as Natixis helped to present a package that was complete.

Lima-based construction group Grana y Montero has signed a memorandum of understanding with Samsung Engineering for the civil works and electromechanical assembly of Kelar.

That US$85m contract involves “performing structural excavations, foundations to insert and close perimeter, as well as the complete assembly, which includes structural, mechanical, piping and electrical assembly, in addition to instrumentation of both gas and steam turbines,” Graña y Montero said in a statement. Graña y Montero’s local subsidiary Vial y Vives - DSD has 19 months to complete the works.

Linklaters and Cariola advised the sponsors on the transaction and White & Case and Claro y Cia provided lender counsel.

The project is currently under construction and is expected to be operational on October 1 2016. The construction is on schedule.

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