the transaction to be well-structured, with lenders enjoying the benefits of a comprehensive
security package, but noted that there was no treaty or other agreement between the United
States and Colombia for the reciprocal enforcement of judgements. Although New York law
governs the financing documents, the exercise of remedies by the collateral agent in the event
of a default would be likely to require litigation in the Colombian courts.
Lessons learned
The picture as of 1998
First, an infrastructure project such as a power plant that generates local-currency revenues
in a developing country can be financed ‘out of the box’ with bonds under the right circum-
stances. In this case, the sponsors were of top quality; Colombia at that time had an invest-
ment-grade credit rating; and the alternate standby facility and debt service reserve were
additional financing tools to bridge timing problems.
Second, it is more efficient to provide a bond issue and a standby facility out of the same
financial institution.
Third, debt-service reserve facilities require careful risk analysis. Issues include:
- whether the drawdowns under such facilities are subordinated to amounts originally
drawn down under a bond indenture or term loan agreement; and - whether the pricing of those drawdowns should be comparable to subordinated debt, or
senior debt, or somewhere in between.
Thomas E. Lake noted that in the subordination ‘waterfall’ interest payments and fees rank
pari passuwith senior debt. If a payment under a debt-service reserve facility is delayed, the
lenders have the right to raise the status of those overdue obligations to the senior debt level.
In Lake’s opinion it is important for bankers to understand and properly explain these struc-
tures. Generally, for a debt-service reserve facility sponsors are willing to pay a slight spread
over the rate for their senior debt, but they try to avoid paying subordinated debt prices for
such facilities.
Events since 1998
In April 1999, shortly before commercial operation was scheduled to begin, Duff & Phelps
downgraded the rating of the US$165 million TermoEmcali Funding Corporation senior
secured notes from ‘BBB’ to ‘BB+’, reflecting a similar rating downgrade of Emcali. The
agency explained that the offtake risk of the TermoEmcali PPA was that of Emcali and there-
fore that TermoEmcali’s credit rating was constrained by that of Emcali. Recent poor eco-
nomic performance in Colombia, and particularly in Cali, had put pressure on Emcali’s
operating performance and liquidity, reducing the company’s ability to meet monthly debt
maturities and make timely payments to its energy suppliers. The agency saw an increasing
probability that Emcali would have to restructure its bank debt and payments due to its fuel
suppliers. Standard & Poor’s downgraded TermoEmcali from ‘BBB-’ to ‘BB’ in May, for
similar reasons.
A series of events in early 1999, including problems with the combustion chamber,
delayed the beginning of commercial operations, scheduled for April. In May Emcali claimed
POWER PLANT