"Private financing returned when AIG stepped up to support the CBK Power Project. It was the largest private, political-risk covered project financing ever completed worldwide, and the first syndicated project financing for a sub-investment grade country since the Asian financial crisis," IFR reported.
CBK involves the construction of one new 350 MW hydroelectric plant, known as Kalayaan II, and the rehabilitation of the three existing CBK plants, at an estimated cost of $460 million. The project is to be undertaken by CBK Power Corp., a partnership between IMPSA of Argentina and Edison Mission Energy of the United States. IMPSA had won the contract in 1997, although slow government approvals had hindered its implementation.
According to the report, CBK had to resort to private political risk coverage following the domestic troubles of the country and the continued high risk in Asia. Initially, IMPSA had sought a bond float for CBK, followed by the possibility of export credit financing. However, due to the 1997 crisis and the Philippine Department of Finance’s failure to provide a required letter to the Japanese Ministry of International Trade and Industry, both options could not be completed. CBK Power thus turned to a syndicated loan, but this required coverage for the project’s political risk.
The IFR report quotes David Gore, director of Project Finance and Advisory in Asia for SG: "One of the lessons of the Asian financial crisis is that the biggest risk in most power projects is in the offtaker, and whether they can pay or not."
"The groundbreaking aspect of the financing was the level of private sector political risk cover that the arrangers managed to take out. IT covered the usual political risks of appropriation and war and so forth but also covered the risk of Napocor not paying the off take agreements and in turn the Republic of the Philippines not paying Napocor’s debt if they did not pay. AIG, Zurich and ACE Syndicate from Lloyds of London led the insurance syndicate. It was the most comprehensive private insurance package ever assembled," the report said.
In the end, syndication for the CBK project closed 30 percent oversubscribed with 18 institutions coming into the transaction. "It took little over six weeks from launch to closing of the financing, showing that with a strong project rationale, strong risk mitigation and strong support from the sponsors, ground-breaking projects can still be financed in Asia," the IFR report said.