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Saturday, 22 September 2018

Investment-Grade Bond

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Indonesian power producer Paiton Energy proved that the international capital markets can play a big role in supporting Asian infrastructure with a landmark US$2bn project bond.

Paiton sold US$1.2bn of 13-year notes and US$800m of 20-year notes in the 144A/Reg S market, reaching emerging-market specialists in the US as well as Asian and European investors looking for stable, long-term assets.

The deal, alongside a US$750m six-year term loan in US dollars and Japanese yen, replaced all of Paiton’s existing project debt and created an entirely new capital structure based on its stable cash flows and operating track record. It freed up capital for the sponsors and original lenders to inject into other investments, and raised hopes that other infrastructure owners may be able to tap the institutional market for long-term money.

Investors certainly showed their interest, throwing in orders of over US$9bn and allowing Paiton to price well inside initial guidance.

The 2030s priced at 4.625% from initial guidance of 5% area, and the 2037s at 5.625% from 6% area, and continued to perform strongly in secondary trading.

Still, the deal was no fluke. It took years of planning and careful negotiation with the existing lenders, who were initially wary of recapitalising the sponsors and reluctant to give up an asset that was performing well. The wholesale refinancing also meant the company’s interest rate swaps needed to be unwound.

An investment-grade rating was far from a given, but structural features helped to win a Baa3/BBB– from Moody’s/Fitch, on par with the sovereign and with state electricity distributor Perusahaan Listrik Negara, Paiton’s sole client.

The tranches were sized to ensure a robust debt service coverage ratio throughout the life of the bonds, and both tranches amortise, removing the refinancing risk of a bullet maturity and supporting the high-grade ratings.

The 2030 notes will amortise from 2024, giving them a weighted average life of 10 years, and the 2037 notes from 2032, giving them a WAL of 17 years. Crucially, Paiton’s power purchase agreement with PLN will outlast the life of the bonds and there are provisions to allow it to repay them in full if the PPA is terminated early.

It was unfeasible to give bondholders security over Paiton’s shares, making the structure slightly less investor-friendly than project bonds in more established markets. Instead the structure would give them powers of attorney, allowing the securities trustee to take control in the event of a default.

The response to the deal was a resounding vote of confidence in both the structure and the concept, proving that infrastructure owners need not rely entirely on Asia’s bank market and breathing new life into a project bond market that had lain dormant for years.

Barclays and HSBC were joint global coordinators, as well as joint bookrunners with Citigroup, DBS and Deutsche Bank.

To see the digital version of this report, please click here

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