ProjectFinance andGuarantees January 1999 ProjectFinanceandGuaranteesDepartment ResourceMobilizationandCofinancingVicePresidency Thailand: EGAT paves the way World Bank Guarantees EGAT Bonds World Bank helps Thailand raise money in In consequence, international credit rating Crisis agencies downgraded Thailand's credit ratings on several occasions since early 1997. At the "The bond structure On October 6, 1998, the Electricity Generating time of the bond issue, Thailand was assigned definitely opens a new Authority of Thailand (EGAT) launched its first ratings by Moody's of Ba1 for its long-term, avenue to the market. bond issue in the US144A/Euro-Reg. S markets foreign currency debt, and B1 for its foreign since the Asian financial crisis erupted a year There is something currency bank deposits. Thailand's ratings by earlier. The bonds were structured for a maturity S&P were BBB- for its long-term, foreign new to consider " of 10 years and issued with a fixed coupon of 7 currency debt with a negative overall outlook on IFR percent. They were priced at 285 basis points foreign currency debt. Additionally, S&P had a over the US Treasuries (due 2008) which were local currency rating on Thailand's long-term trading at historical lows (4.261 percent as of debt of A- with a negative outlook. launch). In addition to a non-accelerable guarantee of the issue's principal, the World EGAT -- The Issuer Bank also guaranteed a single coupon payment on a rolling basis for the first time. Although EGAT is Thailand's national electricity previously envisaged, this type of coverage had generating and transmission company. It was not been structured in any of the earlier World formed in May 1969, as a state enterprise Bank guaranteed bond issues or syndicated wholly-owned by the Kingdom. Specifically, loans. The bond issue was rated A- by Standard EGAT is responsible for (i) constructing, and Poor's Ratings Services (''S&P'') and A3 by operating and maintaining its own power Moody's Investors Service (Moody's); three and generating facilities; (ii) purchasing power from four notches above that of Thailand's long-term small power producers ("SPPs") and foreign currency rating respectively. independent power producers ("IPPs") in the private sector; (iii) establishing and maintaining Thailand Amidst the Crisis the national transmission line grids in the "`Model'Thai Bond principal geographic regions of Thailand; and In early 1997, Thailand began to experience (iv) selling the bulk of the power generated and backed by the World Bank adverse financial and economic developments. purchased by it to the Metropolitan Electricity is a hit " The Bank of Thailand attempted to defend its Authority and the Provincial Electricity Authority, International Herald currency, the Baht against speculative attacks state enterprises wholly-owned by the through significant sales of foreign currency Tribune Government which redistribute electrical power reserves. This, along with the subsequent from EGAT to end-users throughout Thailand, flotation of the Baht led to a rapid depreciation with a view to ensuring a consistent and of the currency, a severe reduction of adequate supply of electrical power within international reserves, and high domestic Thailand. interest rates. EGAT's Urgent Need for Financing These events resulted in increased inflationary pressure, a significant slowdown of domestic The currency crisis in Thailand has had an demand and production and a sharp rise in the adverse impact on the financial health of the level of non-performing financial assets. This in Thai electricity utilities. Before the crisis, turn resulted in real or expected EGAT's financial position was sound. Following undercapitalization of financial institutions and the crisis (with the exchange rate going up from the closure or public sector takeover of several about Baht 25/US$ to more than Baht 50/US$ financial institutions. All of these developments and thereafter stabilizing at around Baht led to a decline in available liquidity and 40/US$), EGAT suffered heavy foreign damaged the effectiveness of the financial exchange losses. The Government adjusted the intermediation system, thus impeding the ability tariff from April 1, 1998 to offset partially the of Thailand to maintain export-driven growth. impact of devaluation. Consequently, there was a need to improve EGAT's financial position and to remove the serious constraints EGAT faced ProjectFinance andGuarantees in meeting the financing requirements of its following the Bank's payment, EGAT and the January 1999 ongoing investment program. The financing gap sovereign are required to reimburse the Bank. was further aggravated by EGAT's inability to As long as this reimbursement is made on time, access long term financing in the capital the Bank's guarantee coverage for another markets because of perceived higher country coupon payment would continue through the risk, the Asian crisis and the collapse of the maturity of the Bonds. Otherwise, coverage of domestic debt market. The Government, in additional coupon payments would cease. The consultation with the Bank, decided that part of Bank would continue, however, to the financial resources required for EGAT unconditionally guarantee the principal at should be mobilized from the capital markets maturity. and not just by continuing the Bank lending program. How did the Guarantee benefit EGAT? In consultation with the Bank, EGAT estimated Generally, World Bank partial credit guarantees that it's investment program over FY 1998-2000 encourage extension of maturity by covering a part of the financing -- usually the latter Electricity Generating could be partially financed with support from the maturities. In the case of EGAT, the guarantee Authority of Thailand World Bank in the form of two successive bond issues of about US$ 300 million each. The benefited EGAT by obtaining market financing (EGAT) proceeds of the first bond issue was to be made with reasonable spread and maturity and helped available to EGAT no later than set a benchmark for its future bond operations Amount: US$300m September/October 1998 in order to meet by re-introducing EGAT to the capital markets. Guarantor: World Bank (principal and planned expenditures. The PCG operation also helped in exposing single rolling coupon guarantee); Kingdom EGAT to the rigors of market discipline, and of Thailand (coupon guarantee) could facilitate its commercialization and Maturity: 10yrs (due October 14 2008) As a precondition for the Bank's support for Coupon: 7% each of the two bond issues, EGAT and the privatization process. In addition, after the Asian Issue and reoffer price: 99.215 Government agreed to a number of steps to crisis and following Russia's financial troubles in Reoffer yield: 7.111% improve the financial viability of EGAT and August 1998, it was practically impossible for Spread: 285bp over the US Treasury due EGAT or any other Asian issuer to go to the 2008 efficiency of the power sector in Thailand. capital markets on reasonable terms for any Fees: 55bp (20bp management and underwriting, 35bp selling) The World Bank Guarantee maturity. The operation enabled EGAT to extend Payment date: octobner 14 1998 its available financing considerably beyond Listing: Luxembourg To meet EGAT's urgent funding need, a 10-year current market terms to 10 years, with an Governing Law: New York bond issue was structured with the World Bank extended grace period through a bullet Selling Restrictions: 144a, Reg S covering the principal and a single coupon structure. The partial credit guarantee for EGAT Outstanding rating: A3 (Moody's), A- payment on a rolling basis. Originally, these would result in exposure for the Bank of about (S&P) Market sector: Euro/144a Bonds were to carry a principal-only guarantee 65% in present value terms, thereby leveraging Lead manager: ABN Amro (books) from the Bank and a Thai Government Bank resources as compared to a Bank loan. Co-leads: Barclays Capital, Goldman guarantee on the coupons. The sudden The guarantee operation also provides capital to Sachs, Lehman Brothers deterioration of the Bond markets in August sustain EGAT's investment program, thereby Co-managers: Caboto-Gruppo Intesa, J.P 1998, and the resulting sharp widening of allowing EGAT to complete its generation Morgan, LB Sachsen Giro emerging market spreads made it necessary for facilities that will make EGAT more attractive for the World Bank to extend its partial coverage to subsequent privatization. coupons in order for EGAT to gain access to the financial markets and encourage the largest possible pool of investors to purchase an Asian paper at a reasonable yield. With the additional coupon guarantee coverage, the issue was able to achieve market distinction by piercing the sovereign credit rating ceiling and becoming the For more information on the EGAT bond Issue, first Asian borrower to return to the capital please contact: markets since Korea's April 1998 global issue. The A-/A3 rated issue was designed to reassure Suman Babbar, Lead Specialist, PFG investors that should EGAT ­ or the Kingdom of Tel: (202) 473-2029 Thailand which is guaranteeing the coupon Fax: (202) 477-0218 payments ­ suffer from a short-term liquidity crisis, the World Bank will step in and guarantee Sbabbar@worldbank.org the coupon payment. In effect, the "single rolling coupon guarantee" provides a built-in liquidity feature for the issuer and the Kingdom of Thailand. Under this structure, the Kingdom of Thailand would be the primary guarantor for the payment of scheduled coupons. In case of default by EGAT and the Sovereign in the payment of a coupon, the Bank would make the coupon payment to the bondholders. Within 60 days ProjectFinance andGuarantees January 1999 Electricity Generating Authority of Thailand US$ 300 million 7.0% Guaranteed Bonds Due October 2008 Structure of the Bonds Non-accelerable guarantee of Principal $300 m PV=62% PV=3% Conditional Rolling Guarantee of a Single Coupon 0 10 yrs. * Discount rate: Bank's Cost of Capital as of October 6, 1998 Market Distribution Fund U.K. France Austria Manager 6% 16% Ireland 1% 1% 26% Italy 8% Insurance U.S. 31% Companies Germany 30% 23% Banks Asia Switzerland 44% 13% 1% To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows, please contact Andres Londono at (202) 473-2326, or by email at alondono1@worldbank.org