Thursday, 17 January 2019

Powering the way to Asian bonds

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The refinancing of PT Paiton Energy heralded the first investment-grade bond issue for a private borrower in Indonesia, the first investment-grade bonds for an infrastructure project in Asia and the first public project bonds from the region in the 144A/Reg S format since 1997. By Gregorie Bouzereau and Gerald Sim, HSBC.

In August this year, PT Paiton Energy (Paiton), Indonesia’s first independent power producer (IPP), which owns and operates three coal-fired units providing a combined capacity of 2,045MW to the Java-Bali power grid, successfully completed a US$2.75bn refinancing of its existing debt, with a tenor of up to 20 years, through Minejesa Capital BV, a Dutch joint venture between the sponsors’ existing entities.

The refinancing was executed through an innovative financing plan featuring a combined bond and loan structure to maximise liquidity, tenor and pricing, that encouraged participation from a well-diversified base of investors and financial institutions.

The transaction was led by Paiton’s sponsors, namely Mitsui & Co Ltd (Mitsui), Nebras Power QPSC (Nebras) and JERA Co Inc (JERA), (the sponsors) and structured and coordinated by HSBC and Barclays acting as joint financial advisers, joint rating advisers, and joint global coordinators, among other roles.

The refinancing was significant on several fronts, most notable of which being (i) assigned credit ratings from Fitch and Moody’s that are on par with sovereign ratings and the sole offtaker, PT PLN (Persero) (PLN); (ii) the first investment grade bond issue for a private borrower in Indonesia; (iii) the first investment grade bonds for an infrastructure project in Asia; and (iv) the first public project bonds from the region in 144A/Reg S format since Quezon in 1997.

Paiton’s landmark refinancing augurs well for the future of infrastructure financing in Indonesia and the wider region, and sets new precedents for the regional project bond markets. This article highlights some of the key factors that contributed to the success of the deal, and how Paiton’s accomplishment has illuminated the way forward for future project financings in the region, particularly in the rapidly developing project bond universe.

Breaking new ground

Paiton is no stranger to breaking new ground. When its power purchase agreement (PPA) was first signed in 1994, and with the completion of its first two units, being Units 7 and 8 as of May and July 1999 respectively, each with a generating capacity of 615MW, it laid claim to being the first IPP in Indonesia.

When Unit 3 was subsequently completed in March 2012, it added 815MW of generating capacity and brought Paiton’s total capacity up to 2,045MW, making it one of the largest IPPs in Indonesia. Paiton today accounts for circa 4% of the total installed capacity in Indonesia, producing circa 13,500GWh of gross electricity annually. Unit 3 also has the distinction of being Indonesia’s first supercritical coal-fired power plant, leading the way towards lower CO2 emissions in the Indonesian thermal power sector.

Table 1

Since operations commenced in 1999 for Units 7 and 8 and in 2012 for Unit 3, Paiton has enjoyed a consistent track record of strong performance, setting the standard for coal-fired power plants throughout Indonesia. Its reliable performance is a reflection of Paiton’s team of credible and experienced international sponsors, namely Mitsui, Nebras and JERA, which together benefit from having significant international experience in the power sector, as well as in Indonesia generally. Collectively, Paiton’s sponsors own in excess of 20,000MW of generating capacity globally, and have in-depth experience as owners and operators in the power sector in the region and beyond.

Key bankability considerations

In Indonesia, PLN (rated BBB– and Baa3 by Fitch and Moody’s, respectively) operates as the sole state-owned electricity utility and sole purchaser of electricity. Paiton benefits from long-term PPAs with PLN, which will purchase electricity from all three units until 2042, providing a five-year tail in excess of the refinancing debt tenor. The PPAs feature availability-based payments and provide for pass-through of fuel costs, providing Paiton with stable revenues over the long term while insulating its exposure to market, demand and supply risk.

Another key consideration for lenders and bondholders is operating risk, and here Paiton’s consistent and reliable operating track record provides significant comfort. Since Paiton first commenced operations 18 years ago, its plants’ performance have consistently exceeded the PPA targets.

Paiton’s class-leading operating performance is underpinned by a rigorous maintenance regime and continuous investments in efficiency, as well as continuity provided by a strong and experienced core management team that has helmed the project since its inception.

It is also worth noting that Mitsui, Nebras and JERA jointly own c. 99% of Paiton’s operations and maintenance contractor, which ensures a strong alignment of interests across the ownership and operating structure, as well as facilitating knowledge-sharing and transfer. Paiton’s proven operational capability and track record provides assurance that the availability-based payments and costs pass-through features under its PPAs will translate into stable and predictable operating cashflows.

Off the beaten path

With assets featuring credible and experienced sponsors, robust and long-term PPAs with PLN, and proven operating track record, a road map was set out to take advantage of the favourable long-term interest rate environment and improving investor appetite for Indonesia and infrastructure as an asset class to refinance Paiton’s existing debt.

Given the absence of construction risk, a refinancing through the capital markets was preferred to maximise tenor, as well as to tap into a wider pool of investors and raise the profile of Paiton as a borrower. The next step was to secure a strong rating outcome. HSBC and Barclays, acting together as joint financial advisers and joint rating advisers to the sponsors and Paiton, set about putting the plan into motion.

Considering the strong rating fundamentals, there should be no impediments to a project such as Paiton obtaining an investment-grade rating. However, there were no precedents of an IPP issuer in Indonesia being assigned a credit rating on par with PLN as the sole offtaker and as PLN is rated BBB– and Baa3 by Fitch and Moody’s respectively, obtaining an investment-grade rating for Paiton’s new refinancing debt was not a given. With this in mind, the sponsors, HSBC and Barclays set about engaging with rating agencies Fitch and Moody’s with a view to securing what would be a landmark investment-grade rating for Paiton’s bond issuance.

A clear and methodological approach focusing on Paiton’s strengths and risk mitigants, and applying a project-based rather than corporate-based ratings approach, combined with strong support from the sponsors and Paiton’s management team, resulted in investment-grade ratings of BBB– and Baa3 from Fitch and Moody’s.

This was the first time an IPP in Indonesia has been assigned the same rating as the offtaker, and helped expand the universe of potential investors available to Paiton. More importantly, Paiton’s achievement demonstrated that while precedents can provide useful references, international rating agencies such as Fitch and Moody’s are open to considering the underlying facts of each transaction on its own merits.

Financing plan and execution

In parallel with engaging the rating agencies, banks were also identified as a potential source of financing alongside bond investors, which would further optimise the overall debt size and amortisation profile, particularly in the earlier years, dovetailing with the bond investors’ preference for longer durations.

The financing plan featured a refinancing debt size of US$2.75bn, comprising a US$2bn dual-tranche amortising investment-grade bond issue maturing in 13 and 20 years, and a US$750m loan tranche with a tenor of six years, with all debt sharing security on a pari passu basis. This allowed Paiton to maximise liquidity, tenor and pricing, as well as ensure participation from a well-diversified base of investors and financial institutions.

HSBC, Barclays, Citibank, DBS, Deutsche Bank, Mizuho, Morgan Stanley and SMBC were appointed joint bookrunners for the bond issue, with HSBC and Barclays also acting as joint global coordinators. Roadshows were held in Singapore, Hong Kong, London, New York, Boston and LA, and attracted overwhelming interest from a wide range of investors.

As of final allocation, the US$2bn bond offering was more than four times oversubscribed, with an order book of over US$9bn from 400 separate orders across the two tranches, proving for the first time that investors were receptive to amortising structures and project bond risk in Asia. The bonds were also priced comfortably, within initial price guidance. Mandated lead arrangers for the US$750m loan included a combination of international and Japanese banks comprising HSBC, Barclays, Citibank, DBS, Mizuho, Shinsei Bank, SMBC, and Standard Chartered Bank.

Table 2

The transaction’s success demonstrates that with the right credit profile, investors are open to considering bespoke structures, including amortising bonds. This will further increase the relevance of the capital markets to project financing in the region, which, apart from the sukuk market in Malaysia, has traditionally belonged largely in the domain of banks.

This is a timely and necessary shift, as banks continue to look at ways to reduce their risk-weighted assets and long-term exposures, which was evident from their participation in the relatively shorter debt tenors of this transaction. Eventually, bond and institutional investors will need to assume the mantle of meeting the sizeable and long-term financing needs of the region’s infrastructure, and Paiton has firmly established itself as a precedent for others to follow.

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