Drivers and trends
Export credit agency financing of
Wärtsilä power plants By Nomi Ahmad, Vice President, Finance
Wärtsilä Development & Financial Services, Inc.
Manaus, Brazil, a 158 MW baseload power plant.
or many, the past decade or experienced economic meltdown, are not equitably structured, or have
F so in the power industry has
been one incredible party –
the early 1990s saw the
huge influx of power investors
into Asia, IPPs emerged as a
‘Enronitis’ hit the US market and US
players, September 11 rocked the
whole world, oil and gas prices surged,
merchant plants collapsed, and the
uncertainty of war and terrorism have all
uncovered political risks in emerging
At the same time, large developers,
mostly the US energy companies, have
suffered strong setbacks in their
phenomena in Latin America, had a slowdown effect on the global aggressive international strategies. Their
qualifying facilities were being economies. credit ratings are low and, as sponsors
developed in abundance in the of power projects, their involvement
USA and elsewhere. If you were Trends in power financing does not provide much comfort to
‘hip’ in the energy business, you These phenomena have also affected financiers.
were developing merchant the ability to finance new power plants. What will it take for banks to finance
power plants with a palatial Many banks have experienced trouble power projects in emerging markets?
trading floor. assets, and few have found themselves With the involvement of Export Credit
in the asset management business. Agencies (ECA) to cover political and
Then the inevitable occurred – the party Generally, though, banks are commercial risk, banks are quite keen
ended, followed by ‘el grande increasingly reluctant to lend to power to finance power projects in emerging
hangover’. The Asian crisis struck, projects that do not have long-term markets. The ECA involvement not only
economies in Latin America power purchase agreements (PPAs), places the bank in a better negotiating
14 Energy News – Issue 17
Fig. 1 Typical Finnvera financing
EPC Contract structure.
AAA Guarantee for
85% of EPC Value
Road to Financial Close
Preliminary Structure Transaction Indicative Finnvera FIDE
Project Analysis to be Bankable Offer Application Application
Analysis of Project Finnvera Credit Term Sheet Satisfy Conditions
Site Visit Approval Approval Negotiation Precedent
Documentation of Funds
Fig. 2 Typical Finnvera financing.
position in the event of a crisis (the Paris with a vendor stake in the project, either competitive environment for exporters
Club) but also encourages both foreign as a shareholder or as an operator. with regard to financing assistance from
corporations and sovereigns to behave their respective governments. Wärtsilä
more responsibly and honour their Anatomy of an ECA financing also has manufacturing/assembly
repayment obligations. ECAs are established by both facilities in Italy and Spain and hence
‘Umbrella’ protection from B-Loans governments and the private sector for has relationships with SACE and
through multilaterals such as the IFC, the promotion of exports. For example, CESCE.
IDB and EBRD offer another avenue for in the case of Finland where most of ECAs provide comprehensive
banks to gain comfort in financing Wärtsilä’s manufacturing base is guarantees to a funding bank for up to
power projects in emerging markets. located, Finnvera plc (www.finnvera.fi) is 85% of the EPC Contract amount. The
B-Loans have been successfully utilized the Finnish ECA and it supports ECA guarantee will typically provide the
in Pakistan, Indonesia, Honduras, Wärtsilä’s sales by financing power funding bank with 90% political risk and
Jamaica and Russia and strongly equipment in countries where local 85% commercial risk coverage. Some
reduce political, regulatory and currency financing markets are not adequately ECAs might even consider a 100%
transferability risks. developed. comprehensive cover on a case by
Lastly financiers get some level of EU rules require that all European case basis. The bank assumes the
comfort from co-financing with other ECAs operate under the OECD residual risk, i.e. 10% political risk and
development banks such as DEG, Consensus Guidelines. These have 15% commercial risk. The funding bank
FMO, FinnFund, NIB or OPIC, coupled been established to provide an even enters into a loan agreement and
Energy News – Issue 17 15
Drivers and trends
security documentation with the that they finance conform to both n Pari-passu treatment with other
borrower, and payments are disbursed applicable World Bank and local creditors.
directly to Wärtsilä under the terms of environmental guidelines, establish an
the EPC Contract. environmental impact study and meet Project finance concerns
The guarantee from the ECA not only corporate responsibility criteria. n Strong sponsors with industry
allows the bank to fund the loan and ECAs can participate in financing experience and on-going financial
assume the residual risk. The bank can through a series of different structures: interest to support the project over its
also price the loan very competitively as a) Corporate borrowing, where the lifetime.
the ECA-covered portion is virtually Wärtsilä customer is the direct borrower n As a general rule: no market risk on
risk-free and therefore the bank margin b) Project borrowing, where the fuel supply or on the output.
typically is only for the uncovered portion. borrower is a special-purpose company n Use of well proven technology.
The ECA is paid a flat upfront fee for having contracts with credit worthy n Clarity of source of repayment, in
providing the comprehensive guarantee. parties, and particular creditworthy off-takers.
The flat fee varies depending on the risk c) Bank guarantees or on-lending, n PPAs priced according to prevailing
categorization of the host country, the where the borrower is a financial market conditions since recent history
structure of the financing and its tenor institution who, in turn, ‘on-lends’ the has seen the renegotiation of existing
(when the payments fall due). funds to a corporate borrower or into a PPAs in both emerging markets and
Uses of funds covered by the ECA project finance structure. industrialized countries.
guarantee include up to 85% of the n Stable legal, tax and regulatory
EPC Contract amount, 85% of the ECA requirements environment.
interest during construction (IDC)1 and, ECA requirements for providing a
on a case by case basis, 85% of the comprehensive guarantee vary Bank risk sharing
ECA flat fee. The borrower is required to depending on the type of risk, e.g. n Risk-taking on local banks, either for
pay a downpayment of 15% of the EPC Corporate Credit, Bank Guarantee bank-guaranteed transactions or
Contract amount, 15% of the IDC and (on-lending) or Project Finance. bank-to-bank financing with on-lending
the ECA flat fee, and all of the funding to the end buyer is generally the best
bank’s fees, legal and closing costs. Corporate finance concerns risk mitigation alternative. Commercial
With the ECA guarantees, banks are n Significant presence of the borrower banks have a network of correspondent
able to provide construction financing within its industry or sector. banks all over the world. These follow
and term financing up to 10-12 years n Access to diversified sources of the credit rating of those counterparties
depending on how long a tenor the ECA funding. on a routine basis for the trade finance
is willing to support. ECAs or their n Stable and experienced business, and are therefore more
affiliates are also able to offer management. comfortable with bank risk than
interest-rate equalization support by n Clear and achievable strategy. corporate or project risk. This is also
offering a fixed CIRR rate – this allows n Regular financial information and valid for ECAs.
borrowers to lock in a fixed interest rate transparent accounting practices. n The ownership, capitalization, asset
for the term of the loan when the EPC n Sound capital and debt structure. quality and profitability of a bank are the
Contract is signed. n Stable and identifiable cashflows in main credit risk elements.
ECAs require that the power projects relation to debt service. n The possibility of support from the
16 Energy News – Issue 17
Nordea Bank Finland plc, one of
Wärtsilä’s main relationship banks, is
providing an 87 million USD loan to
CABEI backed by a comprehensive
guarantee from Finnvera.
Pavana II, an 80 MW Wärtsilä baseload power plant. The bank-to-bank lending structure
with the sole purpose of on-lending to
Lufussa enabled Lufussa to access high
ECA coverage and a reasonable rate.
state in case of financial crisis is also an power purchase agreement (PPA) by
Pavana III will be the largest power
important issue for risk analysis. ENEE, the state-owned electricity utility
plant in Honduras, the largest
of Honduras. The PPA is supported by
transaction that CABEI has made in the
Lufussa – an ECA success story a 267 MW heavy fuel oil power plant
private sector, and the largest
Luz y Fuerza de San Lorenzo S.A. de (Pavana III) also being built by Wärtsilä
transaction Finnvera has completed in
C.V. (Lufussa), an existing Wärtsilä (see the previous article).
the power sector. n
customer, already operating an 80 MW The Central American Bank for
Wärtsilä power plant since 1999 Economic Integration (CABEI) is Footnote:
1) In the case of Project Financing.
(Pavana II), was awarded a 210 MW providing senior debt to the project.
New Sri Lanka order for Wärtsilä
n August 2003 Wärtsilä received a generating sets will be transported on capital Colombo before making a beach
I contract to supply a 100 MW turnkey
power plant to the Heladhanavi
project in Puttalam, Sri Lanka. The
customer for the plant is Lakdhanavi, an
Independent Power Producer (IPP)
river barges north from Sri Lanka’s landing, because the local roads are not
capable of carrying the heavy engines.
Wärtsilä has a strong track record
with Lakdhanavi, having supplied a 27
MW power plant to the company six
company. The energy will be distributed Puttalam years ago. This installation has been
to the national grid under a power successfully operated by the
purchase agreement for 10 years. customer’s own experienced personnel.
Wärtsilä will deliver all the equipment, Wärtsilä was able to work closely
including six Wärtsilä 18V46 diesel with Lakdhanavi from day one to make
generating sets running on heavy fuel Sri Lanka the tariff bid competitive. The
oil, plus auxiliaries, switchyard and equipment delivery will be made at the
11/132 kV power transformers, as well end of the year, with commercial
as the power house. operation expected to begin in August
Although the plant construction will 2004. n
be a straightforward project, the delivery
itself will be challenging. The diesel
Energy News – Issue 17 17