Finally, a bond with a 15-year maturity and a 12-year average life was developed for emerg-
ing-market investors who already had experience with project finance investments and were
willing to stretch for some additional yield.
The US$75 million Asian tranche looked likely to be an easy sell, but it turned out to be
the most difficult because a corruption scandal occurred in South Korea close to the time of
the offering and many Asian institutions shied away from the bonds because of the Hanbo
exposure. When this happened the underwriters had to do additional due diligence, change
their disclosure and print new prospectuses. In the end a large part of this tranche was sold to
institutional investors in the United States.
During the 10-day road show in November 1994 Credit Suisse First Boston held meetings
with 48 investors, typically investment-grade buyers, high-yield buyers and emerging-market
buyers. Twenty-nine investors from 13 cities participated in the transaction. About 50 per cent
of the securities were sold in one-to-one meetings, about 30 per cent were sold at group func-
tions such as lunches and breakfasts, and about 20 per cent were sold to investors with which
the company held no meeting. The amounts purchased by investors ranged from US$600,000
to US$50 million. Jonathan D. Bram, Managing Director, Project & Lease Finance, Credit
Suisse First Boston, recalls that people took longer to analyse this deal than they do with most
projects. Because of the work that CalEnergy did the entire financing effort took just under three
months and could have taken even less time if the scandal had not erupted in South Korea.
Initial credit rating
Standard & Poor’s initially rated all three of the tranches ‘BB’. The agency cited three pri-
mary risks:
- construction risks related to boring 23 kilometres of tunnels in a remote region of the
Philippines over a four-year period; - the credit of the NIA, which was a function of the sovereign credit; and
- the sponsors’ lack of experience in operating hydroelectric and irrigation projects.
The agency cited several strengths that, in its view, offset these risks:
- the liquidated damage provisions and the letter of credit;
- the Philippine government’s support of the offtake purchaser’s contractual obligations;
- the strategic importance of the project to the Philippine government;
- the negligible risk of interruptions to the flow of water from the rivers; and
- projected debt service coverage ratios averaging 1.9 times over the life of the project.
Events since 1996
On 24 January 1997 Standard & Poor’s put CE Casecnan’s BB-rated senior secured debt on
CreditWatch with negative implications because Hanbo Steel Company in South Korea, the
guarantor of Hanbo Construction and Engineering Company’s obligations under the EPC
contract, had been forced into bankruptcy by its creditor banks. Although Hanbo Steel had
failed to make a loan payment, the basic issue was a battle for control of the company.
Standard & Poor’s noted that the implications of Hanbo Steel’s insolvency were unclear, and
CASECNAN WATER & ENERGY COMPANY, THE PHILIPPINES