Case 2: Bulk Liquid Chemical Port JAMES POLAN VICE PRESIDENT SMALL AND MEDIUM ENTERPRISE FINANCE OVERSEAS PRIVATE INVESTMENT CORPORATION
Project Introduction Project Type: Bulk-liquid chemical terminal Distinctive features Liquid chemical terminal for handling and storing various types of petroleum products Logistically most suitable for servicing the chemical belt of the western part of the country and offers savings in freight Project to be financed with a debt equity ratio of about 2:1. Undertakings from sponsors to complete the construction and finance cost overrun, if any. Firm commitment from sponsors to use 50 per cent capacity of the terminal.
Project Introduction (cont.) Description of finance facility A project finance loan of US$120 million with 13-year tenor to be repaid over 44 quarters, Equity of US$39.3 million from sponsors and US$22 million from private investors. Proceeds of the financing to be used for the construction of a liquid chemical terminal on the west coast of the country.
Background Infrastructure support at the major ports has not kept pace with cargo volume growth. Almost all major ports operate at higher than rated capacities leading to preberthing delays, slower vessel turn around, and congestion problems. All major ports operate on the 'service port' concept and all ownership, utility, and service functions are carried out by the government, the port owner. Bulk of the cargo (95 per cent) is handled at major ports. The private sector is being invited to supplement government's efforts and provide the service function. 139 intermediate and minor ports are administered by state governments and are practically unutilized. With a view to increasing minor port utilization, many states have identified potential sites and formulated policies to develop them, specifically buildoperate-transfer (BOT) policies for privatization.
Background (cont.) Large local petrochemical companies are developing a captive liquid chemical terminal to achieve savings in freight and transportation costs. Several entities have promoted the Project Company to set up port and storage terminal facilities for handling liquid chemical cargo at the port. The Project Company was permitted to construct and develop a chemical port terminal as a captive jetty at the Port Authority. The local government announced its build-own-operate-transfer (BOOT) policy for private sector participation in the port sector. Based on this, the Project Company submitted a proposal to the local government for granting the status of commercial port to attract third party cargo in addition to the cargo guaranteed by the project sponsors.
Project Summary The project was envisaged by the project sponsors as a captive jetty for handling cargo from their local plants. Initially, the port capacity was estimated at 2.5 million tons per annum (tpa). However, with the slowdown in the country s petrochemical industry, both project sponsors felt that it would not be possible for them to guarantee 2.5 million tpa of throughput. Instead, the sponsors decided to develop the port on a commercial basis and shift to a project financing funding structure. The project capacity was subsequently increased to 3 million tpa.
Project Summary (cont.) The project envisages construction of the following facilities: A jetty with berthing, mooring and transfer arrangements. A storage tank farm comprising storage tanks and spheres, for storing chemicals/petrochemicals. Loading/unloading arrangements into/from tankers with general utilities including firefighting facilities, water and effluent treatment facilities, etc. For imports, the cargo arriving at the jetty would be transferred to the storage tanks using pumps of the vessel, marine unloading arms and transfer pipelines. For exports, the chemicals would arrive by road tankers and then be transferred to storage tanks by the terminal pumps.
Technical Feasibility A detailed technical/economic feasibility report for the project was prepared by one of the sponsors. Sponsor is a leading design and engineering company providing engineering and related technical services for petroleum refineries, oil and gas pipelines, petrochemical industries, chemical process plants, offshore engineering and other industrial projects. Sponsor has successfully provided design and engineering for over 150 projects totaling over US$15 billion.
Contracts EPC Construction Contract The Project Company issued global tenders for the construction of marine facilities. Bids were received from various international engineering companies and, based on a technical evaluation by a leading design and engineering company, four bidders were shortlisted. Following a detailed commercial evaluation of the proposal submitted by prequalified bidders, a fixed-price and fixedconstruction-period EPC contract was awarded to the project builder for the construction of the jetty, approach trestle, tank farm and associated facilities.
Contracts (cont.) O&M Contract International players have shown interest in becoming the O&M operator and the Project Company is in the process of negotiating with them regarding the scope of work and the pricing. Project Company intends to finalize the O&M contract before completion of construction. Concession Agreement Port Authority will enter into a concession agreement with the Project Company for development, construction, and O&M of a chemical terminal on a BOOT basis for a period of 30 years. The legal advisers to the lenders have suggested certain modifications in the concession agreement to protect the lenders' interest.
Contracts (cont.) Take-or-Pay Contract The sponsors propose to guarantee 50 per cent of the total 3 million tpa throughput to be handled and stored by the Project Company. The sponsors have entered into a 20-year take-or-pay contract (TOPC) with the Project Company to give effect to this commitment. Each user would pay monthly storage rentals, in advance, based on the pro-rated monthly guaranteed quantities at predetermined rates. During the tenor of the TOPC, the Project Company would be free to enter into arrangements with third party users, provided that such arrangements do not prejudice the interests of the user sponsors.
Key Financing Agreements Loan facility agreement Security trustee agreement Mortgage deed Trust and retention account agreement Facility agent agreement Inter-creditor agreement
Financing Structure Of the total equity share capital aggregating US$61.3 million US$39.3 million will be subscribed by the sponsors (reflecting their shareholding in the Project Company) and US$22 million will be raised through a private placement. The Project Company has appointed an international bank to raise the US$22 million through a private placement/public issue of equity shares. The bank is in discussions with several international as well as domestic investments institutions, which have infrastructure-specific funds that may consider investing in ports.
Financing Structure (cont.) Term loans The Project Company is constructing the facility using funds raised through short-term loans from domestic and international banks. These short-term loans are guaranteed by the sponsors. However, a few of these banks are not willing to convert their shortterm loans into long-term project financing. The Project Company has proposed to repay the short-term loans of banks that are not ready to participate in term debt through the funds raised by private placement of equity and an additional long-term loan. The Project Company has appointed another international bank as the lead arranger to raise term loans aggregating US$119.7 million from financial institutions/ banks.
Financing Structure (cont.) Terms and conditions of the debt financing Amount: US$119.7 million Final maturity: 13 years Repayment: over 44 quarters starting from 15 April 2003 and ending on 15 January 2014 as per the following repayment profile (in per cent of total senior debt): 1) First two years ending 31 March 2005, 8 per cent. 2) Next three years ending 31 March 2008, 26 per cent. 3) Next four years ending 31 March 2012, 42 per cent. 4) Last two years ending 31 March 2014, 24 per cent. Interest rate: ranging from 2.0 per cent to 2.5 per cent over 6-month LIBOR Commitment fees: 0.5 per cent on undisbursed amounts. Prepayment fees: nil. Front-end fees: 1.0 per cent of the loan amount.
Financing Structure (cont.) Completion test - a performance completion test stipulates the following: 1) construction as per the design; 2) ability to handle 3 million tpa at design rate; and 3) environmental acceptance by relevant authorities. Cash lock-up: equity distribution is allowed subject to DSCR >1.2 Security structure (initially): when the project was conceived as a captive port facility for the two promoters, the security structure envisaged was as follows: 1) A first mortgage and charge on all the company's moveable and immovable properties, both present and future. 2) Unconditional and irrevocable several corporate guarantees from the sponsors. 3) Pledge of shares held by the sponsors and their associates in Project Company. 4) Assignment in favor of lenders of all the rights, titles and interests of the company in all project documents.
Financing Structure (cont.) Security structure (proposed) Lead sponsors indicated that they would not provide the initial corporate guarantees. In lieu of corporate guarantees, they would enter into TOPC for an annual throughput of 1.5 million tpa. Further, the TOPC would provide that the user sponsors irrevocably agree to deposit all user charges from use of the facility into the trust and retention account (TRA) under the control of the banks. The new proposed security structure is as follows: 1) A first mortgage and charge on all the Project Company's moveable and immovable properties, both present and future. 2) Charge on the trust and retention account. 3) Assignment in favor of lenders of all the rights, titles, and interests of the Project Company in all project documents including the TOPC with the sponsors. 4) Pledge of shares held by the sponsors in the Project Company.
Market Risk The biggest project risk involved is the project s ability to attract additional port throughput from the north-western part of the country as well as from competing ports. The project was conceived as a captive port for the user sponsors. With the slowdown in the country s petrochemical industry, sponsors felt that it would not be possible for them to guarantee 2.5 million tpa of cargo as envisaged at the time of project conception. Subsequently, they brought in another sponsor to enhance the viability of the project. At present, the new sponsor has not guaranteed any cargo, however, the two promoters are confident that this new sponsor would use the proposed terminal to make entry into the country.
Market Risk (cont.) Via the TOPC, the sponsors propose to guarantee about 50 per cent of the total 3 million tpa throughput to be handled and stored by the Project Company. The balance of capacity (1.5 million tpa) is proposed to be utilized by companies who are setting up their plants in the northwest of the country. Lenders to the project appointed an independent business analyst (IBA) to assess the market potential for third party users.
Market Risk (cont.) The IBA indicated that there is a potential for additional traffic of about 1.4 million tpa of naphtha from another domestic oil company and 200,000 tpa of propane from one of the sponsors. The IBA also indicated that the traffic would materialize subject to development of related supportive infrastructure and availability of storage capacity at the Project Company facility. Currently, the domestic oil company is incurring heavy demurrage costs due to severe port congestion at its nearby port. The proposed terminal is logistically the most suitable port serving oil company s nearby refinery.
Market Risk (cont.) However, additional investment of about US$100 million would be required to create a facility for handling crude oil imports. To export finished products the Project Company has adequate handling infrastructure but the domestic oil company would need to lay a pipeline from the terminal to the refinery, at a cost of about US$30 million. The shift from their previous congested port to the Project Company's terminal would result in annual savings of about US$60 million in ocean freight and transportation cost for the domestic oil company.
Credit Analysis Initially, the facility was planned as a captive port with an estimated project cost of US$149 million. With changes in the industry outlook, the sponsors decided to develop the facility on a project finance basis. Also, the project scope was increased to create additional capacity of 0.5 million tpa and to include the propane facility being developed by one of the sponsors. The revised cost of the project is US$181 million, as follows: land and site development, US$7.8 million; civil works, US$78.2 million; plant and machinery, US$56.6 million; preliminary and pre-operative expenses, US$4.2 million; provision for contingencies, US$1.2 million; interest during construction, US$21.9 million; debt service reserve account, US$10.9 million.
Problems Encountered At project conception, the sponsors agreed to guarantee loans for the construction of the project and thus borrowed short-term loans from banks on the basis of their corporate guarantees. However, with the downturn in the petrochemical industry, the sponsors refused to extend the guarantee to long-term debt and now the project is being proposed to be funded on a limited recourse project finance basis. During construction, a few jetty piles collapsed. The turn-key contractor, attributed this to faulty geographic data given by the Project Company and has claimed US$10 million in compensation. However, one of the two sponsors asserts that the turn-key contractor s claim is not tenable. The matter has been referred to an arbitration board and the final decision is awaited.
Problems Encountered (cont.) As prudential practice, the turn-key contractor continued construction but, nevertheless, the overall construction schedule may be delayed by two months. The Project Company proposes to reduce the testing and commissioning period to maintain the overall startup schedule. A leading environmental research institute conducted an environmental impact assessment for the project and, based on this, the Project Company has obtained environmental clearance. However, recently one of the local non-government organizations has filed public interest litigation against the project stating it would have an adverse impact on the environment. The action has been referred to a local court and a public hearing is currently in progress.
Summary of the Concession Agreement Land The lease period runs concurrent with the concession agreement and ends on the expiry of the term of the concession agreement or termination of the concession agreement. Ownership of all land reclaimed by the Project Company would vest with the Port Authority. However, the Project Company is not required to pay any lease rentals for occupation and use of such land. The land has been acquired on lease for the period of 99 years through a lease deed The lease deed provides for creation of mortgage on the land in favor of the lenders.
Summary of the Concession Agreement (cont.) Corporate structure The lead sponsors are required to maintain the following shareholding pattern: Each lead sponsor shall maintain a minimum interest of 20 per cent in the Project Company until seven years from date of commencement of commercial operation (the lock-in period'). The combined share-holding of lead sponsors in the Project Company shall not be less than 60 per cent during the lock-in period. Any reduction in stake below 60 per cent requires the prior written approval of the Port Authority.
Summary of the Concession Agreement (cont.) Construction Project Company is required to substantially complete the construction of the project, as well as obtain the certificate of completion of the project from the Port Authority within 60 days of completion of the construction. In the event that the Project Company fails to complete construction of the project within the scheduled construction period, it is required to pay to the Port Authority liquidated damages (LDs) for each day of delay up to a maximum period of six months. Project Company is entitled to mortgage the leasehold interest in the land and the waterfront. The sub-concessionaires of the Project Company cannot mortgage and/or create any charge on assets, or the subleased title to the land and the waterfront on which such assets are situated, without the prior written permission of the Port Authority.
Commercial Issues Traffic projections The Project Company must submit annual cargo traffic projections to the Port Authority. The Project Company must submit monthly reports on actual cargo traffic and annual variance of actual traffic against annual projections and estimates envisaged.
Commercial Issues (cont.) Tariff 1) Project Company is entitled to fix and collect fees for all services rendered or performed at the port and authorized under this agreement in accordance with applicable law. 2) Project Company must comply with the provisions of the country s Ports Act relating to tariff. 3) Project Company may, to the extent permitted by law, structure the tariff at its discretion and the currency of denomination of the tariff. 4) A comprehensive tariff schedule and the time period from which such tariff shall be in effect shall be notified to the public by the Project Company. 5) Project Company may customize separate service and tariff packages for specific users from time to time. Such customization may include long-term contracts with large and/or dedicated users.
Waterfront royalty payments Commercial Issues (cont.) From the date of commencement of operations, the Project Company shall pay the Port Authority a monthly waterfront royalty per ton of cargo handled at the terminal. Such waterfront royalty payments shall be based on the actual cargo throughputs achieved, which are determined on the basis of customs and other statutory declarations. The Project Company has to irreversibly choose in advance one of the following two options for payment of waterfront royalty: 1) US $1.00 per ton of liquid cargo handled at the port throughout the concession agreement; or 2) Wharfage at the rate notified by the Port Authority from time to time.
Force Majeure Force majeure (FM) shall mean any event or circumstance or combination of events or circumstances that: (i) (ii) are beyond the reasonable control of the Project Company and the Port Authority; or could be avoided, overcome or remedied in accordance with good industry practices. FM has been broadly divided into two categories political and natural/other. The consequences of FM are: (a) the obligations of the affected party, to the extent they are affected by the FM, shall be suspended; (b) the time period for the performance of obligations of the affected party, to the extent they are affected by the FM, shall be extended on a day-for-day basis; and (c) the term of this agreement shall be extended on a day-for-day basis.
Default and Termination Port Authority can terminate this agreement if the Project Company fails to: perform its duties perform statutory obligations construct the project on schedule defaults on its dues to Project Company obtain consent of the Port Authority before assigning rights reduces the shareholding of the sponsors below the specified level does not achieve performance standards The Project Company can terminate the agreement if the Port Authority fails to perform its duties or statutory obligations, or commits a breach of the agreement.
Default and Termination (cont.) If a termination notice is issued by Port Authority, the lenders can approach the Port Authority with a request to replace the Project Company with another operator within 180 days of issue of the termination notice. The decision of the Port Authority to grant permission to the replacement operator shall be final.
Scope of Buy-Out on Early Termination Under early termination by the Port Authority, Port Authority is required to purchase the assets of the Project Company. The assets to be purchased shall include all land and buildings, plant and machinery, spare parts, such deeds and documents as may be necessary for effectively transferring rights, title and all other interests in favor of the Port Authority, the benefits of all rights and interest in all unexpired insurance, guarantees and contractor warranties.
Moveable Assets The Project Company is required to take away the movable contracted assets, except the essential moveable contracted assets, in the event of normal transfer or early termination of this agreement, at its own cost within a period of 12 months.
Treatment and Valuation Approach Normal transfer The immovable and essential moveable contracted assets shall be transferred to Port Authority at the end of the term of this agreement for consideration equivalent to the depreciated replacement value (DRV) of the contracted assets.
Port Authority Default and Change in Law Depreciated replacement value of immovable and essential moveable contracted assets will be compensated as follows: A solarium of 30 per cent of DRV if in the case of Port Authority default occurs any time during the first 15 years from the effective date; A solarium of 20 per cent of DRV if in the case of Port Authority default occurs any time from the beginning of the 16th year till the end of the 25th year; No solarium if Port Authority default occurs after the 25th year of Project Company default; 50 per cent of depreciated historical cost of immovable contracted assets and essential moveable contracted assets.
Compensation in the Event of Termination For normal transfer or on termination of this agreement as a result of Port Authority default, change in law, or Project Company default, as the case may be, the aggregate of the fair value compensation payable in respect of each asset shall be defined to be the 'first estimate of compensation'. The compensation formula is: dues outstanding to the Port Authority; damages suffered by the Port Authority and attributable to the Project Company; insurance proceeds received/receivable; any compensation receivable from any body and/or any amount payable by the central/state government; any other sum deemed appropriate by the appraising team.
Assignment and Transfer of Agreement The right of the lenders, upon assignment of the rights and obligations under the agreement or interest in the assets, to substitute the Project Company is subject to the approval of the Port Authority.
Dispute Resolution All disputes arising shall be submitted to arbitration and shall be finally determined in accordance with the provisions of the local arbitration law.
End of Case 2 QUESTIONS?