Milbank Closes $135 Million Private Financing for Indonesian Coal Mine Owned by PT Ilthabi Bara Utama
SINGAPORE, September 7, 2007 – Capitalizing on the increasing global demand for coal, Indonesian private coal company PT Ilthabi Bara Utama (“IBU”) has completed a $135 million privately arranged equity-linked note financing for the development of a coal mine in East Kalimantan. Marking the first greenfield financing in Asia backed by private investor funds, the funding was provided by various private funds, together with investment bank Merrill Lynch. The international law firm Milbank, Tweed, Hadley & McCloy LLP, led by partner David H. Zemans and senior associate Jacqueline Chan, represented IBU in negotiating and structuring the transaction.
Milbank’s Zemans noted, “Privately arranged funding provided a viable alternative to project financing, which is typically not available for start-up companies and takes longer to put in place. Additionally our experience with this type of highly structured financing enabled us to close the deal in only four months, despite the current volatility in the global equity and credit markets.”
About the transaction:
Through a $135 million structured equity-linked notes deal, investors comprising of private investor funds and investment bank Merrill Lynch are financing the development and operation of an open pit coal mine owned by IBU. Located in East Kalimantan, the mine is expected to begin operations in June or July 2008. With a low strip ratio (a measure of how much waste material must be mined for every volume of mined ore), production costs at the mine are expected to be low and production is expected to ramp-up quickly, with projected volumes of five million tonnes per year by the end of the first year, ten million tonnes within two years and up to twenty million tones in five years. The mine is expected to be profitable within the first year of operation.
The financing structure consists of equity-linked notes with a four year and nine month maturity featuring a detachable convertible equity element that expires in 2037. The equity units entitle the holders to part of a royalty stream that will be paid out of IBU’s EBITDA and can be exchanged for equity in the unlisted company once the notes expire or automatically converted in the event of an initial public offering.
The deal is tightly structured and investors have been granted full senior secured priority. The deal is pre-funded for two years, with part of the $135 million in proceeds set aside to pay the interest coupons to cover the period before the mine becomes fully operational. In addition, IBU can only draw down the funds on a staggered basis, with each draw-down subject to completion of pre-determined milestones. Latham & Watkins represented the lead arranger Merrill Lynch.
In addition to its role as lead arranger, investment bank Merrill Lynch has also entered into an exclusive multi-year offtake agreement to buy all the coal produced by the new mine in the initial years. This move significantly increases Merrill Lynch’s exposure to the project, but is consistent with the investment bank’s ownership of commodity and energy trading firm Entergy-Koch. This type of offtake guarantee also gives other investors additional comfort about the creditworthiness of the underlying company.
About Milbank
Milbank, Tweed, Hadley & McCloy LLP is a preeminent global law firm that for more than 140 years has provided innovative legal solutions in many of the world’s largest, most complex, “first-ever” corporate transactions and litigation. Our transactional expertise includes capital markets, corporate finance and transactions, project finance, acquisition finance, and other major fields of law practice. Milbank litigation teams resolve disputes involving mergers and acquisitions, proxy battles, financings and securities offerings, intellectual property, white collar crime, and corporate restructurings, among others. Our clients range from prominent multinational financial, industrial and commercial enterprises to governments, institutions and individuals. The Firm is headquartered in New York with offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, Singapore, Tokyo, and Washington, DC.