[CPEC, IPP] China Development Bank contributes to $621 million syndicated loan for 2x330 MW Engro Thar Block II Coal Power Project (Linked to Record ID#54316, #54315, #100856, #100857)

Project narrative

Engro Powergen Thar Limited (EPTL) is a joint venture company — established by China Machinery and Engineering Company (CMEC), Habib Bank Limited (HBL), and Liberty Mills Limited — that is responsible for establishing a 2 X 330 (660MW) mine mouth circulating fluidized bed technology coal-based power plant. The independent power plant project (IPP) is located at Thar Block II, 25 kilometers from the city of Islamkot, near the village of Singharo-Bitra in the district of Tharparkar within Sindh Province. Thar Block II is a 95.5 square kilometer area of the Thar coalfield, which has total lignite reserves of 175 billion tons which can be utilized to produce 100,000 MW for over 200 years. The project is expected to be fueled by coal supplied by Sindh Engro Coal Mining Company (SECMC), which was developing a coal mine of 3.8 million tonnes per annum capacity beside the project (see Record ID#54315). The total estimated cost of the 2x330 MW Engro Thar Block II Coal Power Project is $1.1 billion. It is being financed according to a 75:25 debt-to-equity ratio. Accordingly, the total equity requirement is $275 million. The majority of the equity investment for the project is expected to come from EPTL and its affiliates (see Record ID#54316). In December 2014, Industrial and Commercial Bank of China's (ICBC) Karachi Branch submitted an initial expression of interest to provide $825 million of debt financing for the power project. Then, a set of financing agreements were signed in Beijing on December 21, 2015 for the project’s power plant component and mining component (see Record ID#54315). Under these agreements with EPTL, the 2 X 330 MW Engro Thar Block II Coal Power Project project was supported by a Pakistani rupee-denominated syndicated facility agreement from consortium of banks including: HBL, United Bank Limited, Bank Alfalah Limited, Askari Bank Limited, Soneri Bank Limited, Sindh Bank Limited, Bank of Punjab, MCB Bank Limited, Faysal Bank Limited, Pak Oman Investment Company Limited, Industrial and Commercial Bank of China (ICBC), National Bank of Pakistan, and Pak Brunei Investment Company Limited. The total syndicated loan is worth 17,016,000,000 Pakistan rupees. Additionally, EPTL signed a bilateral facility agreement with National Bank of Pakistan worth 3,134,000,000 Pakistani rupees as well as Islamic facility agreements with three banks — Meezan Bank Limited, Faysal Bank Limited and Habib Bank Limited — worth 4,000,000,000 Pakistani rupees. All of these loans were repayable in 20 semi-annual installments commencing from the earlier of (i) the first fixed date falling after 48 months since facility effective date; and (ii) the second fixed date falling after Commercial Operations Date (COD) — where fixed dates are defined as first June or first December of any year and carries interest at the rate of 3 months KIBOR plus 3.5%. Then, on December 21, 2015, EPTL also signed a $621 million syndicated (loan) facility agreement with China Development Bank (CDB), China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC). The original borrowing terms of the syndicated loan facility were as follows: a 14-year maturity, a 4-year grace period, an interest rate of 6-month LIBOR plus a 4.2% margin, and a 7% Sinosure insurance premium. However, as of July 1, 2023, the loan's interest rate was reset to 6-month SOFR plus a 0.42826% credit adjustment spread (CAS) and a 4.2% margin. The loan was collateralized against (a) a first ranking hypothecation charge over the project assets of EPTL; and (b) a pledge of shares in the project company [EPTL] by the equity holders. The Government of Pakistan also provided a sovereign guarantee. The loan's (principal) amount outstanding was $480 million as of July 2024. Record ID#35127 captures the estimated financial commitment of China Development Bank, Record ID#100856 captures the estimated financial commitment of China Construction Bank, and Record ID#100857 captures the estimated financial commitment of ICBC. China Machinery Engineering Corporation (CMEC) was the EPC contractor responsible for project implementation. In April 2016, a groundbreaking ceremony was held. The project reached its commercial operation date (COD) on July 10, 2019. However, this project has encountered a number of revenue generation, debt repayment, and financial management challenges since the power plant went into operation. In May 2022, reports emerged that the Government of Pakistan’s Central Power Purchasing Agency (CPPA) had fallen behind on payments (for the purchase of electricity) to EPTL. Total payment arrears, at that time, amounted to PKR 45 billion (approximately $225 million). Several months later, on October 26, 2022, Sinosure informed the Government of Pakistan that it would not be able to provide credit insurance for any additional projects in Pakistan without ‘early resolution of [the] Revolving Account Agreement (RAA) pending between Central Power Purchasing Agency (CPPA) and Chinese IPPs since 2017’. Under a November 8, 2014 CPEC Energy Project Cooperation Agreement, the CPPA and Chinese IPPs had agreed on the establishment of an RAA to facilitate the automatic payment of at least 22% payables to IPPs directly through the recovery of electricity bills of distribution companies (so-called ‘discos’). However, ‘due to various technical and financial constraints’, the Government of Pakistan’s Power Division acknowledged that the RAA had not been implemented over the previous 5-year period. In May 2022, an effort to establish an RAA was undertaken by the Government of Pakistan, but it was ultimately unsuccessful. Then, on October 31, 2022, Pakistan’s Ministry of Finance came up with an interim arrangement for the Power Division to open ‘an assignment under the title of Pakistan Energy Revolving Fund (PERF) till such time matters pertaining to RAA are resolved’. The escrow account was to be opened at the National Bank of Pakistan and operated by the CPPA and PKR 50 billion was to be allocated from the Ministry of Finance’s subsidy account to the PERF with a monthly withdrawal limit of PKR 4 billion (against invoices from IPPs). The Government of Pakistan acknowledged, at the time, that this '[would] not fully fulfill the revolving account requirements under the RAA, but it [would] provide additional comfort to Chinese IPPs’. Then, in November 2022, the Economic Coordination Committee (ECC) of the Cabinet turned down a proposal by the Ministry of Energy (Power Division) for the PERF (escrow) account to be operated by the National Bank of Pakistan. It decided that the account would instead be operated by the country’s central bank: the State Bank of Pakistan (SBP). Then, in May 2023, EPTL informed the Central Power Purchasing Agency (CPPA) that it might shut down operations entirely because of a 'severe liquidity crunch' that made it challenging for EPTL to settle its liabilities with both lenders and suppliers. Its outstanding receivables from the CPPA amounted to PKR 65.5 billion at the time. EPTL demanded the CPPA pay it PKR 28.7 billion before May 31, 2023 to help it avert a default on debt servicing. Then, in May 2024, EPTL’s CFO, Wang Bu, warned Pakistan’s Minister for Planning, Development and Special Initiatives, Ahsan Iqbal, of a potential default on its $621 million syndicated loan agreement with CDB, ICBC, and CCB. Wang Bu also notified Ahsan Iqbal that ‘[o]ur current receivables from CPPA-G have reached an alarming level of Rs 79 billion, excluding April Energy Purchase Price (EPP) of Rs 5 billion out of which Rs 58 billion are currently overdue; as a result of this high overdue amount, we are facing a severe liquidity crunch with huge overdue liabilities to settle, as our payments to the lenders and suppliers are becoming due.’ Then, in July 2024, the Government of Pakistan reportedly requested that CDB, ICBC, and CCB grant a 5-year maturity extension to EPTL. However, as of November 2024, a debt reprofiling agreement had not yet been finalized.