A good effort - the First Gas refi

There's not much closing in the current market, and less still refinancing, so to bring the First Gas refi in the Philippines to financial close as the banking sector crashed around it was no mean feat. Chaminda Jayanetti looks at a deal that showed that these days, deals need to get creative to get away.


The Santa Rita power plant closed original financing in 1998 in a borrowers' market. International lenders including ABN Amro, KBC and KfW provided debt financing on borrower-friendly terms, while EPC Siemens opened up ECA lending from Hermes.

The project is mainly gas-fired, but has dual-fuel capacity and can use oil. A 25-year PPA with Manila distributor Meralco started upon commissioning of the plant in 2000. Gas is sourced from the Shell-owned Malampaya gas field.

The project is 40 per cent owned by BG, with the majority 60 per cent stake held by First Gen. For its part, First Gen is a subsidiary of First Philippines Holdings, one of the two holding companies (with Benpres) of the Lopez family.

One of the most successful families in the Philippines, the Lopez dynasty had many of its assets seized by the Marcos regime. Over time, the Lopez family clawed back its assets, including First Gen and also a major shareholding in Meralco - the Santa Rita offtaker.

This led to complaints from politicians that Santa Rita was just a sweetheart deal for the Lopez dynasty - a supreme court case ensued in 2003-4, and ultimately the government forced all offtakers, including Meralco, to review their PPAs. As a result, the Santa Rita PPA was amended to provide more balance and reduced upside.

Strategy and challenges

In November 2007 First Gen subsidiary Red Vulcan Holdings acquired the government's stake in geothermal developer PNOC-EDC for around US$1.4 billion as part of the Philippines' power asset privatisation programme.

The PNOC-EDC deal was financed through a bridge loan, and just a month later in December, First Gen started looking to refinance the Santa Rita project. With the project operating successfully and offtake payments being met, First Gen saw an opportunity to recapitalise by taking money out of Santa Rita to help pay down the PNOC-EDC bridge loan.

There were other benefits to a refinancing. Interest on new debt is tax deductible, meaning that gearing up at project level would provide the sponsor with a tax shield.

A five-strong MLA group was mandated in early 2008 to pay off the US$190 million of outstanding project debt - including US$44 million of Hermes financing - and add new debt to help pay off the PNOC-EDC bridge loan:

  • Bank of Tokyo-Mitsubishi
  • Calyon
  • ING
  • KfW
  • Standard Chartered

This group of underwriters, equally splitting the US$750 million refi, was then expanded to its final eight-bank composition during the summer with the addition of Maybank, Societe Generale and Unicredit.

An equally shared debt underwriting was still the plan, and as late as August a straightforward syndication was envisaged, to start by September and possibly even including a second phase should the deal not get away in one tier.

All that soon changed. The traumatic month of September saw lenders' appetite collapse, while the syndication market seized up completely. The MLAs were unwilling to underwrite anything, and submitted their varying preferred final hold positions to the sponsor - who for its part, wanted a larger refi than the combined final holds so as to make the deal worthwhile.

In an attempt to increase the refi and reduce the MLAs' exposure, Filipino banks were considered for the uncovered tranche, but nothing came of the discussions. Nor were MLAs keen to increase their commitments. And with the margins on the deal rising to reflect the new climate, the potential upside was coming under pressure.

Pricing settled at Libor +325bp on the PRI-covered debt, and Libor +350-390bp on the uncovered. BG - a company unaccustomed to project finance - was not happy at the margins, which were far above the corporate debt spreads it was familiar with.

But the refi had to get smaller just to protect the consistent base rate DSCR of 1.30 - with margins rising, a US$750 million deal would have eaten into the upside and tightened the cover ratio. The largest deal that could get away at 1.30 was US$668 million - but the MLAs' final hold positions amounted to just US$500 million.

The solution that emerged was the return of the 'best efforts' syndication, after many years out of the project finance sector. Under the best efforts syndication, the MLAs only committed to lend their respective final hold positions, with no underwriting risk. Instead, they would try and syndicate what they could up to the US$668 million, with whatever they were able to get away going to First Gas. Debt that was not syndicated simply would not be lent.

On this basis, the deal launched to syndication in October - but instead of waiting for the syndication to close, the sponsors pressed ahead for financial close, looking to conclude the deal quickly before various debts fell due in mid-November.

A cash sweep had been introduced for both the covered and uncovered tranches, but was removed from the covered debt close to financial close. The sweep was supposed to enable prepayment of the 13-year covered debt after 12.5 years, but became redundant on this tranche when First Gas agreed to a 12.5-year covered tenor anyway.

The deal received a shot in the arm in late October when food and drink giant San Miguel acquired a stake in Meralco. Meralco had been a good project offtaker with no defaults, but since the original 1998 deal it had been ordered to repay customer charges after a court case, and had been hit with higher than expected tax bills. With its strong credit, San Miguel added to the security of the PPA.

Nevertheless, bank credit committees were in ultra-conservative mood, with heavy scrutiny of documentation throughout an extensive due diligence process. While some covenants could be dispensed with in the absence of construction risk, with banks able relax their day-to-day monitoring of the deal, lenders were exceptionally cautious in their approach to the deal.

The deal signed on 11 November.

The financing

Under the best efforts syndication, the MLAs only committed to lend their final hold positions, totalling US$500 million:

  • Bank of Tokyo-Mitsubishi - US$75m
  • Calyon - US$75m
  • KfW - US$75m
  • ING - US$65m
  • Unicredit - US$60m
  • Maybank - US$50m
  • Societe Generale - US$50m
  • Standard Chartered - US$50m

In addition, the outstanding US$44 million Hermes debt takes the deal to US$544 million. The Hermes tranche has around five years left to run.

Generally, the final hold positions are split pro rata between the covered and uncovered tranches, although there are some slight variations between banks.

The documentation is being formulated so that if extra debt is syndicated - up to a total debt financing of US$668 million including the Hermes tranche - the docs can easily be changed post-financial close.

Offered syndicate fees are:

  • 115bp - up to US$40m
  • 135bp - US$40m+

Three banks are understood to be looking at the deal in syndication, and could potentially take the deal up to the full US$668 total. An international bank is currently considering US$80 million of uncovered debt, while a local and an international bank are eyeing covered tickets.

The US$668 million debt financing breaks down as:

  • covered commercial tranche - US$375m
  • uncovered commercial tranche - US$249m
  • Hermes ECA tranche - US$44m

The covered tranche - which carries political risk insurance provided by a variety of private insurers - has a 12.5-year tenor, while the uncovered tranche has a 10-year tenor.

Pricing on the covered debt is Libor +325bp flat. Pricing on the uncovered tranche is:

  • years 1-5 - Libor +350bp
  • years 6-7 - Libor +375bp
  • year 8 onwards - Libor +390bp

The deal has a PPA until 2025 with Meralco, which supplies 60 per cent of the electricity sold on the key Luzon grid, including Manila.

Base case DSCR is 1.30. Dividend lock up DSCR is 1.20. There is no default DSCR.

The uncovered tranche has a cash sweep under which surplus project revenue will be split 50-50 between the lenders and the sponsors, up to a DSCR of 1.30.

Should the DSCR rise above the base case 1.30, the sweep will only apply to the surplus up to the base case - i.e. 0.30 - with the extra surplus going entirely to the sponsor.

Paul Hastings advised First Gas, with Shearman & Sterling advising the lenders.


Next up for First Gas is likely to be the 500MW San Lorenzo project, another Siemens-built gas-fired plant with a Meralco PPA, located next to Santa Rita. First Gas is expected to try and refi the original 2000 deal, but given the state of the debt market and BG's discomfort at the Santa Rita pricing no approach to banks is expected until late Q2 next year at the earliest.

Santa Rita almost certainly would not have got away if it had less advanced when the bank market collapsed - by September, the MLAs had gone so far with the deal they could not easily turn back. The best efforts syndication reflects the importance of creativity in getting deals through in the current market, while flexibility was also required on the part of the sponsor to accept a smaller deal than initially planned. Similar principles will be vital to bringing deals to a close until the storm clouds finally clear.