Malaysian power plant financing to be finished early next year

Malakoff subisidiary to issue M$300 million of commercial paper following October''s M$850 million bond sale.

The M$1.15 billion ($302.6 million) Islamic project financing arranged by Citibank and Aseambankers for GB3, a gas-fired power plant owned by Malaysia's largest private power producer, Malakoff, will be completed early next year.

In October, GB3, a wholly-owned subsidiary of Malakoff, tapped the Malaysian bond markets with a M$850 million issue of Islamic bonds from a medium term note programme.

The remaining M$300 million will be raised in the first quarter of 2002 from a commercial paper offering, according to officials at one of the leads.

The initial bond deal was split into seven tranches with an average size of M$120 million and maturities ranging from seven to thirteen years.

The transaction was rated AA2 by Rating Agency Malaysia (RAM), one notch higher than the typical rating for Malaysian power project financings, according to a banker at Citibank. This was achieved because the deal was structured with about M$200 million of credit support to cover potential delays to project completion and any shortfall in cash flow that might arise from that.

It is unlikely that the issuer will need to tap this additional feature because first-phase construction of the plant is expected in December, two months ahead of schedule. Additionally, meeting anticipated cash flows should not be a problem either as GB3 has secured a 21-year contract to sell all the electricity produced to Tenaga at a pre-agreed rate. Tenaga also owns a 20% interest in the plant.

As it is an Islamic bond offering, no official coupon was set because interest payments are banned under Islamic law. Instead, investors are enticed by a share of profits from the deal.

According to one banker, the deal placed at a 20bp premium to comparable rated companies, and is currently yielding between 50 and 60bp above equivalent AA2 paper.

The deal was 2.8 times oversubscribed at launch with an average of between 10 and 20 investors participating in each of the tranches. In terms of distribution, asset managers and insurance companies each accounted for 25% of the paper, 19% was placed with banks and pension funds took the bulk of the remainder.

One banker who worked on the deal said that because the deal placed with a relatively large number of accounts, it was an ideal transaction to see a lot of secondary market activity.

"There were a fair few investors involved, which should mean that there will be a lot of activity in the secondary market, " the banker says. "In fact, on the day after launch, there was about M$200 million of secondary activity. In the future there could be more, but because the paper is yielding so well at the moment, I would expect investors to keep the bonds at this time."

The GB3 plant is located in Segari, Perak. Once construction is completed next month, the combined-cycle gas turbine will produce 430 megawatts of electricity, rising to 640 MW by 2003.

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