Mongolia Salkhit financing sets foreign security precedent

Author: Gemma Varriale | Published: 31 Jul 2012
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The Salkhit wind farm is Mongolia’s first renewable energy independent power project. It provides an important template for foreigners negotiating restrictions on taking security in the country.

Provisions in Mongolian law meant that international lenders were unable to take a pledge over immoveable property where that property was land. Companies with more than 25% foreign investment also can’t take certain types of land rights. As Clean Energy had 49% foreign ownership it could only have a use right, a category of Mongolian land right incapable of being pledged as a security.

Worth $122 million (£78 million), the 500 megawatt limited recourse project, developed and sponsored by Mongolia’s Newcom, will supply almost five percent of Mongolia’s electricity, where energy demand is currently increasing by ten percent every year.

Jeffery Barratt, London-based partner with Norton Rose said the ability of a wholly Mongolian-owned company to take possession rights over the land, grant use rights out of those to the project company, but then pledge the possession rights to a local bank on behalf of the lenders was an important structural enhancement to the security package that Newcom was able to offer to the lenders.

Mongolian law doesn’t provide for the concept of an enterprise mortgage. Lenders were thereby unable to take a general charge over the borrower’s entire business. Each class of asset had to be secured individually, therefore. The Mongolian borrower had numerous assets including bank accounts and contractual rights.

Barratt said the land arrangements were complex in that there were three parcels of land. “This uncertainty was heightened because there were also elections in June, the month before financial close,” he said.

Attaining sign off from the electricity regulatory authority on the security package, was another hurdle to complete the financing.

“It was the first time the authority had approved a package of this kind it and, at first, the scope of their approval was somewhat unclear,” said Barratt.

Deal counsel also believed that Salkhit could well be the template for further private sector interest in the country’s renewable sector. The Mongolian government has put in place a number of legal and regulatory measures to support the development of renewable energy. This includes enacting the 2008 renewable energy law, which regulates relations concerning generation and use of energy utilising renewable energy sources.

Chris Down, the senior Norton Rose associate working on the deal, said question marks only remained around commercial lenders enthusiasm, and how their approach would differ from that of multilaterals and development institutions in terms of what they expect as comfort arrangements.

The guarantee obtained on this transaction took the form of a government-issued letter of support to the international investors as an undertaking to ensure there was an obligation on the state to dispatch the project in priority to other generators.

“Commercial lenders may require a more robust form of off take support,” said Down.

Mongolia’s Newcom retained a majority interest in the Mongolian project company, Clean Energy. The European Bank for Reconstruction and Development (EBRD) and the Netherlands Development Finance Company (FMO), together with GE Pacific Private, acquired equity interests in Clean Energy in March 2012.

The financing closed on July 17.

Hogan Lovells advised General Electric on the financing and equity aspects of the project. Norton Rose advised the lender, EBRD and FMO. GTs Advocates provided Mongolian law advice to the EBRD and FMO.