Intercreditor issues
Some people say that because of intercreditor disputes it is difficult to arrange a deal with
banks, bondholders and ECAs at the same time. While admitting that hard work was required,
Jonathan D. Bram of CS First Boston recalls that his firm, Chase, OPIC and the ECAs were
able to reach agreement simply by sitting down together and patiently working out each issue.
First Boston developed a covenant package for the bondholders that is typical of a bond deal
and not as rigorous as in many commercial loans. The indenture events of default are major
events such as nonpayment of principal or interest, or bankruptcy. If there is a default under
the bank or the ECA agreements the bondholders can rely on cross-acceleration.
Credit rating
Standard & Poor’s gave the US$180 million of 9.75 per cent bonds privately placed under
Rule 144A a ‘BBB’ rating, the same as Indonesia’s sovereign rating at that time. The prima-
ry risk factors cited by Standard & Poor’s were as listed below.
- Three years of construction remained before commercial operation of the project began;
the project’s coal supply involved a succession of transport modes and transfers, with the
possibility of fuel supply disruption. - Creditor rights and enforcement were subject to uncertainty, a lack of precedent and
interpretative differences under Indonesian law.
•With the bond principal representing only 10 per cent of the US$1.8 billion debt out-
standing, bondholders’ rights, remedies and abilities to take action would be controlled
primarily by the project’s bank and agency lenders, not the bondholders themselves.
Offsetting these risks, the rating agency cited a substantial number of strengths.
- The project helped to fulfil a strategic need for increased generating capacity in
Indonesia. - The plant design incorporated proven, pulverised coal-fired, steam turbine and coal-han-
dling technologies. - Project construction was to be under a turnkey, lump-sum contract with a highly quali-
fied consortium. - The PPA with PLN appeared at the time to be well-structured to hedge inflation, fuel
price and regulatory risks; it contained provisions that allocate currency risk to PLN; and
it provided for the full recovery of project capital and operating costs, including debt ser-
vice. - PLN’s PPA obligations benefited from a letter of support issued by the Government of
the Republic of Indonesia. - Established project sponsors were contributing US$680 million of equity and subordi-
nated debt, 27 per cent of the project’s capital, and were obliged to provide up to US$300
million in overrun commitments.
Lessons learned as of 1996
Dealing across cultures, across time zones and under time pressures made this project a par-
PAITON 1, INDONESIA