The refinancing of the 220MW Bhola 2 gas-fired combined-cycle power project in Bangladesh was a multi-jurisdictional transaction with a bespoke refinancing structure to meet the requirements of existing and incoming lenders. By Rahul Agrawal of Actis, Dennis Foo and Mitesh Soni of Bridgin Power and Jean-Louis Neves Mandelli, Claude Jiang and Shao Wei Tan of Shearman & Sterling LLP.
The refinancing of the 220MW Bhola 2 gas-fired combined-cycle independent power project (IPP) was provided by a syndicate of six commercial banks in support of the acquisition of a 49% shareholding in the project by Actis through its Asia gas to power platform, Bridgin Power. Actis is a leading global investor in sustainable infrastructure and Bridgin Power is a platform newly formed by Actis pursuing gas-fired power generation projects in South-East Asia and Bangladesh. The project has a 22-year power purchase agreement (PPA) with the Bangladesh Power Development Board (BPDB) and started commercial operations in June 2021.
Over the past two decades, Bangladesh has quietly risen from being a low-income country to a middle-income country, maintaining steady GDP growth averaging more than 6% per annum including an impressive positive growth figure of 3.5% in 2020 despite the onset of the Covid-19 pandemic. Accompanying this continued and sustained growth comes steadily increasing demand for energy in the country, with the Bangladesh Ministry of Power, Energy and Mineral Resources reporting that demand for heightened electricity generation has been rapidly rising.
In order to meet the country’s burgeoning demand for electricity and to support the continued growth of the Bangladesh economy, the Bangladesh government has been keenly focused on attracting private investment into the power sector, from both domestic and international investors, by providing a relatively favourable and liberal investment regime – including by imposing no restrictions on foreign ownership and by providing attractive tax and investment incentives. In accordance with this policy, the government has prepared model documents for the implementation of IPPs on a build-own-operate basis, which provide a risk allocation that has been accepted by international financiers, multilateral agencies, and crucially by investors, and has remained broadly consistent over the last 20 years.
This investor-friendly concession framework, together with the reliability of the BPDB as offtaker and its track record of regular on-time payments, has considerably solidified the bankability of power projects in Bangladesh, transforming the country from a frontier market into a premier market for the development of IPPs, attracting multiple prominent international power developers to its shores.
The rapidly rising demand for energy in Bangladesh described above has been further exacerbated by climate change, international geopolitics, the Russia-Ukraine war and their severe impact on global gas supply and prices. The Bhola 2 gas-fired combined-cycle power project, which relies on gas produced domestically to generate electricity, is a prime example of a self-sustainable means of improving the supply and reliability of electricity while keeping costs manageable in Bangladesh. In the face of a volatile global natural gas market, the Bangladesh government is continuously seeking to hike domestic production through development and gas exploration, including by exploiting previously untapped gas reserves in Bhola, so as to bolster its energy security and better ensure its self-sufficiency.
An attractive investment destination
Owing in large part to the investor-friendly attitude of the Bangladesh government, the global private market now sees Bangladesh as a jurisdiction in which it is comfortable investing. The acquisition of a 49% shareholding in the project by Actis and managed by Bridgin Power represents the first infrastructure fund acquisition in Bangladesh and could signal the start of a trend for infrastructure funds to channel significant amounts of investment funds into Bangladesh, in particular its power sector.
The marked progress of Bangladesh as an international investment destination is also clearly visible from the type of international financial institutions willing to provide long-term debt financing to IPPs in the country. Development finance institutions (DFIs) have historically been active in the Bangladesh market, and while their investment has decreased in many other countries in the region, it saw its highest growth in Bangladesh in 2018.
Until recently, however, the number of foreign commercial lenders that were willing to participate in IPP financings in Bangladesh was limited. The Bhola 2 IPP refinancing signals a significant change in attitude as it is funded by six commercial banks, many of which are lending to Bangladesh IPPs for the first time.
As is common at this stage in the development of IPP markets, the lenders benefit from non-commercial risks protection through a political guarantee provided by the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group. This investment inflow from the global private market will free up the balance sheets of DFIs as the loans they have made are refinanced, allowing DFIs to move on to and invest in more challenging jurisdictions, thereby promoting job creation and sustainable economic growth in those countries as they did in Bangladesh.
Innovative refinancing approach
The Bhola 2 IPP refinancing has required innovative refinancing structuring, including a bespoke refinancing structure developed in close coordination with all stakeholders so as to allow the refinancing to be achieved substantially simultaneously with the acquisition of shares and to be on terms acceptable to the outgoing DFI and local lenders as well as the incoming commercial banks.
Set out in Figure 1 is a diagram as a simplified illustration of the core contractual structure of this transaction.
The legal advisers to the lenders and the sponsors, Shearman & Sterling LLP and Clifford Chance LLP, respectively, led the development and optimisation of this bespoke structure, allowing all parties including the outgoing lenders and incoming lenders to feel comfortable with the risk allocation between the incoming lenders and existing lenders during the process of the refinancing.
Although this structuring may not look too out of the ordinary at first glance, each component was very carefully crafted and drafted to serve the unique needs of each party. In addition to a thorough review of the existing project documents and proper gap-filling through the finance documents, this bespoke structuring included mechanisms and other intricately devised measures to mitigate and reallocate certain risks between the parties. The MIGA policy described earlier served as yet another risk-mitigating layer on top of these mechanisms and measures, covering non-commercial risks.
Despite the many moving parts of this transaction, each ambitious and complex in its own right, the refinancing was successful, owing to the careful planning, structuring and execution of all the teams involved. This innovative refinancing structuring sets a precedent for future refinancing of projects in Bangladesh, in the region and even in the world.
One of the first SOFR-based deals
The Bhola 2 IPP refinancing is one of the first Secured Overnight Financing Rate (SOFR) based project financings in the region. Given the phasing out of the London Interbank Offered Rate (Libor), financial institutions have begun transitioning to risk-free interest rates. SOFR, a broad measure of the cost of borrowing cash overnight collateralised by treasury securities, has been taken as the US dollar benchmark rate instead of Libor for the purposes of the Bhola 2 IPP refinancing.
Bangladesh law requires any change to the financing terms to be approved by the Bangladesh Investment Development Authority. The sponsors and lenders worked closely with the Bangladeshi regulators to gain their support for the move over to SOFR and outline how this compared with the previously applied Libor.
This discussion was made more challenging by the rising interest rate environment, but was eventually accepted, together with approval for the revised SOFR-based interest rate hedging strategy to be implemented in connection with the project. Like many other projects at this time, rising interest rates were a significant concern, but these had been presciently managed by the sponsors by entering into pre-hedges that fixed the base rate and that were transitioned over to a SOFR swap.
The Singapore connection
Although Singapore is an already established hub for project financing in East Asia, the Bhola 2 IPP is a prime example of how it is increasingly becoming a hub for energy and infrastructure investment into Bangladesh and the region.
Bridgin Power, the platform set up through which Actis acquired shares in the project, has its management team headquartered in Singapore. Bridgin Power will continue to manage power assets across South-East Asia and Bangladesh in gas-fired power projects.
The Actis team and the international commercial lender teams, as well as all of the adviser teams, including those of the legal adviser to the lenders and sponsors, Shearman & Sterling LLP and Clifford Chance respectively, were also based in Singapore.
The acquisition of a shareholding in the project by Actis through its Asia gas to power platform Bridgin Power, and the refinancing provided by leading international commercial banks in support thereof, is a testament not only to the strength of Bangladesh’s IPP programme, but also to the breadth of opportunities that Bangladesh, a rapidly rising middle-income country, presents to investors looking to invest their funds in emerging markets and highlights the role of gas as a transition fuel to achieve global net-zero ambitions.
In this context, the Bhola 2 IPP is a remarkable milestone in Bangladesh’s development, leaving an indelible mark in the country’s development and history in three key aspects. First, it serves as one of the first infrastructure fund acquisitions in Bangladesh and the first investment in a Bangladesh project for several leading commercial lenders in the world, reflecting the positive light in which Bangladesh is now viewed by the global private market. Second, it is one of the first SOFR-based project financings in the region following the phasing out of Libor. Third, it utilises an innovative refinancing approach that could serve as a precedent for the future refinancing of projects, not only in the region but also in the world.
The Bhola 2 IPP is a true watershed moment for energy and infrastructure financings in Bangladesh. The success of the acquisition and refinancing augurs well for future investments and project financings in the country and region.
Shearman & Sterling acted as international counsel for the lenders, comprising Sumitomo Mitsui Banking Corporation, ING Bank, DBS Bank, Bank of China, Mizuho Bank and Société Générale as international commercial lenders, with Farooq & Associates acting as Bangladesh counsel to the lenders. Clifford Chance acted as international counsel to the sponsors, with DFDL as Bangladesh counsel for the sponsors. PMC Treasury, an independent specialist treasury and risk management consultancy, acted as hedge advisers.
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