CDB (Hong Kong Branch) participates in $700 million syndicated loan for 400MW Lower Sesan II Hydropower Plant Project

Project narrative

The Lower Sesan II Hydropower Plant first emerged in a 1999 study of hydropower dam potential in the Nam Theun, Sekong, and Sesan River basins in Laos, Vietnam, and Cambodia funded by the Asian Development Bank (ADB). However, the ADB did not follow up on the project due to its marginal financial viability and its potentially serious environmental and social impacts, especially on migratory fish stocks and fishing livelihoods. Then, in June 2007, the Ministry of Industry, Mines, and Energy (MIME) of Cambodia granted permission for Electricité du Viet Nam (EVN) to conduct a detailed feasibility study. The study was implemented by a consulting firm, Power Engineering Consulting Joint Stock Company 1 (PECC1), in collaboration and consultation with technical ministries/agencies of the Royal Government of Cambodia. Then, on November 26, 2012, The Government of Cambodia and Hydro Power Lower Sesan 2 Co., Ltd. (桑河二级水电有限公司) — a special purpose vehicle (SPV) legally incorporated in Cambodia and a joint venture of the Royal Group Power Co., Ltd. (39% equity stake), Hydrolancang International Energy Cayman Co., Limited (51% equity stake), and EVN International Joint Stock Company (10% equity stake) — signed an implementation agreement (IA) for the 400MW Lower Sesan II Hydropower Plant Project. On the same day, Électricité du Cambodge (EDC) and Hydro Power Lower Sesan 2 Co., Ltd signed a Power Purchase Agreement (PPA). Under these two agreements, Hydro Power Lower Sesan 2 Co., Ltd. was granted a 45-year concession (40 years of operation and a construction period of 5 years) and it was specified that the electricity generated by Hydro Power Lower Sesan 2 Co., Ltd. — through the Lower Sesan II Hydropower Plant — would be sold to EDC at the fixed price of 6.95 US cents per kilowatt-hour. These agreements also specified that, after 40 years of operation, the ownership of the Lower Sesan II dam will be transferred to the Government of Cambodia. On December 12, 2012, the Government of Cambodia also agreed to guarantee the payment (power purchase) obligations of EDC and Cambodia’s Ministry of Industry, Mines and Energy to Hydro Power Lower Sesan 2 Co., Ltd under the PPA and the IA. The total cost of the 400MW Lower Sesan II Hydropower Plant Project, which was implemented on a Build-Operate-Transfer (BOT) basis, was $978 million and it was financed with a mix of debt and equity. In December 2013, ICBC Financial Leasing Co., Ltd. provided initial bridge financing (worth approximately $81 million) to Hydro Power Lower Sesan 2 Co., Ltd. under a financial leasing structure. Then, on December 15, 2015, Hydro Power Lower Sesan 2 Co., Ltd. signed a $700,000,000 financial facility agreement with the Hong Kong Branch of China Development Bank Corporation and the Phnom Penh Branch of Bank of China. The facility, which was arranged by the Hong Kong Branch of China Development Bank Corporation, was secured by (i.e. collateralized against) (i) all the perpetual leasehold rights in respect of the land and all the machinery and equipment associated with the 400MW Lower Sesan II Hydropower Plant Project and (ii) the equity stakes that Royal Power Group Co., Ltd. and EVN International Joint Stock Company hold in Hydro Power Lower Sesan 2 Co., Ltd. It was also guaranteed by Huaneng Lancang River Hydropower Inc., the ultimate parent of Hydrolancang International Energy Cayman Co., Ltd. Sinosure underwrote the transaction and the Government of Cambodia issued a sovereign guarantee to Hydro Power Lower Sesan 2 Co., Ltd. in the event on non-payment by EDC. The $700 million facility (loan) carried a 5-year grace period, a 17.5-year maturity, and a 6.5% interest rate. 60 months after the first drawdown of the loan, the borrower was expected to repay the loan in 25 equal, consecutive, semi-annual principal installments. Then, on July 12, 2017, Hydro Power Lower Sesan 2 Co., Ltd. entered into a side agreement with the Hong Kong Branch of China Development Bank Corporation, the Phnom Penh Branch of Bank of China, Shanghai Pudong Development Bank Co., Ltd., and the Yunnan Branch of China Eximbank. The side agreement transferred part of the commitment of the original lenders (the Hong Kong Branch of China Development Bank Corporation and the Phnom Penh Branch of Bank of China) to the new lenders (Shanghai Pudong Development Bank Co., Ltd. and the Yunnan Branch of China Eximbank). The side agreement did not change the terms and conditions of the original facility agreement. ICBC Financial Leasing Co., Ltd.’s estimated contribution is captured via Record ID#106019. China Development Bank’s estimated contribution is captured via Record ID#62217. China Eximbank’s estimated contribution is captured via Record ID#92481. Bank of China’s estimated contribution is captured via Record ID#92483. Shanghai Pudong Development Bank Co., Ltd. is captured via Record ID#106021. On November 6, 2019, Hydro Power Lower Sesan 2 Co., Ltd. entered into an amendment agreement to the facility agreement and side agreement with the Hong Kong Branch of China Development Bank Corporation, the Phnom Penh Branch of Bank of China, Shanghai Pudong Development Bank Co., Ltd., and the Yunnan Branch of China Eximbank. The amendment agreement stated that: (a) when LIBOR was greater than 1.5% per annum, the loan’s interest rate would be set to six-month LIBOR plus 300 basis points; and (b) when LIBOR was less than 1.5% per annum, the loan’s interest rate would be set to six-month LIBOR plus 350 basis points. Then, on December 15, 2022, Hydro Power Lower Sesan 2 Co., Ltd. entered into a second amendment agreement to the facility agreement, side agreement and first amendment agreement with the Hong Kong Branch of China Development Bank Corporation, the Phnom Penh Branch of Bank of China, Shanghai Pudong Development Bank Co., Ltd., and the Yunnan Branch of China Eximbank. The second amendment agreement stated that: (a) when LIBOR was greater than 1.5% per annum, the loan’s interest rate would be set to six-month LIBOR plus 280 basis points; and (b) when LIBOR was less than 1.5% per annum, the loan’s interest rate would be set to six-month LIBOR plus 330 basis points. As of December 31, 2022, the loan carried an interest rate of six-month LIBOR plus 280 basis points. The November 2019 debt rescheduling from the four Chinese banks is captured via Records ID#106022, #110834, #110835, and #110836, and the December 2022 debt rescheduling from the four Chinese banks is captured via Records ID#106023, #110837, #110838, and #110839. Total drawdowns under the facility agreement amounted to $547,000,000 in 2021 and $547,000,000 in 2022. The facility expired in September 2019 and therefore the remaining facility amount was not drawn down. However, on June 9, 2019, a shareholder loan agreement was signed by Hydro Power Lower Sesan 2 Co., Ltd. and Hydrolancang International Energy Hong Kong Co., Ltd. (瀾滄江國際能源香港有限公司). While the face value of the loan is unknown, it is known that the amount outstanding was $7,014,503 in 2021. The loan tenure was 3 years and it was scheduled to expire on June 8, 2022. The loan’s interest rate was six-month LIBOR plus 350 basis points and it was to be paid in full upon the maturity of the loan. The unsecured shareholder loan, which is captured via Record ID#106020, was fully repaid by the end of calendar year 2022. The purpose of the project was to construct a hydroelectric power plant in the northeastern province of Stung Treng on the Se San River. Its locational coordinates are 13°32′59.5″N 106°15′49.4″E. The Lower Sesan II Dam is 80 meters tall and occupies a 36,000-hectare plot. The plant has eight turbines and each turbine has an installed capacity of 50 megawatts (400 MW total capacity). Upon completion, the plant was expected to produce 1.9 billion kilowatt-hours per year, boost electricity production in the country by 20%, and bring installed hydropower capacity to 1328MW. PowerChina HuaDong Engineering Corporation Limited (HDEC) was the contractor responsible for project design. Sinohydro Bureau 8 Co., Ltd was the contractor responsible for project implementation. Construction began in December 2013. The watergate was officially closed on September 25, 2017. The first turbine began producing electricity in November 2017. The dam was officially opened on December 18, 2018. The Chinese banks that financed the project divided environmental and social risks control into specific segments, including pre-loan investigation, loan review, contract management, loan issuance and post-loan management. They also required an environmental impact assessment (EIA) after the completion of the project. CDB went even further by introducing a standard review procedure. Sinosure also required that the project developer pay special attention to social and environmental responsibilities -- in particular, by resolving controversies around the dam through public consultation. The project developer held several public consultations with the affected communities in line with the guidelines of the Chinese banks. In July 2015, as requested by the local staff members of the CDB, the project developer held a dialogue with 140 people representing communities affected by the 400MW Lower Sesan II hydropower plant, Cambodian government representatives at national and sub-national levels, and NGOs to discuss their concerns and other issues related to the project. The participants then paid a visit on July 27, 2014 to the resettlement site to inspect on the quality of the housing construction, agricultural land, and dam construction. During the visit, community representatives and media held an informal on-site dialogue and raised questions to the Ministry of Mine and Energy’s secretary of state, project development, and the Stung Treng Deputy Governor in charge of Resettlement and Compensation Committee. Nevertheless, the project was affected by protests from thousands of villagers who were at risk of being displaced or losing their livelihoods. On February 13, 2014, villagers living in the dam reservoir lodged a petition to the Chinese embassy in Phnom Penh, relevant ministries of the Cambodian government, and the developer to discuss compensation and resettlement conditions in detail. On August 10, 2021, Human Rights Watch released a report about the various ways in which the 400MW Lower Sesan II Hydropower Plant Project allegedly harmed the lives and livelihoods of thousands of indigenous and ethnic minority people. The report claims that the construction of the Lower Sesan 2 dam displaced nearly 5,000 people without adequately providing compensation or livelihood assistance. It also notes that, although by community members occurred during the dam’s construction between 2011 and 2018, public officials ignored the complaints and moved forward with the construction project.