banking firm risks doing a lot of work for minimal fees. Alternatively, the client may choose
a universal bank to underwrite a facility that provides for a bond financing or a commercial
loan, depending on market conditions. Once the universal bank receives the mandate, it
knows that it will be compensated in one way or the other for its analysis, due diligence and
other work. In the past the problem with this approach has been that few financial institutions
have had really good capabilities in both commercial and investment banking, but that has
begun to change as large commercial banks expand their investment banking groups and buy
or merge with investment banking firms.
The bonds were oversubscribed. Lake saw several factors that made the bonds attractive
to institutional investors. Investors were looking for attractive ‘alternative investment’ oppor-
tunities. The TermoEmcali bonds were investment grade, but also with a good spread. The
engineering and contract structure of the project was sound. Emcali was a relatively strong
credit. Colombia had an investment-grade credit rating and, despite recent problems with
drugs, terrorism and political corruption, one of the strongest, best managed economies in
Latin America.
Credit analysis
Debt-service coverage was projected to be 1.62 times average and 1.54 times minimum. The
base case assumes a seventeen-and-three-quarter-year bond tenor (12.61-year average life) and
a 318 bps spread over US treasuries, equating to an all-in fixed rate of 9.625 per cent. The PPA
largely insulates the project from interest rate risk, since the capacity payment is adjusted to
compensate for interest rate fluctuations within a range of 9.5 to 12 per cent. With the sale of
the 144A notes, Emcali effectively locked in the passthrough cost of interest. The Colombian
peso devaluation and inflation rates were assumed to be 15 and 19 per cent respectively.
Credit rating
At the time the bonds were issued, TermoEmcali was rated ‘BBB’ by Duff & Phelps and
‘BBB-’ by Standard & Poor’s, whose rating for the Republic of Colombia at that time was
‘BBB-’. Lake observed that the rating for a domestic infrastructure project such as
TermoEmcali, with revenues collected in local currency, seldom pierced the sovereign ceiling.
The rating was based on the stability of cash flow to be derived from the power plant’s
sale of capacity and energy to Emcali, a corporation then rated ‘BBB-’ by Standard & Poor’s.
The agency stated that the rating was highly dependent on Emcali’s ability and willingness to
honour its obligations. As of September 1997 the agency concluded that construction risk
detracted from the credit quality of the transaction. Although liquidated damages of 40 per cent
of the EPC contract amount, a US$10 million contingency built into the contract budget and a
US$5.8 million delay in opening insurance were protective features for bondholders, the
agency believed that the 24-month construction time frame under the PPA could be tight if
force majeureevents or other scheduling problems occurred. It also noted, however, the addi-
tional 12-month cushion that could be obtained through payments for a schedule extension.
Standard & Poor’s concluded that, as long as the plant was constructed properly and
achieved startup, Stewart & Stevenson should be able to operate and maintain the plant with
little difficulty, and therefore that operating risks associated with the project were negligible.
It also concluded that fuel risk, borne primarily by Emcali, was minimal. The agency found
TERMOEMCALI, COLOMBIA