Despite Korea's emergent role as the darling of foreign investors in Asia, there has to date been little foreign participation in financing for Korean infrastructure development. But the Pusan Newport project that signed last week could herald a new chapter for foreign involvement in Korean project finance.
The financing package is for the construction of phase 1 of the Pusan Northern Container Port, which will see the construction of a new container terminal with 6 berths and 2,000 metres of quay and intermodal facilities. The total cost of the project is around $1 billion.
The two main sponsors of the project are Samsung (25%) and CSX World Terminals (24.5%). The remaining equity is being provided by a large group of Korean companies: Hyundai (11.24%), Hanjin (10.22%), KCTA (9%), Kumho (6.95%), Daewoo (5.73%), Doosan (3.27%), Daelim (1.23%), Kukdong (0.98%) and Samhyup (0.65%). Each of the equity sponsors apart from CSX has a role in the construction contracts and so it makes sense to tie their interest in with equity in the project. CSX will be the operator and maintenance contractor on the port.
What is notable about this project is the appetite for pragmatism all parties have shown in its formulation as well as the level of foreign involvement. The lenders and sponsors have assumed all the construction risk and market risk of the project. This is also the first time that a South Korean project has been financed without a government minimum revenue guarantee. Lenders and sponsors have such faith in the project's economics that they wished to get the potential upside on the project without insuring the downside.
But the government is still heavily involved. It is providing a subsidy of W317 billion ($283 million) towards the project, or roughly 30% of the total project cost. This subsidy counts as equity in the financial structure although it confers no ownership rights to the government. As a result the sponsors' returns will be boosted by 30% as will the project's credit profile.
The debt portion of the project is divided into an offshore dollar loan and an onshore won loan. The offshore loan has a 13-year maturity and is for $276 million. During the construction phase of five years it offers a coupon of 195 basis points (bp) over six-month libor. After that if the debt service coverage ratio (DSCR) is between 1.5 and 1.75, the loan pays 190bp, if the DSCR is between 1.75 and 2 the loan pays 185bps and if it is over 2, the loan pays 175bp.
Lead arrangers of the offshore facility are Banca Intessa, Bank of Tokyo Mitsubishi, Credit Lyonnais, DZ Bank and Bayerische Hypo-und Vereinsbank. The loan will go into general syndication and the leads have already attracted KfW, KBC and WestLB as sub-underwriters. There is no political risk insurance on the loan.
The onshore loan is for W245 billion and also has a 13-year maturity. During construction it is priced at 150bp over the three year, AA- corporate bond yield. After that it is priced at 130bp if the DSCR is between 1.5 and 1.75, 120bp if the DSCR is between 1.75 and 2, and at 100bp if the DSCR goes over 2. Kookmin Bank and Samsung Life are the mandated lead arrangers of the onshore loan and Pusan Bank and Samsung Fire and Marine are the sub-underwriters.
The remaining W292 billion of the project cost is to come from sponsors' equity. Half of which has already been injected into the project with the other half to be bled in over the life of the deal.
It was intended from the start that this deal looked and felt like an international project financing. Understandably, the sponsors and the government felt that this was a project that was uniquely suited to such an approach. The economics of Pusan's port make it a very attractive investment; it is already the third busiest port in the world whose main challenge has been availability of new berths.
Moreover the port will generate significant dollar revenues, making dollar financing expedient. The sponsors have offered no completion guarantee during construction, rather they have signed an international standard turnkey construction contract.
"This financing is the first limited recourse financing in Korean Private Participation Infrastructure (PPI) projects raised through an extensive due diligence process led by international banks in accordance with international project finance practice," said James Douglass, Head of Linklaters' Project Finance group in Hong Kong, who advised the lenders. "This financing is noteworthy as the lenders have recognized the strengths of the Korean marketplace and agreed with Pusan Newport's conclusion to accept market risks and forgo the Government minimum revenue guarantees generally associated with these types of project."
Despite foregoing the minimum revenue guarantee, the government's involvement is very evident. President Roh, who a few years ago was the Minister of Maritime Affairs, signed the original concession agreement. For CSX, John Snow, who is now secretary of the Treasury in the US government administration, signed the concession agreement.
Moreover, Pusan is being relentlessly showered with government largesse to boost its status as Korea's second city. New roads and rail links are being planned and last month the government announced that the newly merged stock, futures and Kosdaq exchange would be housed in the city.
The new port will allow the southern city to improve its logistics and become a manufacturing powerhouse, even more than it is today. To this end the sponsors will not only benefit from the construction contracts they have, but a successfully operating port could see their export businesses improve as well.
"This deal will be viewed as a landmark owing to its unique, complex and innovative structure," said Simon Black, Asian Projects Group partner at Allen & Overy, who advised the sponsors. "With this financing structure, not only have the risks of the project been fairly allocated, the parties involved will also receive significant returns if the market projections are met. There were inevitably challenging issues to overcome but we have continued to draw on our substantial experience and are delighted to see the completion of the financing."
Much credit for devising the structure of the deal and keeping all the parties moving forward must go to Babcock and Brown, the advisers to the project company. Other parties that worked on the project include Kim & Chang as domestic legal advisers to the sponsors and Lee & Ko as Korean counsel to the lenders.