A big-ticket breakthrough for Thai power's foreign banks?

Fierce competition persists between local and international lenders in the Thai power market. Despite predictions that local lenders would edge out foreign banks completely, recent big-ticket financings have featured large offshore components. Japanese banks, fast establishing a stranglehold on regional project finance business, have been aggressive in support of their Japanese clients, which remain active in Thailand.

The country is still a promising place to develop power plants, despite the aftereffects of the 2008 crisis, the devastating floods of 2011, and the effects of the Eurozone crisis on European banks’ presence in the market. The macroeconomic background, for one, is still promising.

Thailand overshot the World Bank’s 4.5% growth forecast in 2012, recording a 5.5% growth rate that was slightly above the regional average. Some of this might reflect a rebound from the 0.1% in the wake of the floods, which inundated manufacturing capacity in the industrial north of Bangkok. It also reflects Thailand’s determination to bounce back from the devastation. Energy will account for 22% of the country’s $72 billion reconstruction and growth budget. A comprehensive new land transport system tops the priority list for development, however, and could spur growth in energy demand.

The Energy and Policy Planning Office of Thailand’s Ministry of Energy predicts that the country will need to add 55,130MW of capacity to its the 32,395MW it had online as of the end of 2011. When combined with 16,839MW of retirements, this would give Thailand a total fleet size of 70,686MW. According to Sakorn Suriyabhivadh, a senior investment banking executive in Kasikornbank’s capital markets division: “I am sure that development of transportation and infrastructure (e.g. the electric train) will create a huge amount of demand in energy.”

U-Thai and debt dynamics

The most recent conventional power financing to close illustrates the delicate competitive balance between onshore and offshore debt sources. Gulf JP closed the 23-year financing for its U-Thai gas-fired plant, hedging against currency volatility by using a US dollar-denominated tranche of $568 million, and a Baht-denominated tranche of Bt21billion ($702 million).

The overseas lenders are believed to have brought pricing in from the 200bp over Libor region on the debt for its Nong Saeng plant, a deal that Gulf JP closed in October 2011. Debt service coverage ratios (DSCR), though, remain fairly constant: U-Thai had a DSCR of 1.57%, while Nong Saeng had 1.55x.

The plants are very similar – 1,600MW combined-cycle facilities that sell power to the Electricity Generating Authority of Thailand, the giant and influential state-owned utility, under 25-year power purchase agreements. Nong Saeng is set to start operations in 2014, and U-Thai, which reached financial close in October 2012, in 2016. Gulf JP is a joint venture between Gulf Energy Group (10%), Thailand’s first publicly listed power company, and J Power, the Japanese generator (90%). The combination makes the developer a powerful draw in onshore and offshore markets.

One development bank – the Asian Development Bank – participated in the financing, with a $184 million loan, while the Japan Bank for International Cooperation provided a $284 million direct loan. But neither the dollar of Baht lenders benefited from export credit agency or multilateral cover. BTMU provided the $100 million uncovered dollar loan, while SMBC, which has a branch in Bangkok, participated in the $720 million equivalent Baht tranche, alongside local lenders Kasikornbank, Bangkok Bank, Siam Commercial Bank and Land and Houses Bank.

The U-Thai financing suggests that lenders are looking at new risks in light of recent events, particularly flood insurance, where demands for additional cover featured in its $1.27 billion debt financing. It could trigger a deluge of similar demands. Vit Vatanayothin, a partner at Baker & McKenzie in Bangkok, believes “most of the major new projects in Thailand will be required to take out additional flood insurance.” Other market participants stress how difficult it has become finding insurers willing to cover flood damage for large projects, especially in low-lying areas.

Small projects, big advantages

Vatanayothin says that development banks and export credit agencies are still necessary allies: “The ADB and IFC provide very cheap finance – and it is a US dollar-denominated loan.” Beyond the small number of large IPPs that come to market, Thai banks continue to enjoy a more entrenched advantage. They can write large tickets on financings, and have come to dominate renewables financings. In June 2011 Kasikornbank and Bangkok Bank, for instance, led the Bt3.3 billion in debt for Ratchaburi and Yanhee’s Bt4.4 billion 34.25MW Solarta portfolio, on which Vatanayothin advised the sponsors.

The ready availability of local debt and steadier dealflow are starting to interest the most conventionally-minded developers. Gulf JP, for instance, concentrates almost exclusively on gas-fired plants, though Fupoj Tiboonthitakphon, a manager in its finance department says, “we are really interested in investing in renewable projects and want to know more about the opportunities. We are considering a number of plans, on which we are conducting feasibility studies, to make sure the return is sufficient to meet our requirements.”

The biggest non-Thai participant in the Baht power finance market is the Asian Development Bank, which has made lending to solar projects in the region a priority. The ADB planned to lend $2.25 billion to 3GW of solar power between 2010 and mid-2013. Thailand accounted for a large chunk of that total.

Oil company Bangchak Petroleum expanded into solar power in 2010, closing a Bt134 million loan with the ADB in October for two photovoltaic plants in Ayuttaya, north of Bangkok, with a total capacity of 38MW. Early in 2013, Solar Power Company closed on Bt2.4 billion in 10-year debt with K-Bank for five solar projects – Korat 5, Korat 8, Khon Kaen 3, Khon Kaen 4 and Khon Kaen 8 – with a total capacity of just over 37MW. Solar Power Company has raised both debt and equity from the International Finance Corporation, but will get to its target of 34 plants with a total capacity of 204MW primarily with debt from local banks.

This pattern of early-stage support from multilateral lenders followed with additional financing from local banks is established in Thailand. Natural Energy Development (NED) closed on a $70 million ADB loan and $112 million baht equivalent commercial bank loan for its 73MW Lopburi plant in 2010, but turned to the local lenders for a Bht1.2 billion loan to expand the plant by 11MW. NED’s sponsors are CLP Renewables (33.3%), Diamond Generating (33.3%) and Electricity Generating Public Company (33.3%), while Sharp was panel manufacturer. Another Japanese manufacturer, Kyocera, supplies Solar Power Company, but Japanese export finance has not historically been a component of Thai renewables financings.

In fact, Japanese lenders have little presence even on smaller conventional power plants. Siam Commercial Bank and Kasikornbank, along with Tisco, TMB, and Thai Exim, closed a Bt32 billion 20-year financing in 2010 for Gulf JP’s 780MW small power producer slate.

“If Thai banks can compete with international banks, I think Thai project companies tend to finance now from local institutions, because they have closer connections with local sponsors, says Baker & Mckenzie’s Vatanayothin. “In terms of risk appetite, local banks can take on more than international banks, and they are better placed to monitor their assets.” International developer Sonnedix, in a joint venture with local construction group Ch. Karnchang, closed a Bt826 million loan with Krung Thai Bank in June 2011 to support the development of a 9.5MW PV plant in Chiang Rai province. The plant came online in February 2013.

As development ventures, even those with minority foreign shareholders, establish themselves, their preference for local debt becomes equally clear. In August 2011 Amata B Grimm, a joint venture of B Grimm (56%), Sumitomo (30%) and Amata Group (14%), closed a Bt7.9 billion syndicated loan with a 20-year tenor for two new 120MW power plants at the Amata Industrial Estate in Rayong, with Kasikornbank and Bangkok Bank.

Amata B Grimm closed on Bt9.17 billion in debt with Kasikornbank and Bangkok Bank for project companies B Grimm BIP Power, and Bangkadi Clean Energy. The debt signed on 28 February 2013, and supports the construction of two plants with a total capacity of 228MW, located in Bangkadi Industrial Park, Pathum Thani. Kasikornbank was also financial adviser, while Clifford Chance was legal adviser to the developer.

The most recent financing falls under the jumbo Bt50 billion advisory mandate that the developer signed with Kasikornbank in August 2012. The mandate covers ten projects, each of which would sell 90MW of capacity (the SPP programme’s maximum) to the Provincial Electricity Authority under 25-year power purchase agreements. The PEA buys power from small power projects, whereas EGAT is the offtaker from the larger IPPs. An SPP can sell any excess above the PEA maximum to local industrial users.

EGAT endures

EGAT’s influence over the larger independent power developers has made these developers increasingly influential cross-border players. EGAT owns 45% of Ratchaburi Generating, which owns of 4,499 MW of capacity, or about 13.6% of the Thai generating fleet, both outright and through joint ventures. But Ratchaburi also owns 40% of the 1,878MW Hongsa mine-mouth coal-fired plant, and 25% of the 440MW Nam Ngum 3 and 615MW Nam Ngum 2 in Laos.

Ratchaburi attracted the most attention when it took control of Transfield Services Infrastructure Fund’s 1,125MW generating portfolio in May 2011. It funded that acquisition with Y15 billion ($195 billion) in 15-year corporate guaranteed bonds placed in the Japanese market. Thai banks are still a little uncomfortable with the risk attached to the target company’s Australian portfolio, while Australian banks were unlikely to go beyond their preferred seven-year tenor for a new entrant.

Ratchburi now owns 80% of the fund, and was able to sell down its 14% stake in the coal-fired Loy Yang A power station to AGL as part of AGL’s move to take control of the 2,200MW plant. The sale, for A$20 million cash and a 15-year tenure scheduled payment option agreement with a present value of A$100 million, allowed the seller to escape the impact of Australia’s carbon tax, which is hitting the country’s coal generators hard.

Moody’s, which rates Ratchaburi Baa1, worries about its coming capital expenditure requirements. It can point to a high ratio of funds from operations (FFO) to debt, which consistently ranges from 2-3X over the last six years. But its ratio of adjusted debt to capital has increased from 27% to 41%, and it will have to write a large equity cheque on the forthcoming 410MW Xe-Pian Xe-Namnong hydroelectric plant in Laos. The project company, comprising Ratchaburi (25%), SK (26%), Korea Western Power (25%) and the government of Laos (24%), will need around Bt10 billion in equity and over Bt20 billion in debt to fund construction.

Long-term loosening?

Ratchaburi has also become increasingly active in renewables. It owns a 20% stake in the Bt6.653 billion 90MW First Korat Wind project and the Bt6.087 billion 90MW KR Two wind project, which closed a 12-year Bt8.9 billion financing with Kasikornbank in September 2011. The plants sell power to EGAT under rolling renewable five-year power purchase agreements, which use an adder tariff on top of any market-based tariff that sponsors and offtaker agree.

But government worries about the extent of support it has provided for renewables may cause a swing back towards conventional sources. Solar has beaten government installed targets by 56%, and biogas by 39%, though wind’s progress has been more halting.

A fixed feed-in tariff may well replace the adder under looming reforms, but more likely is the potential for conventional sources to crowd out renewables. Gas and hydro are particularly likely to rebound, though Fukushima put paid to Thailand’s ambitions to add any more nuclear capacity. If all of the conventional additions in the 2010-30 Long-Term Power Development Plan come to pass, there may be little need for Thailand to spend lavishly to meet the targets in its 2009-22 Renewable Energy Development Plan.

Thailand’s tangled legislative framework and competing bureaucracies mean that – for good and for ill – the current competitive dynamic in power lending will continue. With the liquidity and tenors on offer for greenfield developers, it would be hard to argue for a change to the status quo.