Milbank, Tweed, Hadley & McCloy LLP represented the lenders, KEXIM and Sumitomo Mitsui Banking Corporation, in the US$130 million financing of a 45 MW run-of-the-river hydroelectric power plant on the Wampu River in North Sumatra, Indonesia. The deal was the first power financing under Indonesia’s Fast Track 2 program, and could signal increased bankability for the country’s renewable reserves.
The project’s sponsors are Korea Midland Power Co., Ltd, Posco Engineering Co., Ltd. and PT Mega Power Mandiri, with Posco Engineering Co., Ltd. as EPC contractor. The financing included a direct tranche from KEXIM and a covered tranche guaranteed by KEXIM.
“This was in many respects a first-of-its kind project,” said James Murray, the Singapore partner who led Milbank’s team, which included associates Kristina Hokenberg and Cristy Cross.
Under the Fast Track 2 program introduced under Indonesia’s Regulation 139, lenders are provided with a government business viability guarantee letter (BVGL). Wampu was the first completed power financing to use a BVGL. The project was also the country’s first completed project based in a protected forest, which presented unique structuring challenges in terms of land rights and lender security interests, but indicated there was potential for Indonesia’s renewable reserves, many of which are based in protected areas, to be developed.
“Under KEXIM’s leadership and with very strong support from SBMC, the lenders were able to put together a well-thought through financing package. The terms and scope of coverage of the BVGL required careful consideration by the lenders. However, there was also a process of consultation between sponsors, lenders and the Ministry of Finance and an opportunity to help in the shaping of the letter.”
Mr. Murray noted that without the BVGL/fast track process there were plenty of lenders who would not be able to finance a power project in Indonesia.
Among other first-of-its-kind features, the project also included a long term offtake of carbon credits being sold to a carbon fund in Korea, and a PPA with water flow credits backstopped by the state utility PLN, helping to mitigate against risks associated with future fluctuations in weather patterns.
