Refinancing launches for Indonesia's Paiton

Refinancing launches for Indonesia's Paiton

The three shareholders in Indonesia's Paiton coal-fired power plant complex
have launched a $2.75 billion bond and loan refinancing. The new debt comes
about six years after Paiton paid down its 1990s-vintage bond debt and marks
another chapter in the story of Asia's benchmark independent power plant
(IPP).

The rule 144A-eligible issue, which is currently going through roadshows and
is likely to price in the next few days, would be the first large
international project bond to close in the Asian market for about a decade.
While Asian energy and infrastructure issuers have occasionally been able to
access high-yield, private placement or leveraged loan markets, large 144A
issues have been rare, particularly compared to the Middle East and Latin
America.

The shareholders in three-unit 2.045MW Paiton are Japanese trading company
Mitsui & Co (45.5%), Qatar's Nebras Power (35.5%), Jera, a joint venture of
Japanese utilities Tokyo Electric (Tepco) and Chubu Electric (14%) and local
investor Batu Hitam Perkasa (5%). The banks leading the bond refinancing for
Dutch-registered special purpose company Minejesa Capital are Barclays and
HSBC, while Citi, DBS and Deutsche are also bookrunners.

The shareholding structure of Paiton has undergone several changes in the
last 12 months. In July 2016 Jera took over Tepco's stake in Paiton. In
December 2016 Nebras acquired Engie's stake in the complex after Engie
decided it wanted to reduce its exposure to coal-fired generation.

Mitsui is now the only one of the plant's original developers that is still
a shareholder. Of the other founders Edison Mission, a subsidiary of
Californian utility Southern California Edison, sold out during the last
decade and is now part of NRG Energy. GE Capital, now under the brand of GE
Energy Financial Services, still buys stakes in power plants, though less
frequently in emerging markets than before. BHP, since merged with Billiton,
now concentrates on mining and oil & gas. Engie had acquired its stake in
the plant when it acquired UK IPP International Power, which in turn had
bought out Edison in 2004.

In a sense, Paiton is a good microcosm of what has happened to the IPP
business in Asia, with US utilities and suppliers giving way initially to
Asian investors, and more recently Middle Eastern sponsors expanding outside
their original market. But Paiton also illustrates the evolution of the
Indonesian IPP market - its rise, fall, and rebirth. Paiton's construction
financing included a bond component, with those bonds only being retired in
2010.

Paiton's operational history has been excellent. Since its first two units
came online in 1999 (the third arrived in 2012), it has experienced only one
major outage, when a transformer failed in 2014 for four months, as Fitch
Ratings, in its BBB- rating on the refinancing notes. Paiton's troubles, and
its credit today, mirror the health of Indonesia's state-owned utility PLN.

It was PLN's struggle to keep up with its dollar obligations under power
purchase agreements (PPAs) with foreign-owned IPPs, after the 1997
devaluation of the rupiah that forced Paiton into a drawn-out restructuring
that encompassed commercial banks, US Ex-Im and the original set of
bondholders.

As PLN regained its reputation as a reliable customer, and Indonesia's
economy improved, PLN was able to start building new power plants, as well
as procure power from IPPs. While the process of obtaining land has
bedevilled the financing and construction of new capacity, PLN's willingness
to service its obligations is no longer in doubt, and Mitsui has gained a
good reputation for sticking with its projects.

But lenders to Indonesia's power sector have grown used to receiving
generous financing terms from borrowers. When JBIC participated in the
$1.519 billion financing for unit 3, which closed in 2010, it could still
request that a proportion of the PPA for Paiton be indexed to the Japanese
yen, to lessen its foreign exchange exposure. The refinancing, as a result,
includes a yen loan component to manage the impact of this partial
indexation.

Fitch Ratings has assigned an expected BBB- rating to the debt for the
project, the same level as its sovereign rating on Indonesia, which has been
investment grade since 2011, though Fitch's outlook on the sovereign is
positive, while its rating on the issuer is stable. Moody's has assigned the
bonds a Baa3 rating.

Anastasiya Kapustina, an associate director at Fitch Ratings in London, says
that there are "structural enhancements in the debt, including cross-default
provisions between the bank and bond debt, if debt/ebitda goes above 6x, and
a default covenant, if the debt service coverage ratio (DSCR) falls below
1.05x. These covenants will not endure beyond the repayment of the bank debt
in 2023, but bonds will continue to benefit from locks on distributions if
the on the debt falls below 1.2x."

The refinancing will pay down outstanding debt, including both operating
company debt and some holding company debt that goes back to the Edison
acquisition, and swap breakages, as well as pay a dividend to the sponsors.
It will simplify Paiton's capital structure and allow the recent changes in
shareholders to bed down.

However, there is one slight kink in the structure that stems in part from
the terms of the PPA, and in part from the use of a separate financing
vehicle. PLN would typically have to consent to a pledge of shares in the
issuer, so the financing instead grants the trustee for the bonds a power of
attorney that gives it the ability to vote or sell shares and manage
accounts. As Ray Tay, a vice-president in Singapore at Moody's Investors
Service, notes "this is an uncommon mechanism in lieu of a share pledge."

Indonesia is still likely to use coal to meet much of its current and future
power generating requirements, despite increasing nervousness at development
finance institutions and ECAs about funding the technology. Still,
greenfield and brownfield project bonds could be a vital way of bringing in
new capital into a variety of Asian infrastructure sectors, not just
Indonesian coal. According to Moody's Tay, bank loans account for about 90%
of project finance debt in Asia, suggesting that there is huge potential for
a more liquid project bond market in Asia.

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

Link to Original Article:
http://www.txfnews.com/News/Article/6182/Back-to-the-future-Refinancing-laun
ches-for-Indonesias-Paiton

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com