Case study: Indonesian power project in landmark bond issue

05 October 2017 - 12:00 am UTC

The sponsors of Paiton energy were able to tap Asia’s nascent project bond market for their multi-stage power project, as Jackie Range reports.

The USD 2.75bn debt financing for Minejesa Capital B.V. marked a revival of Southeast Asia’s long-dormant project bond market and points to the potential for sponsors to unlock new sources of capital for infrastructure.  

“This benchmark transaction represents the first project bond for an Asian credit in the international debt capital markets for more than a decade and is one of the largest transactions in recent times in the project bond space. It is considered as a landmark transaction concluded at extremely competitive pricing and will set a precedent for future Asian power project financings,” Paiton shareholder Nebras Power said on its website. 

Proceeds of the issue were used to fund the activities of Indonesian independent power producer PT Paiton Energy. 

The key trends underpinning the deal were a, “strong appetite from the project/EM (emerging market) investors’ universe with plenty of liquidity,” Paiton shareholders Mitsui and JERA told Inframation. 

A complex deal
Minejesa Capital B.V. reached financial close for its USD 2.75bn multi-sourced non-recourse debt financing on August 10, according to Nebras. The financing package is a mixture of a USD 800m, 20-year amortising bond, a USD 1.2bn, 13- year amortising bond, and a six year USD 750m (equivalent) amortising corporate loan facility with tranches denominated in USD and JPY. The bonds are listed on SGX, the Singapore Exchange. 

“The funds will be used by PT Paiton Energy to prepay outstanding senior debt facilities and subordinated shareholders loans and for general corporate purposes. PT Paiton Energy provided an unconditional guarantee of the debt financing package,” Nebras said. 

From a financing perspective, the deal was of particular interest due to its complexity, Mitsui and JERA said. “(It had a) combination of pari-passu project-style bonds with term loan facilities which led to one of most complex deals in years,” Mitsui and JERA said.

Deal Name Country Sub-Sector Issue Amount Coupon
Asian Development Bank Green Bond Philippines Renewables Portfolio Tranche: (1)USD 750m, (2)USD 500m (1) 1.875%, (2) 2.375%
Kudat 50MW Solar Project Malaysia Solar PV USD 58.35m  
China Longyuan Power Group First Green Bond China Renewables Portfolio USD 289.94m 4.90%
China Longyuan Power Group Second Green Bond China Renewables Portfolio USD 445.2m 4.78%
Greenko Dutch Green Bond Refinancing (2017) India Onshore Wind Tranche: (1)USD 350m, (2)USD 600m (1) 4.875%, (2) 5.25%
Neerg 504MW Wind and Solar Portfolio Refinancing India Renewables Portfolio USD 475m  

The sponsors
Paiton’s sponsors are Japan’s Mitsui & Co. Ltd, Qatar’s Nebras Power Q.P.S.C., Japanese energy company JERA Co, Inc. and PT Batu Hitam Perkasa, a company part owned by Indonesian investment company PT Saratoga Investama Sedaya Tbk. According to the Offering Memorandum, dated August 3, Mitsui owns 45.5% of Paiton, with Nebras holding 35.5%, JERA holding 14% and Batu Hitam Perkasa owning 5%. 

The offering memorandum, emphasizes the strength and commitment of Paiton’s owners, pointing to “strong support from high quality and experienced sponsors.”

The sponsors draw on significant experience. Mitsui’s interests span 75 power plants in 21 countries with a total of 10,374 MW effective net generating capacity, according to the offering memorandum. JERA is in 38 independent power producers with more than 7000MW of capacity, in Asia, the Middle East and the Americas. Saratoga has interests in Indonesian coal and resources. Sponsors of Nebras are owners or operators of more than 11,087 MW of capacity in the Middle East. 

Pricing indicated strong appetite
With a USD 9.4bn order book and 4.7 times oversubscription from more than 400 investors around the world, Nebras said that the bonds were priced “at the tight end of final price guidance.” 

The 13-year bonds were priced at 4.625%, while the 20 year bonds were priced at 5.625%, according to Nebras. 

“The bonds have received unprecedented levels of interest from investors internationally, resulting in very competitive pricing,” said Nebras.“The unprecedented level of investor appetite for the bond is a strong indicator of the confidence investors have in the credit quality of the asset and the sponsor group, and the robustness of its business model that generates long term stable cash flows,” Nebras said. 

The USD 750m non-recourse facility was priced “very competitively” and oversubscribed to USD 1.4bn, Nebras said, “evidencing the high quality of the underlying credit.” 

The business
Paiton is one of Indonesia’s biggest independent power producers, with a net installed baseload capacity of 2045MW. 
It has three coal fired generating facilities, located in Probolinggo Regency, East Java, some 141km south east of Indonesia’s second biggest city Surabaya, according to the offering memorandum.

“Paiton Energy generates approximately 13,500 GWh of electricity per year, which contribute to around 10% of the annual electricity consumption in Java Island,” said Nebras.

“(The facility has) two power plants (Units 7 and 8) with capacity of 615MW each, and Unit 3 with capacity of 815MW and it is the first supercritical power plant in Indonesia which provides a higher efficiency, a lower fuel consumption and subsequently lower CO2 emissions,” Nebras said.

The Paiton deal comes at a time the Indonesian power market is expected to grow, with coal-fired power expected to remain dominant for some years. The Indonesian government plans to add 35GW of new power generation capacity. According to Transparency Market Research, power generation in Indonesia was 236 TWh in 2015 and is set to grow to 442.5 TWh by 2022. 

The Paiton facilities supply power to the Java-Bali grid under fully contracted power purchase agreements with Indonesia’s state owned utility PLN, with take or pay commitments in place until 2042, the offering memorandum says. Availability at Paiton’s power plants have exceeded the power purchase agreement target each year since operations began, apart from in 2014 when damage to a transformer caused more downtime than usual. 
Indeed, a key factor in the success of the transaction, according to Mitsui and JERA, was the “proven operating track records with consistently high availability.”

Paiton’s revenues were USD 893.9m for the year to December 31 2014, USD 892.5m in 2015 and USD 863.8m in 2016, the offering memorandum says. In 2014 adjusted EBITDA was USD 408m, rising to USD 458.8m in 2015 and USD 469.1m in 2016. 

“Paiton has consistently generated steady cash flows to support its working capital requirements while at the same time servicing and repaying debt on a timely basis,” the offering memorandum says. 

Ratings agencies confident
An important development for the deal was its positive assessment by ratings agencies. 

“One of the key milestones was that we successfully obtained investment grades from both rating agencies: Moody’s and Fitch,” Mitsui and JERA said. 

Moody’s Investors Service gave a Baa3 rating, with stable outlook, to Minejesa Capital’s proposed backed senior secured USD notes on July 25. 

“Paiton Energy’s credit quality is supported by the revenue visibility provided by the long-term power purchase agreements (PPAs), which allow for cost pass-through, and its cost competitiveness and operating track record,” analysts at Moody’s said, in a credit opinion published on July 26. 

“Paiton Energy has a robust tariff structure that supports its rating, allowing for the recovery of capital costs and pass-through of foreign exchange and coal costs, thereby protecting its cash flow generating ability. Furthermore, nearly half of the company’s revenue is derived from capacity payments, which translates into stable and predictable cash flow,” they said. 

Fitch Ratings assigned an expected rating of BBB- to Paiton Energy’s notes and loans, contingent on final documents, final pricing and financial close. 
“The expected ratings of debt guaranteed by Indonesian power producer PT Paiton Energy are supported by its: absence of demand risk or merchant price exposure due to its favourable power purchase agreement..; pass-through of fuel costs; long operating track record; use of proven technology; experienced operator; and financial profile commensurate with standalone ‘BBB-’ ratings under Fitch’s Thermal Power Project Rating Criteria,” Fitch said in research published August 2. 

Behind the scenes
Barclays and HSBC were financial advisors, provided advice on ratings and also acted as joint global co-ordinators, Mitsui and JERA said. Barclays and HSBC couldn’t immediately be reached for comment. 

Skadden, Arps, Slate, Meagher & Flom LLP was international counsel for the issuer/borrower and Shearman & Sterling was counsel to the lenders/bondholders, while EY provided tax advice, according to Mitsui and JERA. EY declined to comment on the transaction, while Shearman & Sterling and

Skadden couldn’t immediately be reached for comment. 

For the issue of the notes, according to the offering memorandum – as well as joint global co-ordinators Barclays and HSBC – Barclays, Citigroup, DBS Bank Ltd., Deutsche Bank and HSBC were joint lead managers and joint bookrunners. SMBC Nikko was a joint lead manager and Mizuho Securities and Morgan Stanley were co-managers. 

Alternative source of capital 
Sector watchers saw the deal as a significant indication that project bonds were likely to be a source of fresh capital for infrastructure. 
“This debt issuance marks the return of Asian project bonds raised in the offshore debt capital markets after many years of absence,” said Terry Fanous, Moody’s Managing Director for Project & Infrastructure Finance in Asia Pacific.

“So far, project finance in Asia has been predominantly provided by banks, which will continue to play a key role in this sector over the foreseeable future, but a broader approach will help raise private sector-debt capacity,” Fanous said.

The need for fresh sources of capital is clear. The Asian Development Bank predicts more than USD 22.6trillion to 2030, or USD 1.7trillion a year, will be needed for infrastructure in developing Asia-Pacific, to keep up growth momentum, including the costs of climate change mitigation and adaptation. 

According to Moody’s, as lending grows, banks may be unable to deploy further resources in some destinations. 
“Institutional funds are an especially important fresh source of capital, because bank limits on lending to individual countries, sectors or borrowers, could over time restrict their ability to increase funding to the sector,” Moody’s said. 

Indeed, for Mitsui and JERA, the success of the Paiton deal demonstrates that capital markets may well be open for other infrastructure projects in the region.
“Key take away: could be that investors’ appetite for project-type bonds in SEA (Southeast Asia) would be strong and could help raise a wider capacity of project-based financing for infrastructure markets in SEA,” Mitsui and JERA said

Minejesa Capital