Bankers at SG, Hana and Fuji are celebrating the first ever limited recourse project financing to close in Korea. The deal is for the purchase of a petrochemical plant from the Daelim group by a project company called PolyMirae. PolyMirae is a 50/50 joint venture between Daelim and the Montell Group - which in turn is held by Montell Industrial, Taiwan Polypropylene and Montell SDK Sunrise.
The size of the deal is $284 million of which $184 million is in debt and $100 million is in equity. The debt portion is split into three tranches all of which have a seven year maturity. The first tranche is a $122 million MTN programme which has been provided by Societe Generale Finance (Ireland). The note carries an up front fee of 2.5% and a coupon of Libor plus 325 basis points. The note is split between a $98 million issue which is being drawn down immediately on signing and a $22 million issue which can be drawn any time in the next two years.
The second tranche is a W46.5 billion ($42 million) term loan provided by Hana Bank, Samsung Life Insurance and Kyobo Life Insurance Company. It carries an up front fee of 2.5% and a margin of 2.3%.
The third tranche is a W22 billion revolving working capital facility provided by Hana Bank which has an up front fee of 2.5% and a margin of 2.1%.
Together the working capital facility and the second installment of the MTN provide the project with contingent financing of around $54 million which will be used to improve the project's interest cover or to purchase any additional petrochemical assets from Daelim in the future.
Risky business
The main risks that the project sponsors and their lenders face are that there are no offtake contracts involved in this project. The global petrochemical sector is at rock bottom at the moment, but being cyclical it is forecast to improve. Nevertheless, the lenders have built low price forecasts into the repayment schedule of the debt. If the market does improve significantly then the debt could be repaid as early as four and a half years. If it does not improve - or it gets worse - then the lenders have to assume the consequences.
The lenders deny that they are taking any foreign exchange risks. Although much of polypropylene products will be sold in Korea for Won revenue, the petrochemical market globally operates under an international price formula where local prices are adjusted to the relative value of the US dollar, thus keeping the revenue streams the same in dollar terms.
One area which caused concern during the 11 month negotiations that this deal needed to close were the security arrangements that had to be devised under Korean law. In the Korean legal system, assignment of assets to lenders away from sponsor parties is quite difficult, but the arrangers say that with this project, that has now been achieved to the satisfaction of the credit committees.
"It is quite rare for any petrochemical project to go out with no formal offtake contracts," says Ashley Wilkins, head of project finance at SG in Hong Kong. "That and organizing the security aspects under Korean law is why this deal took so long to do."
Nevertheless, as an acquisition of an existing plant, the project carries no construction risks which mitigates the lenders during the early stages of the financing. Overall, these risk factors contributed to the rather hefty Libor plus 325bp price tag that the international financing commanded.
Firsts
"People will now see that it is possible to do these kinds of deals in Korea," says Wilkins. "As the first ever limited recourse financing in Korea it is really something of a landmark."
Not only is this the first such project financing in Korea, but the MTN is also the first project bond since the crisis of 1997/98. The only comparable deals to be done in Korea since then were the purchases by Sithe Energies of two Hyundai power plants. Both of those deals were financed in Won.
