Pusan Newport Company, the project company sponsoring the greenfield port facility in Pusan, South Korean has mandated the onshore and offshore banking groups which will provide the project's financing. The lead arrangers for the won denominated debt are Kookmin Bank and Samsung Life Insurance. The international lead arrangers are Bayerische Hypo-und Vereinsbank, Credit Lyonnais, DZ Bank, Intesa BCI and Tokyo-Mitsubishi International (HK).
The group of banks beat out another group comprising SG, Sumitomo and WestLB, that were bidding for the mandate. The lead arrangers reveal that the overall package they were offering, including price and covenants persuaded the sponsors to mandate them.
The project involves the construction of a new port with six container berths and 2000 metres of quayside and facilities. The total project cost will be around $934 million. Of this total some W240 billion ($180 million) will come from the onshore bank facility, which is being hard underwritten by the lead arrangers. $270 million is coming from the international facility. $269 million is coming from a non-repayable government subsidy and the remaining $215 million is sponsors' equity.
The debt - both won and dollar - has a tenor of 13 years and is being lent on an uncovered basis. The dollar facility is priced between 185bp and 195bp over libor while the won facility is being priced between 100bp and 150bp over three year corporate bond paper. Both facilities have the ability to reduce their margins based on the debt service coverage ratios that the project achieves.
Perhaps most interesting about the structure of this deal is how it compares with other Private Participation in Infrastructure (PPI) deals that the Korean government has been pushing. Usually as part of these deals, the government offers a Minimum Revenue Guarantee (MRG), which means that the government will pay up if the project revenues fall below 90% of the base case revenue targets. However, under the MRG, the government will also take back any revenues if the project achieves 110% or more of the base case revenue target.
In this deal however, it is likely that there will not be the MRG in its original format. "The MRG in its conventional form as for other PPI projects may not be requested for this project" says Jean Marie Charollais, vice president in the structured finance group of Credit Lyonnais in Tokyo. "The mandated lead arranger group have accepted this."
Another interesting feature on the financing side is the presence of the government subsidy. From an equity holders point of view this subsidy gives them a huge amount of free leverage on their investment. Essentially for the sponsors, the project has a debt to equity ratio of 2:1. However, from a lenders' point of view the subsidy represents equity so that the ratio to them looks like a 1:1 debt to equity split, much more comfortable than if it were 2:1.
Furthermore, the sponsors only have to provide 50% of their equity upfront, with the remaining 50% to be bled into the project over time. The effect of these two conditions will be to significantly boost the IRR of the sponsor's equity.
The credit for such a good financial structure must go to Willy Lim of Babcock and Brown in Kuala Lumpur, who is the financial adviser to the sponsor group. This group comprises CSX World Terminals of Charlotte North Carolina and Samsung Corporation of Korea who both have 25% each of the company. Various Korean groups such as the Hanjin Group and three of its subsidiaries and government-owned Korean Container Terminal Authority hold the remaining 50%.
The presence of the Samsung Group is pervasive in this project. Samsung and its affiliates are sponsors, contractors, insurers and lenders, and probably will be involved in the operation and management of the facility. From a lender's point of view the presence of Samsung must be seen as a positive given that they are the largest and best known group in Korea. But concerns over credit limits and the fate of previous number one chaebols, Hyundai and Daewoo, could put some potential syndicate banks off the deal.
The lead bankers are sanguine if not bullish on Samsung's omnipresence in this deal. "The presence of Samsung at various levels in this transaction must be seen as one of the project's main strengths," says Charollais.
The deal is another important step in Korea's efforts to introduce market financing into its infrastructure sector. The structure is such that sponsors, lenders and the government can get substantial returns if the market projections are met. Moreover, the risks of the project have been fairly allocated. "This is a more western styled than any other limited recourse project ever attempted in Korea," says Jamie Douglass, a partner at Linklaters & Alliance in Hong Kong who is representing the lenders.
The other law firms involved in the project are Lee & Ko as the local counsel to the lenders and Allen & Overy as sponsor's counsel. The final details of the financing are now being worked out. Under the terms of the concession agreement, all, documents have to be signed by December 15th. It is unclear at this stage how much of the $450 million onshore and offshore debt portion will be sold down through a general syndication between now and then.