35886 3URMHFW )LQDQFH DQG *XDUDQWHHV September 1995 Private Sector and Infrastructure Vice Presidency · Project Finance Group World Bank Guarantees Broaden Capital Market Access The National Power Corporation (Philippines) and Jordan Telecommunications Corporation bond issues The World Bank partial credit guarantee is a tool typical infrastructure project. The World Bank which can help governments and government guarantee addresses both these problems of The US 144A market entities access long-term financing on developing country borrowers by stretching international credit (loan) and capital (bond) maturity and facilitating market access. markets. Over the past year, the Bank's Rule 144A, passed by the US guarantee program has supported two bond NPC Bond Issue Securities and Exchange issues for state utilities: a 15-year, US$100 With the support of the Bank's guarantee Commission (SEC) in 1990, established a new market for million issue by the Philippines' National Power program, NPC was able to achieve a 15-year stocks and bonds in the US. The Corporation (NPC), launched in July 1994 and a maturity, one-third greater than the longest rule allows US and foreign issuers 7-year, US$50 million issue by Jordan maturity previously attained by an issue from a to issue securities which can be Telecommunications Corporation (TCC), Philippine sovereign entity (10 years). The 15- bought and traded only by scheduled for launch this month. (Another Bank- year maturity was obtained at extremely favorable institutional investors (such as guaranteed bond issue, a 10-year, US$200 million pricing of 250 basis points (2.5%) over the yield of insurance companies or pension funds) who have securities issue by Hungary's State Development Institute, US treasuries of the same maturity. This pricing holdings of at least $100 million. was launched in August 1990.) The maturity and compares favorably with that of previous Under 144A, issuers do not have pricing obtained with the support of the Bank's Philippine issues of much shorter maturities. The to provide the extensive financial guarantee program are, for both issues, bonds were successfully placed just seven disclosure or undergo the lengthy significantly better than those which could be months after the Philippines completed its second approval process with the SEC as achieved without the Bank's support. Brady commercial debt restructuring. World Bank they would for the public market. As an indication of the size of the support was structured as a put option for 144A market, over one-third of Putting the NPC and TCC issues into a global principal repayment at maturity. (The put option total US corporate borrowing is in capital market context, developing country allows bondholders to present or "put" their bonds the 144A market. It is a major borrowers took advantage of historically-low to the World Bank at maturity for payment of source of long-term capital--144A interest rates and launched a record number of principal.) bond issues typically have longer maturities than Eurobond issues. bonds in 1992-1993. One might ask why, then, The issue, underwritten by Morgan Stanley, with this record borrowing by developing tapped the Eurobond and US 144A markets (it is countries, is there a need for credit enhancement? the first Bank-guaranteed transaction to tap the The answer is that this record borrowing was, in 144A market). It was primarily placed in the 144A fact, dominated by issues in a few countries in market to access the longer maturities available in Latin America, Asia and Europe. Also, the that market (compared with the Euromarkets) as weighted-average maturity of new issues during well as introduce the Philippines and NPC to a 1 this period was only about six years --not nearly new investor base consisting largely of long enough to fit into the revenue structure of a institutional investors. 1 Private Market Financing for Developing Countries. IMF, March 1995. Page 14 3URMHFW )LQDQFH DQG *XDUDQWHHV Leyte-Luzon Geothermal Project · First guarantee issued for a project in the September 1995 Middle East. Peak electric power demand in the Philippines is Prior to the TCC issue, Jordan had been expected to double by the year 2000 to 8.3 MW. absent from the international financial markets Proceeds from the NPC bond issue, in parallel since 1990, when it arranged aircraft financing for with a Bank investment loan, are being used to Royal Jordanian Airlines. Following its Brady debt help finance the US$1.3 billion Leyte-Luzon rescheduling in December 1993, Jordan was Benefits of World Bank Geothermal Power Project which is part of the eager to re-establish access to international Guarantees Government's program to increase capacity to financial markets. With the Bank's guarantee, it meet this demand. was able to obtain seven-year financing--the The project is being implemented by NPC, longest maturity obtained to date for a Middle- World Bank guarantees (both Philippine National Oil Company (PNOC) and the East borrower in the bond markets. It is important partial credit and partial risk) Electricity Development Corporation, all state- to note that the TCC issue comes just nine provide borrowers with several owned companies, and has two components: months after the Mexican financial crisis of last benefits in addition to market (i) expansion of the Leyte geothermal field and (ii) December, which effectively curtailed new issues access. These include longer construction of converter stations and related by developing country borrowers until June of this maturity, lower cost of financing and tremendous flexibility in terms transmission lines and equipment. Capacity of year. of market, instrument (loan or the Leyte geothermal field will be expanded to 640 An innovative feature of the Bank's guarantee bond), currency and interest rate MW (from 200 MW) by the project. When is that it is designed to enable Jordan to tap (fixed or floating). completed, the project will enable the Philippines domestic sources of foreign currency, thereby to replace coal- and oil-fired capacity with mobilizing domestic savings for the country's environmentally-superior geothermal power. In infrastructure development. These savings are in addition to expanding capacity, the project will the form of deposits held by Jordanians either better integrate the Leyte field into the national working in the Gulf or who returned to Jordan power grid. following the Gulf War. This large pool of foreign currency (estimated at US$3 billion) is currently Financing Plan: placed by Jordanian banks in the international Leyte-Luzon Goethermal money markets (aside from the required 35% Power Project (US$m) which must be deposited with the Central Bank). The bulk of these deposits are short term, placed Power Transmission Component on a one-month, roll-over basis and yield a World Bank Loans 240 relatively low rate of return. Bonds w/ World Bank Put 100 J-Exim 170 The structure of TCC issue marks a milestone BITS1 / Grant 39 for the Bank in terms of risk sharing. It is the first GEF2 / Grant 30 Bank-guaranteed financing for which there was no PNOC/NPC Internal Cash 134 Jordanian sovereign guarantee to bondholders on Power Generation Component either principal or interest payments. This means BOT Contract 240 investors, though covered by the Bank's TOTAL 1,333 guarantee on principal repayment, are assuming TCC risk on the interest payments--thereby 1BITS: Agency for Technical and Economic Cooperation (Sweden) helping to establish the corporate credit of TCC in 2GEF: Global Environment Fund (World Bank) the capital markets. Jordan Telecommunications Project TCC Bond Issue Efficient and well-functioning telecommunications The TCC issue breaks new ground for both the are especially important to a country's services Bank and Jordan: · First capital market issue for the Kingdom. sector, which, in Jordan's case, accounts for over · First guarantee issued by the Bank for a half its GDP. Jordan's economy, however, is hampered by poor telecommunications. This telecommunications project (prior Bank manifests itself in line shortages (only 77% of line guarantees have been mainly for power projects). demand is filled; without investment to expand 3URMHFW )LQDQFH DQG *XDUDQWHHV service, this will deteriorate to 55% by 1998), poor interest payments), meaning that investors are quality of service (a 40% call completion rate) and assuming risk on about 76% of the bond's cash September 1995 an imbalance between international and local flows. For the TCC issue, the numbers are 58% service tariffs. and 42% for the Bank and investors, respectively. The concept of inherent credit appreciation is Financing Plan: closely related to risk sharing, and it is valuable in Jordan Telecom Project (US$m) marketing Bank-guaranteed instruments to potential investors. Take the case of a Bank- World Bank Loan 20 guaranteed bond issue. At launch, the bond's Bonds w/ WB guarantee 50 J-Exim 16 notional credit rating is a "blend" of the AAA credit European Invest. Bank 55 rating of the Bank, which is guaranteeing principal ODA1and BITS2 Grants 7 TCC Internal Resources 69 repayment, and the lower credit rating of either the TOTAL 217 government, if it is guaranteeing interest payments, or the issuing entity. When the bond 1ODA: Overseas Devt. Association (Great Britain) reaches maturity, its credit quality has become 2BITS: Agency for Technical and Economic Corporation (Sweden) that of the Bank. This results from the fact that at maturity, the only cash flow remaining is the Bank- guaranteed principal repayment. The chart below depicts the credit appreciation/risk sharing of Proceeds from the TCC bond issue will be NPC's issue. used to finance the Jordan Telecommunications Project. (A Bank A-loan is also being used to NPC Bond Issue: Credit Appreciation finance the project.) The project will help address Jordan's telecommunications problems through two components: (i) sector restructuring, which NPC WB will help the Government develop the risk risk 38% 100% telecommunications sector and lead to eventual NPC risk 61% privatization and (ii) investment, which will result in NPC risk WB a 6% increase in the number of lines and 76% risk 62% associated local and long-distance networks. The WB WB risk project is expected to be completed by the end of risk 39% 24% 1997. Launch 5yrs 10yrs Maturity Risk Sharing and Credit Appreciation: Related Concepts Risk sharing is a key element of the Bank's For further information on the Bank's guarantees guarantee program. In a Bank-guaranteed for the NPC and TCC bond issues, please contact financing, the Bank "shares" risks with the market Ms. Farida Mazhar, PFG, tel. (202) 473-1235. (i.e., investors and lenders) by covering only those risks that the market cannot bear. For partial credit guarantees, this generally means guaranteeing the later maturities (in the case of a bond, this means covering repayment at maturity). The extent of risk sharing for a bond issue backed by the Bank's partial credit guarantee can be measured by taking the present value of the bond's cash flows and tends to be a reflection of the market's perception of the creditworthiness of the country in question. In the case of the NPC issue, the present value of the Bank's put option on principal is about 24% of the present value of the bond's total cash flows (i.e., principal and NPC and TCC Bond Issues: Summary Information National Power Company (Philippines) Jordan Telecommunications Corporation · Issue Amount US$100 million US$50 million · Maturity 15 years (July 2009) 7 years (September 2002) · Amortization Bullet Bullet · Coupon 9.75% fixed, semi-annual LIBOR + 110 · 99.4 100 Issue Price · US treasury + 250bp n/a (floating-rate bond) Yield · Put option on principal at par Guarantee of principal repayment Support Under World at maturity at maturity Bank Guarantee · Interest only None Sovereign Guarantee Morgan Stanley; co-managed by Banque Paribas and ANZ · Lead Manager(s) Salomon Brothers International Gindlays Bank Plc 3URMHFW )LQDQFH DQG *XDUDQWHHV To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows, September 1995 please call (202) 458-0834. Please direct editorial comments to Andres Londono, tel. (202) 473-2326.