New shirts

“I’ve always thought that as an untouchable national institution in Thailand, EGAT [the Electricity Generating Authority of Thailand] is up there with the monarchy.” The  American lawyer, based in Bangkok, is rightly wary of upsetting either of them, and preferred to remain nameless. But he highlights one reason why lenders are so fond of Bangkok’s power procurement framework, and the frustrations that it can present to foreign developers and lenders.

The recent Thai election pitted the incumbent prime minister Abhisit Vejjajiva, from Thailand’s broadly conservative and royalist Democrat Party, against Yingluck Shinawatra, head of the newly-formed Pheu Thai party, and sister of deposed populist prime minister Thaksin Shinawatra. Shinawatra subsequently won a convincing victory, though she has said little about what changes, if any, she plans to make to Thai energy policy.

Thailand’s political history since 2008 has been bloody, as different factions, which adopted different-coloured t-shirts, battled in the streets. Through this all, EGAT, and its state-owned siblings, the Provincial Electricity Authority and Municipal Electricity Authority, have established an enviable record in procuring small and solar power projects.

Stability of leadership at EGAT might be one reason for this record, but the other main reason is the increasing confidence of Thailand’s banks in taking on new risks and asset types. Where once foreign lenders might complain that they struggled to match the Thai lenders’ pricing, most have now given up trying, focusing instead on large advisory mandates.

Solar leads the way

Perhaps the clearest indication of both trends was the Baht-denominated financing for the Bt8.5 billion ($272 million) Natural Energy Development Lopburi solar photovoltaic project. The documentation process for the deal took place in the first half of 2010, as Thailand’s military cracked down on unrest. But Bangkok Bank, Kasikornbank and Siam Commercial Bank were able to provide Bt1.16 billion each in 12-year debt to the project, with the Asian Development Bank providing another roughly Bt2.2 billion in debt.

The financing is for one of the largest single-phase PV projects in Asia, and was the first large-scale solar financing in Thailand. The ADB, which has made developing renewables financing capacity in the region a priority, used a complex mix of interest rate and cross-currency swaps to provide 18-year debt to the project. Even then, the ADB’s presence in the market may be transitory. Since the first Lopburi financing closed, NED, sponsored by CLP (33.3%), Mitsubishi (33.3%) and Electricity Generating Public Company (33.3%), has asked the Thai lenders to provide a follow-on financing of Bht1.2 billion.

Then, in June, Kasikornbank and Bangkok Bank closed the Bt3.3 billion debt financing for the Solarta photovoltaic portfolio, sponsored by Ratchaburi and Yanhee Solar. Ratchaburi, of which EGAT owns 45%, is a familiar name in the Thai power market. Yanhee is the solar development arm of a hospital that is best known for attracting foreign customers for its cosmetic surgery offerings.

But Solarta attracted extremely competitive debt terms, in the form of 12-year debt priced at 200bp over the Bangkok Interbank Offered Rate initially, dropping to 180bp in year three and then rising again to 190bp in year 6. The deal backs construction of a 34.5MW portfolio of plants with a total cost of Bt4.4 billion.

If lenders and advisers active in the market asked sceptically whether hospital operators should be in the generating business, or ask how non-industry players snagged so many offtake agreements, it is because they fervently hope that consolidation leaves renewable generating assets in the hands of more familiar sponsors, be they domestic or foreign. But it is possible for small players to go it alone. Solar Power Company, a management-owned developer, has closed a Bt3 billion loan with Kasikornbank for three plants – Nakhon Ratchasima, Sakhon Nakhon and Nakhon Phanom.

Several construction contractors, with the ability to complete balance-of-plant work but limited financial resources, are believed to be among the developers talking to larger equity players. Foreign developers are also more likely to seek foreign lenders. US-based developer SunEdison has approached the IFC for $55 million in equity (equivalent to a 15% holding company stake) and $46 million in debt for a portfolio of projects in India and Thailand. SPC has also asked the IFC for debt ($12 million) and equity ($2 million) investments.

The scale of this activity in solar dwarfs most other regional powers, with the possible exceptions of India and China. And Thailand has emerged as a solar player without troubling to develop a wind industry first. Its climate and power demand patterns make solar a much more attractive option, as does the Bt6.5 per kWh adder tariff, which solar generators receive on top of the standard wholesale tariff.

Some sponsors had protested that the tariff, which was recently reduced from Bt8 per kWh, is not generous enough, though it compares favourably with the Eu0.148 per kWh that, say, an Italian producer will receive if it comes online in the first half of 2012. With debt costs and tenors roughly comparable to those on offer in European markets, Thailand’s claim to regional leadership looks even more convincing.

Nevertheless, the country had a target of 500MW of solar capacity additions in the near term, but developers have won between 4GW and 5GW of contracts. A European-style retrenchment is unlikely, if only because many developers may struggle to fulfil their contracts. But most local lenders assume that even if the most recent round of contracts leads to bumper activity in the coming months and years, this level of activity will not be sustained.

Small power, big impact

In parallel with the movement in solar there have been several financings for small and very small power projects. In early June, the local conglomerate B. Grimm closed the Bt7.9 billion 20-year financing for two plants located near Amata City, Rayong. Lenders Kasikornbank and Bangkok Bank, advised by Baker & McKenzie, provided a mixture of local currency debt (Bt5.3 billion) and US dollar loans ($84 million).

B Grimm owns 56% of the venture that developed the plants Amata B. Grimm Power, while Sumitomo Corp owns another 30% and Amata Group 14%. The two plants have a capacity of 120MW each and will sell power to EGAT under its small power producer programme.

The deal for the two Rayong plants followed an earlier financing in July 2010 for the Amata B Grimm 3 plant, which raised Bt2.7 billion and $41.8 million, again from Kasikornbank and Bangkok Bank. That deal was the first time the local market stretched to 20 years in tenor. It backed the construction of a 132.5MW gas-fired combined-cycle plant, which is located at the Amata Nakorn industrial estate in Chon Buri. It sold 90MW of capacity to EGAT under a 25-year PPA and the rest to local industrial users.

The venture has indicated that it will look to raise Bt12 billion in debt in 2012 for another three power projects, with Kasikornbank already mandated as financial adviser on the deal. Those projects, with a total cost of Bt15 billion, will be geared at 75%. Kasikornbank, together with Krung Thai Bank, closed a Bt4.11 billion loan for Ch. Karnchang’s 110MW Bang Pa-In cogeneration plant in March 2011. Bang Pa-In will sell 90MW of its capacity to EGAT under a 25-year PPA, and the rest to local users.

The largest recent financing for a portfolio of small power projects was the Bt32 billion loan that Gulf JP closed for a 679MW portfolio of seven small power plants. This financing required more than two arrangers, with Export-Import Bank of Thailand, Thai Military Bank, Siam Commercial Bank, Kasikornbank and Tiso Bank all participating. The borrower is a joint venture of J-Power and Gulf Holdings, and even with the foreign ownership, the presence of Mitsui as engineering, procurement and construction contractor, the use of Siemens as O&M contractor, and the sheer size of the portfolio, foreign lenders could not come close to the local market’s 20-year tenor.

Big-ticket ambitions

That financing in turn followed Hongsa, the Laos hydroelectric project that suggested that Thai lenders would now be taking over a market where international banks and ECAs have had a strong presence. Hongsa, of which Ratchaburi owns 40%, Banpu another 40%, and Lao Holding State Enterprise owns 20%, was the subject of the largest project loan ever raised exclusively in the Thai market. Roughly two thirds of the $2.7 billion equivalent loan was in dollars, with the rest in Baht. As a sop to cross-border risk perceptions, the loan’s tenor was 18 years, and included a five-year grace period.

There were some solid reasons why Thai banks could be so competitive on Hongsa, including the project’s use of Chinese equipment, which ruled out non-Chinese export credit agencies. This meant that Thai lenders’ main competitors were Chinese lenders, which can take time to approve project loans, and are often more comfortable with sponsor guarantees. The mine-mouth coal project may also have presented technical and environmental challenges to international banks. The 1,878MW project benefited from EGAT as offtaker under a 25-year PPA, EGAT as 45% shareholder in Ratchaburi, and access to EGAT’s engineering expertise, since it owns Thailand’s largest coal plant.

The next test for the Thai bank market will be the Xayaburi hydro plant, also in Laos. The early indications are that the project will be more threatened by regional politics and environmental risk than by scant appetite. Indeed, four of the largest Thai lenders, Bangkok Bank, Kasikornbank, Siam Commercial Bank and Krung Thai Bank, are all understood to be working on the deal. The sponsors of the 1,285MW plant are CH Karnchang (57.5%), PTT (25%), EGCO (12.5%) and Construction & Irrigation Company (5%).

The biggest problem facing Xayaburi stems from its location on the main stream Mekong River. The location means that the Mekong River Commission, a body set up by Thailand, Laos, Cambodia and Vietnam to resolve issues around the river, must opine on the project, and in practice that all four can reach a compromise on the project.

The sponsors are producing a new environmental impact assessment to answer criticisms from Vietnam and Cambodia, in particular. Given that relations between Cambodia and Thailand have recently been frosty, lenders’ confidence that the $3.8 billion deal can close in 2011 looks optimistic.

A slightly more solid prospect, and probably the most realistic chance of outside lenders having any presence in the Thai/Laos power market at all in 2011, is the 440MW Nam Ngum 3 plant. The sponsors, GMS Lao Company (27%), Marubeni (25%), Ratchaburi (25%) and Lao Holding State Enterprise (23%), have retained BNP Paribas as financial adviser.

The sponsors have approached the IFC for $75 million in senior debt, and the Asian Development Bank for $475 million in debt for the $1.015 billion project and related transmission network upgrades. The plant would be located in the Nam Ngum river basin in Laos, and sell power to EGAT under a 27-year PPA

What’s missing from this list is any mention of a large Thai independent power project. EGAT’s last round of bids, from December 2007, still have a substantial overhang, as sponsors first had to contend with the aftermath of abortive plans to privatise EGAT, which were abandoned in 2006, and then the financial crisis. Since then, several developers, including Gulf JP’s Siam Energy project, and National Power Supply, have struggled to overcome local opposition. EGAT has indicated that it would be happy to build the additional capacity itself.