PFI Japanese Project Finance Roundtable 2015: Part 1

Rod Morrison: Good afternoon, everybody. Welcome to the Thomson Reuters Project Finance International Japanese Roundtable, our first roundtable event in our Tokyo office. Our event this afternoon is kindly sponsored by MUFG, Mizuho, and SMBC.

It is a pleasure and an honour to welcome our distinguished panellists this afternoon to discuss the ambitions of Japanese banks and corporations in the global project finance market.

And welcome to you, our guests, to listen to the discussion, which we trust will be filled with wisdom and a good deal of hope for the future.

My name is Rod Morrison, or Mori-san as they say here in Tokyo, editor of Project Finance International. I’ve been editing PFI for more than two decades now. As soon as I joined Thomson and PFI, I was struck by the influence of the Japanese on the global project finance market. Early in my PFI career, I reported on deals such as Qatargas, Paiton and a host of other financings where Japanese banks, funders, and sponsors played a key role.

There was a period of consolidation more than a decade ago with the Japanese banks but the activities of folks such as JBIC and the corporate sponsors remained strong.

By the time of the global financial crisis in 2008, Japanese banks had fully returned to the market and as other banking systems collapsed, the Japanese banks became the mainstay, indeed the bedrock, of the global project finance market.

Fortunately, times have moved on again, and the European banks have returned to the market, but the Japanese banks remain predominant. In the Thomson Reuters Project Finance League Tables of 2014, we can see that the top three Japanese banks, represented here this afternoon on the panel, had a market share of 15% of the global project finance loan market, which totalled US$260bn, up from US$205bn in 2013.

This market share has been a consistent feature of our league tables. In the first quarter of 2015 it was 15% again, on the back of loan volumes of US$50bn.

In our Multilateral League Tables 2014, JBIC and NEXI topped both the tables for developing and developed markets with a market share of 25% for the developing markets and 50% for the developed markets.

In the corporate sector, Japanese companies are among the most active developers of projects around the world, whether it be in the specialist independent power projects market, oil and gas, LNG, mining, or other energy-related and natural resources-related projects. Japanese companies have been active investors in renewable energy schemes around the world too.

So it’s indeed timely that we are holding our PFI Japanese Roundtable event today. We will be seeking to establish how Japanese funders and sponsors view current trends in the global project finance market, and how they will respond to them. What are the ambitions of the Japanese banks and companies? And what strategies will be employed to see these ambitions through?

We will start the discussion with introductory remarks from each of our panellists and then move on to our general topics of discussion: banks, funders, and sponsors. First is Koichiro Oshima, who is head of Project Finance Department, Structured Finance Division, MUFG.

Koichiro Oshima: Good afternoon. My name is Koichiro Oshima. I am the head of project finance for Bank of Tokyo-Mitsubishi UFJ here in Tokyo. It’s a great pleasure to invite all of you here, and thanks for coming. So I’d like to quickly introduce myself and our views of the market.

So in our group in Tokyo we have 60 people working in project finance and we cover both domestic projects and also international projects sponsored by Japanese sponsors.

And for the international projects we work with our colleagues overseas, and we have approximately 280 people working in project finance globally, in nine offices worldwide.

In Tokyo one of our focuses has been on the domestic market, and as you know the domestic market has grown a bit, especially in solar PVs, and also we are looking at opportunities in the PPP sector, like airports and roads.

On the international side, as everybody knows, LNG has been a strong leader of the market and we’ve been following the LNG chain for a number of years now. The large deals in Australia, Asia, and the Americas – I think everybody has worked on a little bit.

What we see now is that with the price changes in the oil sector, people are struggling a little bit. But in the long run, projects will come back and we are still waiting for those to come back online.

Other than that, the power sector globally has always been one of the largest sectors for the bank and especially for the Japanese sponsors. In the Middle East and Asia, while there are always some slowdowns here and there, I think the market is still going to be there for us to bank.

Rod Morrison: You mentioned the domestic market. It has been fairly quiet up to now, but there are signs of it growing in importance…

Koichiro Oshima: In the old days, there wasn’t much of a Japanese project finance market, but because of the PV solar market, we’ve seen a lot of international names come into the market as sponsors or operators. We’ve seen that in the airport sector as well. It’s a very important thing that we see foreign entities getting involved in Japanese projects, and that’s a very good thing for developing the market.

Rod Morrison: So now on to Toshi Fukumura who is Assistant General Manager of Power and Plant Strategy and Planning Department at Marubeni Corporation.

Toshi Fukumura: My name is Toshi Fukumura from Marubeni. I am currently in the planning and strategy department for Marubeni’s power and plant group.

I’d like to briefly share my view on the IPP business, the IPP market, in the global market from the sponsor perspective.

Prior to my current position, for the past six years I was based in New York heading up a company called Marubeni Power International. I was responsible for project development, M&A transactions and financing arrangements, and asset management for Marubeni’s power portfolio in North America.

Just looking back at my six years, I was in the US during a very interesting period. I saw all the ups and downs in the market. The commodity price was extremely volatile and the gas price went down from US$13 to US$2. It really squeezed profit margins for power companies. And we saw lots of merchant projects went bankrupt.

The environmental policies constantly changed, so did tax incentive schemes like ITC, PTC, which was driven by political sentiment in the US.

The central bank, FRB’s monetary policy, provided too much liquidity and it created very stiff competition over the power sets for the equity investors across the country. So it has been really a challenging market environment.

Now looking at the global market beyond the US, the situation is pretty similar. The IPP business for Japanese sponsors is different and becoming more challenging compared with 10 or 15 years ago. In the traditional market for Japanese, such as the ASEAN or Middle Eastern countries, we still see power purchase agreement opportunities, contracted asset opportunities, but we are competing against lots and lots of investors from Asia, Europe and other countries. These traditional markets are getting saturated.

So if you want to stick with PPA opportunities, contracted asset opportunities, you have to shift your attention to the new markets, emerging markets, such as countries in Africa. Then, of course, you have to deal with different types of risks, the risk of inflation, fluctuation of exchange rates, and you have to worry about repatriation of your investment capital and so forth.

If you want to pursue growth in developed countries such as the US, then you have to think about investing in unconventional assets, such as a merchant or quasi-merchant asset. Then you have to make a difficult explanation to your stakeholders, internal and external stakeholders, that your IPP business no longer provides a stable cashflow. This could be very contradictory to the expectations or the mandate that you are getting from your management within your organisation.

Thinking about the IPP business in the next 10, 15, 20 years, the key question is how or where we should deploy our capital in order to maintain sustainable growth? My view is that each company has a different strategy, but there is no straightforward or plain vanilla transaction anymore. If you want to pursue growth or expand your investing portfolio in the IPP business, you have to take some additional risks, and at the same time you should set a limit for your exposure.

And importantly – that’s something I’m telling myself every day – you have to be very accountable for what you are doing and the risks that you are taking to your stakeholders or management.

There is no simple solution. And, of course, project finance is always a critical driver for investment decisions, so I would love to hear comments or some creative ideas from our friends, the project finance vendors on this panel today.

Rod Morrison: Well, as a journalist, there are about 20 questions I hope to ask you from those introductory remarks because they were fascinating. But one simple question. Are you prepared to take in the PGM market in the US, merchant risk as a sponsor?

Toshi Fukumura: We already did, actually. We participated in one of the quasi-merchant assets in PJM. We did lots and lots of analysis, but at the end of the day it’s both science and art. But my perception is we looked at just the number of projects and made some comparisons between merchant assets before Lehman and after Lehman.

My understanding is that the recent merchant projects are a lot more conservatively structured, have a very conservative debt-equity ratio. It’s not 70/30, 80/20 as we always see in the traditional, conventional IPP project. It’s more conservatively structured like 60/40, 55/45. So that gives us some comfort.

You can’t avoid the revenue fluctuation because you are exposed to the market. Our conclusion was based on this conservative structure. We can avoid a very catastrophic situation, bankruptcy, so that really drove our investment decision in the PJM.

Rod Morrison: Moving on now to Rajeev Kannan, who is Director and General Manager, Structured Finance Department at Sumitomo Mitsui Banking Corporation.

Rajeev Kannan: I am Rajeev and I’m based in Tokyo. I moved here about three years back, and before that I was based in Singapore. I’m originally from India. But since April this year, I have taken on responsibility for domestic project finance in addition to global project finance.

When we look at the market over the last few years, as was already mentioned by Oshima-san, particularly after the euro crisis, it was the years of mega projects. And mega projects predominantly in the resources sectors, be it the oil sector or gas sector or mining sector. That’s why you’ve had very large transactions like Ichthys LNG, Cameron LNG or Nghi Son Refinery in a number of important markets.

But when I look at the market from 2015, at least for the next one or two years, it’s going to be very different. The market is probably going to be more of multiple projects. It’s going to be more of projects in the power sector, infrastructure sector, and maybe some new sectors.

As we know, commodity prices have dropped, and to create a bankable case for new commodity projects is a lot more challenging. I’m sure there will be some projects done but it won’t be as many as we have seen in the last few years.

We see in the next couple of years, including this year, to be where we will have a lot more renewable projects, which are typically smaller, a lot more power deals, and power deals in markets that we have not traditionally touched. That’s why, from SMBC’s perspective, we need to go beyond what we have been doing historically where we were comfortable within certain markets, say, for example South-East Asia or the Middle East market or even the developed markets.

We are actively looking at other emerging markets; be it Africa, be it frontier markets like Myanmar. We have to think beyond the traditional markets because I think, as Fukumura-san mentioned, it is challenging even for Japanese sponsors to create adequate returns in traditional markets or to have enough deal flow in traditional markets.

When I talk about beyond finances, historically, or at least for the last few years when the situation was quite attractive for banks like us to expand our presence in the market – we were able to use our balance sheet. But we have to think beyond the balance sheet or beyond finance, and we are looking at creative solutions, we are looking at working with partner banks, we are looking at working with life insurance companies, regional banks. We need to think about using a wider pool of capital, not just our own pool of capital.

And it was quite interesting for me to hear from Rod when he mentioned that Japanese banks are playing a very important role globally but we have only a 15% market share. The market size is about US$250bn as of last year. It is still a large amount of capital that we are using, but this is not sustainable on a long-term basis.

We, as banks, need to contribute and support our Japanese customers; that’s why we need to work with more partners. We need to work with a different type of investors, and that’s why there’s probably a discussion relating to a new class of investors looking at this business. I am definitely quite interested and focused on that aspect.

Rod Morrison: You mentioned the new markets. Myanmar and Africa are two good illustrations. As a bank, do you need, say, a MIGA credit support or a credit support of some others, or do you feel comfortable by taking the credit yourself and the credit risk yourself?

Rajeev Kannan: When we look at new markets we have to analyse on a country-by-country or transaction-by-transaction basis, so it will probably be difficult for me to say that, okay, we will take country A risk but not country B risk. I would say that on a deal-by-deal or case-by-case basis, we may need support, or we may need only partial support, or we will not need any support.

Rod Morrison: Now on to Kohei Toyoda, who’s a Director of IPP Projects EMEA at JBIC.

Kohei Toyoda: Hi, I’m a Director, Division 3 of the Power and Water Finance Department of JBIC. The coverage of my team is IPP and IPP projects in EMEA – Europe, the Middle East and Africa. Our team closed a deal in Morocco last year, which is the Safi coal-fired power plant. We closed a liquidation transaction two months ago in which we sold project finance assets to Japanese financiers, including regional banks.

I came to this position in August last year. That means my experience in this area is less than one year. Before coming to this position I was in the human resources management office. The assignment was totally different from my current assignment. And I spent two years in the human resources management office.

I was in the mining department before the human resources management office. And that means I’m not a specialist, different from these gentlemen on this panel, but I hope to give some useful input from my limited experience in the power sector in the Middle East and the mining sector.

At the same time, I am the Vice Committee Chair of the Project Finance Committee in JBIC, so I may be able to give you some overall picture of JBIC project finance and its future directions.

As an initial remark from myself, I would like to explain the role and function of JBIC’s project finance.

We at JBIC have been providing large-amount, long-term finance to various projects in order to support Japanese businesses and to cope with the market squeeze after the financial crisis. But now liquidity has been coming back.

I understand the market expects us to change or business model on taking new risks, such as merchant risk in IPP projects, collaboration with project bonds, the mini perm structure, as well as opening up new markets, such as Sub-Saharan African countries. We would like to live up to such market expectations as much as possible.

At the same time we see a huge increase in the funding needed for infrastructure all over the world. The funding gap is said to be expanding. In that context, we will continue our kind of traditional operation and providing large, long-term finances in order to fill that gap.

Rod Morrison: You mentioned Sub-Saharan African projects. Would you, in terms of financing a Sub-Saharan African project, need a government-to-government pledge from the host government and the Sub-Saharan country or other supports to go into a sort of new market such as that?

Kohei Toyoda: We need basically a strong commitment from the host government, and we, JBIC, may facilitate the discussion between the investor and the host government as a public organisation. That’s the approach that we’ve been taking in the various markets all over the world.

Rod Morrison: So on to Fumio Inagawa, who is General Manager of Project Finance Division at Mizuho Bank.

Fumio Inagawa: My name is Fumio Inagawa, the General Manager of the Global Project Finance Division of Mizuho Bank. And my assignment is to oversee all Mizuho’s project activities all over the world, except the Japanese domestic market.

I’ve been in this field for more than 20 years, and during that 20-year period I spent 10 years in the US back in the 20th century. Most of you know about our activities in the project finance area. We have six main offices all over the world: New York, London, Sydney, Hong Kong, Singapore, and Tokyo. And compared with Mr Oshima’s Mitsubishi UFJ, our size is a little bit smaller than them. We have only in total 220 professionals working in the project finance area.

And about the market overview, I agree with the previous presenters. We are now focusing on certain sectors and regions. In terms of the sectors, as Mr Oshima mentioned, the LNG value chain is quite important for us because there are many Japanese corporations involved from upstream, midstream, to downstream. And the other sector is the renewable energy.

And in terms of the region, we are focusing on Asia, and in particular infrastructure, and also, as JBIC mentioned, Africa is our focus.

Rod Morrison: You have some new ideas for financing projects in Africa and new markets?

Fumio Inagawa: New markets? I’d like to introduce one thing. In November last year we established the infrastructure fund focusing on the Asia and the greenfield projects developed with the Japanese sponsor. The purpose to establish this infrastructure fund is we’d like to utilise our knowledge and experience in project finance for our client, from the beginning of the project, the development.

As a lender we have a certain limitation to support our client because our stage is a little bit later than the development, so we decided to establish the infrastructure fund, working together with our client. Maybe some of you will be our future partner.

Rod Morrison: And now moving on to Masahiro Morimoto, who is Manager, Finance Coordination Strategy Office, Natural Gas Division, Energy Business Group at Mitsubishi Corporation.

Masahiro Morimoto: My name is Morimoto. I am part of the Natural Gas Division of Mitsubishi Corporation and I’m responsible for procuring optimal financing to all the new LNG projects of Mitsubishi Corporation to promote them.

Recently I have been assigned to the current position after a four-year secondment period to a joint venture company in Indonesia named Donggi-Senoro LNG. This is our first LNG project promoted by Asian sponsors only, without all the major companies.

And that deal achieved financial close last year and then I could come back to Tokyo last year. Unfortunately, that deal wasn’t awarded the PFI Deal of the Year (laughter). But anyway, it’s a pleasure to have this opportunity to talk on the LNG market as a project promoter.

Rod Morrison: I can’t remember which deal was awarded it anyway. But you’re financed into construction now, and it’s a project that serves both Indonesia and Japan?

Masahiro Morimoto: Located in Sulawesi Island in Indonesia. Seventy percent of LNG cargoes will flow into Japan, and are promoted by the Asian companies only, led by Mitsubishi Corporation. It’s the first experience for Mitsubishi to take a majority in the project and take the role of the operator of an LNG project.

Rod Morrison: Now moving on to Hiroki Shibata, who is Director at Standard & Poor’s Ratings Japan KK.

Hiroki Shibata: I am Hiroki Shibata of Standard & Poor’s, and Director and Lead Analyst of Corporate and Project Finance Sectors. I have been covering utilities, infrastructure, and general trading and investment companies and capital goods, as well as project finance.

As other panellists mentioned, we are focusing on infrastructure development project finance in the ASEAN region. And having said that, while Japanese megabanks, we expect, would continue to be aggressive in project finance investment, financial institutions like a pension fund or capital markets, still think there are few investable projects in the region.

This is mainly because of the uncertain country risk, political risk, and cost-overrun risk. As a rating agency, we continue to provide an analytical methodology for market participants, with default studies and recovery prospects, so that new funding sources are not only for the bank and government funding, but also for capital markets. That’s one of our key missions.

Rod Morrison: Are there any markets in Asia where you see project bonds becoming a feature of the market?

Hiroki Shibata: Yes, as a Tokyo-based analyst I focus on the Asia-Pacific region, but globally we focus on oil and gas and natural resources. In general the infrastructure business is a more focused area for us.

Rod Morrison: Moving on to Takahide Yamamoto, who is the General Manager, Structured Finance Department, at JGC.

Takahide Yamamoto: My name is Yamamoto, General Manager of JGC Structured Finance. I have been working for JGC more than 30 years and for most of the period in the finance and accounting section. It’s an honour to be here as a panellist, although rather unusual that an EPC contractor is participating in this roundtable.

Today, I’d like to talk about the EPC market and financing. Let me allow an introduction to our company briefly and share my observations on the recent EPC and finance market.

JGC is not such a sophisticated company like the other panellists, and is known as an EPC contractor, especially for hydrocarbon projects – like energy plants, oil refineries and petrochemical plants. And JGC annual sales are around ¥7bn, and 80% will come from overseas.

Not so many people may know that JGC is now diversifying our business field from EPC to investment in IPP or IWPP or renewables and oil and gas assets, and also into infrastructure investment, including airports, hospitals, and industrial townships, and so on.

But today I will talk from the EPC contractor point of view. JGC is a little bit unique in that we have a dedicated financing team to assist the client in arranging financing. Within the EPC contractors’ organisation I don’t know of an EPC company that has such a department in it.

Our Structured Finance Department was established in 2000, and since then we have accumulated expertise in arranging financing, especially in export credits. And our mission is to bring the best finance for the client to fit the project, tying up with the client and financial institutions, like export credit agencies and commercial banks.

We have been keeping a good relationship with Japanese banks and other international banks. As a Japanese contractor we owe our business to JBIC and NEXI. But JGC is maybe the No. 1 user of other major ECAs, including COFACE, CESCE, Hermes, EKF, US Ex-Im, Kexim, etc. And we have a direct contract with those institutions.

Rod Morrison: Your relationship with the other ECAs is linked to your equipment sourcing policies? It’s interesting to hear you say that you have relationships with other ECAs as well.

Takahide Yamamoto: Yes.

Rod Morrison: Moving on to Alexander Borisoff, who is an experienced project finance lawyer and has been in Tokyo for three years. He’s a partner in project finance at Milbank Tweed.

Alexander Borisoff: My name is Alex Borisoff. I’m a partner with Milbank here in Tokyo. Our focus primarily here in Japan is in supporting a lot of the institutions that are up here today with their overseas investments across a variety of traditional project sectors – energy, natural resources, infrastructure, and so forth.

Our focus here is really global. We’re supporting projects in every region of the world, so not just South-East Asia but also the Middle East, the US, Latin America – really everywhere where Japanese sponsors and finance providers are going.

In terms of what we’ve been seeing in the market, the key dynamic over the last few years has been the competition issue. Certainly for the Japanese companies that we have been working with, the biggest issue that they’ve been facing has been competition, which really has two components.

One is other players in the market, and over the recent past seeing some of those who had been hibernating a bit coming back into the market and shedding some of their hesitancy from the financial crisis. The other component is the opportunities and finding those opportunities, and that was something that was touched on a bit earlier – high-quality assets in the fairly safe jurisdictions, we’ve seen a lot of that over the last couple of years.

Whether those continue at the same pace is really dependent to a large extent on where natural resources prices go. If I knew that, I wouldn’t be doing this for a living. But it’s a question of where those markets develop.

Going forward, a lot of the focus will be on continuing to take more slightly aggressive risks or aggressive positions to deal with that competition. Certainly, we’re seeing a lot of the entities that we’re working with starting to take more aggressive positions. They are trying to find niches where there aren’t otherwise companies from other places or competition from other areas coming in to take advantage of those.

There are a lot of strengths that the Japan-based entities have. Certainly, good and strong access to capital and a lot of support from the finance providers in this market, and albeit sometimes a little bit slower, an ability to be flexible and try new things and try new approaches where needed to really support the companies that are going outbound.