Yearbook 2004 Project Finance International
Pusan Newport
The Pusan Newport Co project has offered a few firsts since the South Korean government introduced the private participation in infrastructure scheme. The project is a marine container terminal and logistics hub being constructed in Busan, one of the busiest cities in South Korea.
Located at the southeastern section of the country, it has one of the busiest ports in the world, and construction of the new port will help handle the increasing traffic volume, especially between China and Japan.
PNC is a joint-venture company formed by major Korean conglomerates which are led by the Samsung Group. CSX World Terminals of the USA is the foreign partner and the operator once construction is completed.
The project comprises Phase 1-1 and Phase 1-2. Phase 1-1 is divided into two sub-phases and each sub-phase consists of the construction of the operation of a marine container terminal having three berths. Phase 1-1 also involves the construction and operation of a multipurpose support area. The estimated completion date for the first three berths is 2005 and they are expected to be operational by 2006. The second three berths are scheduled to be operational by early 2007. Three additional berths may be constructed as market demands dictate under Phase 1-2.
Total project cost is estimated at US$1.2bn. This comprises a US$250m equity from sponsors and the government, through the Korea Container Terminal Authority, is also a taking a stake with the project development funding of Won 317bn(US$250m). In addition, there is a contingent equity of US$10m which may only be drawn upon after base equity has been fully contributed and all senior debt has been drawn. The contingent equity may take the form of subordinated loans or subscription for shares in PNC. There is also a contingent debt service support of US&45.5m in the form of subordinated shareholder loans or subscription for shares in PNC.
The ratio of senior debt to equity will be approximately 1:1. The debt portion is a limited recourse facility that is made up of a 13 year offshore US$276m and an onshore-year Won245bn, totaling about US$460m. The offshore mandated lead arrangers are Bank of Tokyo-Mitsubishi, Credit Lyonnais, DZ Bank, Hypo Vereinsbank and IntesaBci. They were joined by lead arrangers KfW, KBC Bank and WestLB; arranger NordLB and lead managers Dexia and SMBC.
The onshore tranche of Won245bn has been coordinated by Kookmin Bank and Samsung Life Insurance. The participants in this tranche are Pusan Bank and Samsung Fire and Marine Corp. Financial advisers were Babcock & Brown and Kookmin Bank.
Indeed the response to the syndication had been favourable. There is a significant
participation from offshore lenders, and not many PPI projects enjoy this.
The project being implemented on a build, transfer and operate basis under a 50-year concession period from the commercial operation date expected to take place in 2007. While PPI projects feature a minimum revenue guarantee from the government, sponsors of PNC have decided to throw out that feature. While there is advantage to it as the government would fill the gap up to 90% of targeted revenues when there is shortfall, there is also a limit on total potential return on the project. PNC would have to remit to the government revenues that exceed 110% of projected revenues. However, extensive modeling and surveys, sponsors decided the price for the MRG was too high. Thus, this was removed after almost a year of negotiations on the deal support structure with the government. The Pusan port is the first to drop the government’s minimum revenue guarantee.
In addition to accepting full market risk, the offshore lenders were prepared to lend without political risk cover for a 13-year tenor. The deal also does not carry the support of political risk insurance, thus lenders are taking a full market risk.
Also, the sponsor support package dose not include a completion guarantee and that, instead, PNC and its lenders would rely heavily on a bankable turnkey construction contract. The cost overrun support provided by the sponsors is, in comparison to the financing as a whole, relatively small. The contingent debt service support provided by the sponsors is also limited, and the obligation will be released once certain DSCR thresholds have been met, unlike the other projects in South Korea.
* Lee & Ko represented Kookmin Bank and Samsung Life Insurance Co., Ltd. as the lead arrangers for the lenders and other banks and financial institutions who participated in this project as the lenders.