ProjectFinance 35890 andGuarantees September 1997 Resource Mobilization and Cofinancing Vice Presidency Project Finance and Guarantees Department World Bank Guarantee Electrifies Lebanon's Power Sector TransactionOverview On June 16, 1997 the Republic of transaction completed by the World Lebanon launched its longest dated Bank since 1994. The operation, issueintheinternationalbondmarkets which will help finance a power sector - a US$100 million, 10-year Euro/ restructuringandtransmissionproject, 144A offering to finance its Power consists of a World Bank loan compo- Sector Restructuring and Transmis- nent of $65 million and a guarantee sion Expansion project. The bond is- component of $100 million. The par- sue is supported by the World Bank's tial credit guarantee is structured as a Issue Summary partial credit guarantee. The guaran- bond issue with Government of Leba- tee covers 100% of principal repay- non (GOL) as the issuer which will in ment,onanon-accelerablebasis,with turn onlend to the project company, Issue Amount: $100m theinterestpaymentriskbeingunder- Electricte du Liban (EDL), the state Guarantor: Principal guaranteed by taken by private investors. The ex- utility. the World Bank tended 10 year maturity is at least Maturity: 10 years (July 2007) twice that of the Republic's recent World Bank Guaranteed Bond Amortization: Bullet borrowingsfrominternationalmarkets Issue Coupon: 7.50% (annual) which have ranged from 3-5 years. Yield: US Treasury + 100bp The 10-year maturity was obtained at The World Bank partial credit guaran- Issuer: Government of Lebanon extremely favorable pricing of 100 tee is a tool which can help govern- Financial Closure: July 2, 1997 basis points ( 1%) over the yield of US mentsandgovernmententitiesaccess Market: Euro/144A treasuries of comparable maturity. long term-financing on international Also, this pricing compares favorably credit (loan) and in the capital (bond) withthatofpreviousRepublicofLeba- markets. Generally, World Bank par- non issues of much shorter maturi- tial credit guarantees cover all events ties. of nonpayment for a designated part of a financing. These guarantees The issue, underwritten by Merrill encourage extension of maturity by Lynch International, tapped the Euro- covering a part of a financing, usually bond and US 144A markets and rep- the later maturities. In the case of resents the Republic's debut into the Lebanon, the guarantee covers the US144Amarket. Thismarketwasse- bullet principal payment at maturity. lected primarily to access the longer Another example of how the partial maturities available in the market as credit guarantee can extend maturities well as to introduce the Lebanese Re- is a contingent take-out facility, where public to a new investor base consist- the guarantee ensures continuity of fi- ing largely of institutional investors. nancing. The need for such roll-over guarantees arises if short-term financ- The Lebanon Power Sector Restruc- ing (for the construction period, for ex- turing and Transmission project rep- ample) is available but the prospects resents the first guarantee operation of rolling over such financing are un- in Lebanon and the eighth guarantee certain. ProjectFinance andGuarantees Power Sector Restructuring and of the borrowing sought under the TransmissionProject partial credit guarantee. September 1997 The project will help the Republic to Theguaranteeoperationhasprovided complete the reconstruction of its se- EDL with long-term funds and facili- verely war-damaged electricity supply tated mobilization of the foreign ex- system. It will offer the Lebanese a change required for the completion of permanent solution to electricity short- the project. Through the leveraging ages by restructuring the sector and effect of the partial credit guarantee, expanding the transmission network. themarketwasencouragedtoassume Over two decades of fighting had virtu- Lebanese sovereign risk for a longer ally destroyed Lebanon's electricity credit period by assuming the inter- system, leading to blackouts and est payment risk. The operation also chronic power shortages. served to broaden the investor base to include international institutional in- Under the project, a new national vestors, thereby helping to diversify transmissionsystem,consistingof339 the country's borrowing sources, an km of 220- kV transmission lines, 49 important consideration given the kilometers of underground 220-kV country's large investment require- cablesand14new220-kVsubstations, ments. About 50% of the issue was is to be constructed. Substation sites subscribed by US institutional inves- "This deal has been a success include the southern city of Siada and tors under rule 144A. because it appealed to a niche mar- BaalbeckintheBekaaValley.Thenew ket of investors who liked the idea transmission system is vital to bringing Thus,theextendedmaturity,thediver- of a World Bank - guaranteed deal the new generation supplies (four sified investor base, and the tightened combined with an element of expo- power stations, totaling 1020 Mega- spread, all achieved with the help of sure to Lebanon, thus giving them watts, are under construction) to con- the World Bank guarantee, should an attractive yield with only a small sumers. help to act as a catalyst for future in- degree of risk." Bookrunner's com- vestments in Lebanon. ments - IFR Institutional reforms are also planned along with physical construction to undertakethefinancialandinstitutional rehabilitation of the sector's state owned Electricte du Liban and in- crease private sector participation. Lebanon'sFirstPartialCreditGuar- For more information on the guaran- antee tee for the Lebanon Power Sector Restrucutring and Transmission The partial credit guarantee for the Project, please contact Abha Joshi- US$100 million bond issue helped mo- Ghani, PFG (202) 473-2728. bilize the necessary financing to fund the financing gap for the Lebanon Power Sector Restructuring project. The guarantee was successful in cata- lyzing private financing for the power sector from the capital markets. EDL is in the process of recovering from 17 years of damage caused by the civil war. It would have been difficult for EDL to access the commercial capital markets under its own name. There- fore, while EDL is undergoing restruc- turing and sector reforms are in progress, GOL has borrowed on behalf of EDL in order to maximize the terms ProjectFinance andGuarantees September 1997 Lebanon Power Sector Restructuring Partial Credit Guarantee $100m *PV=$52m World Bank Support for Longest Term Additional term Principal Available to provided by WB Repayment Lebanon support 0 5 10 * The guarantee represents credit from the World Bank of about 52 percent in present value terms of the total funds mobilized through the bond issue. These benefits are important to Lebanon, given the country's large infrastruc- ture investment requirements. Lebanon Power Sector Restructuring Project Financing Plan (US$ Million) Source of Funds Amount Percentage of Total EdL/GOL 60 12 European Investment Bank 20 4 Islamic Development Bank 26 5 ECAs/Suppliers'Credits 227 46 IBRD Loan 65 13 Bank-guaranteed Bond 100 20 Total 498 100%