Directory of Innovative Financing: China

China

Project Title: AES China Generating Co. Initial Public Offering

Project Title: Huaneng Power International ADR Offering

Project Title: LIPTEC 144a Bond Offering

Project Title: AES China Generating Co. Initial Public Offering

Country: China

Issue Amount: $150 million

Sector: Power generation

Status: 10 million shares sold in an oversubscribed February, 1994 NASDAQ offering, of which 2 million were offered to international investors.

Sponsors/Lead Manager: AES China Generating, a wholly-owned subsidiary of AES Corp.; Donaldson, Lufkin & Jenrette served as lead underwriter.

Purchaser: US and international investors.

Financing Package: AES Chigen was organized as a Bermuda subsidiary of AES Corp. in December, 1993, and plans to use proceeds of this offering to develop and finance acquisition and construction of power plants in China. Chigen raised $150 million at an offering price of $16/share, which added to the $50 million stake already held by its corporate parent for an initial capitalization of $200 million. Under terms of the transaction, the equity raised in the offering can be returned to shareholders at the original offering price in February of 1997 if Chigen does not have at least $50 million invested in Chinese independent power projects by then.

Innovation: Through this transaction, Chigen raised initial equity for potential future development of six coal-fired power plants in China with aggregate generating capacity of 5,400MW. Yet at the time of the IPO it only held non-binding letters of intent in the plants, for which it estimated it would eventually have to be responsible for up to $506 million in equity and at least $1.3 billion in debt. The total costs to Chigen and its anticipated Chinese joint venture partners for the six projects was estimated at up to $5.5 billion, including total debt financing requirements of $4.1 billion. The plants would be developed on a project finance basis.

Large scale commercial debt of that magnitude has never been raised for Chinese IPPs, which have moved slowly to date because of uncertainty over government approvals, political risk perceptions, and other factors. Keen market interest in China at the time and the strong reputation of parent AES Corp. as a developer of other US and international IPPs led investors to flock to the IPO, however, despite the uncertainty.

Brief: Chigen is using this equity in its early stage development of projects big and small, including the proposed 2100MW, $1.35 billion Yangcheng power plant in Shanxi Province. Even though it had no performing power plants in its project portfolio at the time of the IPO, it still was able to price the offering at the high side of the $14-$16 filing range and sell 20 percent internationally. But as of early October, 1995 the share price had dropped to $9.

Project Title: Huaneng Power International ADR Offering

Country: China

Issue Amount: $625 million

Sector: Power generation

Status: ADRs sold on the NYSE in October, 1994

Sponsor/Lead Manager: Huaneng Power International (HPI), a state-owned Chinese power plant developer.

Purchaser: US, Asian and European equity investors.

Financing Package: 31.25 million ADRs sold at offering price of $20, representing a 25% float of HPI's equity; in early October, 1995 they were trading at $17.75.

Innovation: This was China's largest international stock offering in history. It allowed HPI to both reduce its level of state ownership to 75% and raise initial foreign capital for 1995 capital expenditures on planned power plants with total projected capacity of at least 3,400MW. HPI is also expected to seek export credit agency financing for those plants, and to begin issuing debt in its own name in 1996.

According to the prospectus, HPI has projected building plants representing a total capacity 6,100MW. Each of those plants may involve additional equity from individual foreign joint partners as well, but this offering gave HPI new funds at a time when the state-run Chinese banking systemwas restricting credit availability as part of the government's inflation-fighting macroeconomic policy.

Brief: HPI was established in June, 1994 as the owner of five existing power plants in China's most prosperous provinces with aggregate installed capacity of 2,900MW. Its stated business goals include "using foreign equipment, technology and capital to provide a reliable and affordable supply of electricity to its customers while earning consistent profits for its shareholders."

The transaction was not without its hitches, however. The selling price was below even the low end of the original filing range of $22.50-$27.50, which Lehman had to adjust downward after sounding out the market. Part of the disappointing reception was reportedly due to the fact that an earlier ADR by another state-run Chinese power producer had not traded well. Shandong Huaneng Power Development Co. raised $333 million in an August, 1994 ADR offering coordinated by CSFB that priced at $14.25 but was trading at $11.50 at the time of the HPI offering. By October, 1995 Shandong Huaneng's shares were trading at $8.50.

Project Title: LIPTEC 144a Bond Offering

Country: China

Issue Amount: $110 million

Sector: Power generation

Status: Successfully placed in October, 1994

Sponsors/Lead Manager: China Long Yuan Power Group; Morgan Stanley was lead manager.

Purchaser: US institutional investors.

Financing Package: $110 million, 7-year maturity, 4-year average life bond issue priced at 200 bp over Treasuries. It was an investment grade issue rated BBB-/A-, or equal to China's sovereign ceiling at the time.

Innovation: This was the first financing in the US bond markets for a Chinese power project sponsor.The bondholders were given little information about the specific projects being pursued by Long Yuan, which is 100% owned by the Ministry of Energy and Power and received no guarantee of principal or interest repayment on these notes. A British Virgin Islands partnership related to Long Yuan's projects, LIPTEC, is the sole source of debt repayment.

Brief: Long Yuan is developing two coal-fired power projects in Jiangsu province and used this mechanism as one way of raising funds for them. The final pricing was considerably higher than the 150-160 bp spreads that had originally been anticipated.

Infrastructure and Financial Markets Division
Private Enterprise and Financial Markets Subdepartment
Sustainable Development Department
Inter-American Development Bank

Last updated: 02/26/07