This article is an extract from GTDT Market Intelligence Project Finance 2022. Click here for the full guide.

1 What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?

Green energy projects have been a hot topic of project finance in recent years in Taiwan. Among the ongoing solar projects and onshore and offshore wind farm projects, the landmark case was the Formosa 1 Offshore Wind Power Project (F1), the first offshore wind farm project in Taiwan, which closed in 2018, followed by the subsequent milestone projects including Formosa 2 Offshore Wind Power Project (F2), which closed in 2019, Yunlin Offshore Windfarm Project (Yunlin), which also closed in 2019, Changfang and Xidao offshore wind farm projects, which closed in February 2020, Greater Changhua projects, which closed in November 2021, and Zhong Neng offshore wind farm project, which reached financial close in December 2021. In addition, since solar plants have been the major source of green energy and its target output set by the government accounts for nearly 70 per cent of that of the green energy in Taiwan, various project financing for solar plants is also blossoming in the market. Our firm has actively participated in various offshore wind farm projects and solar projects, acting as the Taiwan (ROC) counsel to the sponsors and borrowers as well as the lenders, advising on various issues in relation to the foreign investment, government permits and authorisation, project due diligence, financing structure, foreign exchange, hedging and the creation of security interest under local laws, and reviewing and commenting on the relevant project and finance documents.

2 In terms of project finance transactions, which industry sectors have been the most active and what have been the most significant deals to close in your jurisdiction?

In Taiwan, there is no general or industry-specific law designed for project finance, and the general body of commercial law is applicable. Through the various project financing engagements in recent years either for onshore or offshore wind farm projects, solar plants or otherwise, there seems to be a steady practice that the relevant participants normally follow the international practice of project finance.

In the past decade, project finance was not frequently seen in local syndicated loan markets, most of which were applied to infrastructure projects developed by the private sector or through a public–private partnership. The major legislation that governs private participation in infrastructure projects is the Act for Promotion of Private Participation in Infrastructure Projects (the PPP Act), last amended in 2018. The PPP Act provides 14 categories of public works for private sector participation, including, among others, transportation facilities, sewerage treatment facilities, water supply, flood control and drainage facilities, hygienic and medical facilities, recreation and tourism facilities, power supply facilities, sports facilities, industrial, commercial, technical and agricultural facilities, and government office buildings.

A project company under the PPP Act may apply for medium- and long-term loans from domestic banks at preferential interest rates. Foreign banks may also participate in the syndication of loans. In addition, there is further deregulation regarding the issuing of new shares and corporate bonds to facilitate the project company’s financing.

Among the above-mentioned 14 categories, transportation facilities have the lion’s share of the project finance projects. The most high-profile project financing transaction was the Taiwan High Speed Rail project (a NT$323.3 billion multi-tranche syndicated loan) in 2000, which was restructured to NT$381.06 billion in 2009. Project financing was also adopted for other large-scale projects, such as:

  • Taipei 101 Tower (NT$35.3 billion), which opened in 2004;
  • Taipei Port Container Terminal (NT$16 billion), which began operation in 2009;
  • Kaohsiung Kuo Min Container Terminal (NT$16.2 billion), which began operation in 2011; and
  • Taipei Dome Complex (NT$15.4 billion), which consists of a main dome building used as a baseball ground and for other sporting and cultural activities (construction commenced in 2012 but was suspended in 2016) and shopping malls, cinemas and hotels nearby.

Beyond these, project financing was also adopted for some other construction projects for a waste incineration plant, power plant and so forth.

However, green energy has been the industry focus in recent years. The relevant amendments to Taiwan’s Electricity Act and Renewable Energy Development Act have simulated the project sponsors’ interest in Taiwan’s green energy industry. See question 5 for further details in this regard. Since project finance in relation to green energy has been the main focus of project finance in Taiwan recently, we will depict the current situation in the green energy industry in the questions below.

3 Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?

In terms of the recent dynamic development of offshore wind farm projects, internationally renowned developers (eg, WPD, CIP, Swancor, Macquarie, Ørsted and Northland Power) have all been active as project sponsors in Taiwan. China Steel Corporation has also joined the market since its participation as the major shareholder in Zhong Neng.

With respect to banks, in the past, as project finance features non-recourse or limited-recourse, which goes against the risk-averse mindset of Taiwanese banks, which are used to following commercial banking business models and relying heavily upon the creditworthiness of the borrower and its sponsor, most Taiwanese banks do not actively participate in project finance. Compared to international banks, local banks are generally less active in project financing, and state-run banks are even more conservative about funding large-scale projects, especially after the high-profile loan fraud involving Ching Fu Shipbuilding Co in 2017.

However, Zhong Neng offshore wind farm project financing has been a landmark case as it is the first offshore windfarm project financing led by local banks (especially state-owned banks) and participated by mostly local banks. While, by and large, most of the project financing was arranged or funded by foreign banks (including but not limited to Mizuho Bank, MUFG CACIB and DBS, through its Taipei branch or otherwise), large local banks (such as CTBC Bank, Taipei Fubon Bank, Cathay United Bank, E.SUN Bank and SinoPac Bank) have also been very active in the participation of project finance relating to renewable energy.

4 What are the biggest challenges that your clients face when implementing projects in your jurisdiction?

In recent offshore wind farm projects in Taiwan, the lenders usually require step-in rights via assignment or direct agreement to the power purchase agreement or other major project documents. The relevant counterparty’s consent will be required for entering into either an assignment or a direct agreement. In the event that the counterparty to a project contract is a Taiwanese government or state-run entity, this would be a problem as these types of entities would tend to be reluctant to grant such step-in rights. So far the Taipower Company has agreed on the pledge arrangements made over the rights under the power purchase agreement and limited step-in rights in some offshore wind farm projects.

In addition, some local governments or certain associations might ask for ‘tributes’ or ‘compensation’ from developers if the project would negatively impact the local residents or otherwise. This might also create uncertainty in the negotiation and planning of the projects.

In terms of solar energy projects (including those under the newly implemented structure of fish farm or electricity symbiosis plant), the major difficulty would be the environmental issues to be resolved among the relevant stakeholders, including the farmers, developers, environmentalists, etc, and the foreseeability in the changes to regulations that might impact the investment decision from the developers. Take land use, for example, due to the concerns from the agricultural authority of Taiwan, the relevant regulation was amended in July 2020 such that any land parcel, if intended to be used for solar power plants is under two hectares, would now be prohibited from changing the land use. Such amendment would complicate the obtaining of land for solar power plants.

5 Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance? Do you believe these changes will open the market up to a broader range of participants?

The drive behind the rise of project finance relating to green energy has been article 95 of the Electricity Act, passed by the Taiwanese government on 26 January 2017, which stipulated that all nuclear power plant operations in Taiwan should be ceased by 2025. This has stimulated the demand for alternative energy sources in the Taiwanese market. In addition, to accelerate investment in renewable energy technologies, Taiwan law also offers the ‘feed-in tariff’ policy mechanism. This also acts as an incentive for foreign investors to develop green energy in Taiwan. Article 95 of the Electricity Act was removed from the Electricity Act on 2 December 2018 due to the results of the referendum held in 2018, which showed that the majority of Taiwan citizens are in favour of deleting such rule.

However, despite such change to the Electricity Act, Taiwan’s legislature further amended the Renewable Energy Development Act in May 2019, the gist of which appeared to stimulate investors’ interest in continuing the development of green energy in Taiwan. The Taiwanese government is focused on achieving the 20 per cent renewable energy consumption target in 2020. This target has been incorporated into the amended Renewable Energy Development Act by setting out the aim for the total amount of electricity generated by renewable energy power generation facility by 2025 to be at least 27 million kilowatts. Aside from this change, according to the amended Renewable Energy Development Act, for the distribution of the generated electricity, the investors’ choices are no longer restricted to either selling such electricity entirely on the free market (wheeling) or to the Taiwanese electricity retailing utility enterprise (ie, Taiwan Power Company) wholesale. Under the amended rules, the investors may interchange between the two channels for the distribution of the generated electricity, offering project sponsors a certain level of freedom or variation to the handling of the generated electricity. In addition, another important change under the amended Renewable Energy Act is that new construction, expansion or reconstruction of public construction or public buildings established by Taiwanese government institutions, public schools and state-run enterprises are required to install a renewable energy power generation facility as a priority. Since the preferential policies under Taiwan law offered for renewable energy are still in place, it seems that such interest has not entirely diminished, as green energy project sponsors continue to invest in Taiwan. We are still approached by lenders aiming to participate in relevant project finance.

Additionally, the political party endorsing the latest amendment of the Renewable Energy Development Act continues to control the legislature and the Presidency after the election held in Taiwan on 11 January 2020, and the third round of grid allocation had just been announced by the authority in late 2019. Foreseeably, there will be more and more offshore wind farms projects in order to reach the goal of accumulating 10GW in 2026–2035, and correspondingly, the need for project financing would therefore increase.

6 What trends have you been seeing in terms of range of project participants? What factors have influenced negotiations on commercial terms and risk allocation? Are there any particularly innovative features?

Although the market of Taiwan’s renewable energy project finance is still in the earlier stages in terms of development, secondary markets in the finance debt market should be a matter of course. As commonly seen in large-scale financing, the conditions of a lender transferring its participation would usually be subject to a ‘white list’ agreed by the obligors that sets out all the acceptable lenders. Credit rating requirements would also be imposed upon such new lenders.

In the Taiwanese market, export credit agencies are heavily relied on as a major source of debt financing, as 60–70 per cent of the facilities are covered by export credit agencies. The dominant players in the Taiwanese market are international financial advisers and banks, adopting the international norms and practice in transactions.

Aside from banks, insurance companies’ and global institutional investors’ participation are worth noting in project financing. A case in point should be the announcement by Ørsted in late December 2020 that it had signed agreements with a consortium comprising global institutional investor Caisse de dépôt et placement du Québec (CDPQ) and Taiwanese private equity fund Cathay PE, which acquired a 50 per cent ownership share in Ørsted’s 605MW Greater Changhua 1 Offshore Wind Farm in November 2021. The reason behind this trend is due to the lending limit. For the banks currently active in providing debt finance to renewable energy project sponsors, the respective maximum dollar amounts that such banks are legally permitted to lend to their respective borrowers are all almost exceeded; these banks are therefore unable to further participate in the later renewable energy projects. Project sponsors, therefore, would have to seek other sources of funding. Recently, banks in Taiwan would issue green bonds as the project sponsors’ alternative sources of funding. See further explanation in question 7.

While large local banks in Taiwan and foreign banks are open-minded about project finance with good finance model and technical advice, most of the local banks (notably state-run banks) take a conventional view toward the financing model and still turn to the creditworthiness of the sponsors or value of collateral made available to the lenders. As project finance features non-recourse or limited-recourse, no special considerations come from the project sponsors. In some structures, the project sponsors do not invest in the special purpose company (SPC) established specifically for the investment in Taiwan’s renewable energy directly, and a separate holding company (the Holdco) will be incorporated to hold the SPC directly. Usually, the financial institutions’ utmost concern is how to ensure that the holdco and sponsors will inject funds (by equity or shareholder loan) into the SPC in the construction phase as they committed. In this regard, the financial institutions may require a corporate guarantee or a letter of support from the sponsors’ financially sound parent or a bank guarantee to cover the funding risks of the sponsors.

Moreover, regarding the bankability issue in Taiwan, for finance documents and security documents, the Asia Pacific Loan Market Association form is regularly used in financing deals in Taiwan. The governing law of the finance documents is not an issue under Taiwan law as Taiwan courts normally respect the governing law chosen by the parties. In addition to Taiwan law, some projects choose English law as the governing law for the finance documents.

7 What are the major changes in activity levels or new trends you anticipate over the next year or so?

After the United Nations (UN) Climate Change Conference in Glasgow (COP26), environment, social and governance (ESG) undoubtedly is the hottest topic not only in the world but also in Taiwan’s project finance market. Cooperating with several public sectors, associations in the financial sector and non-profit organisations in Taiwan, the Financial Supervisory Committee of Taiwan (FSC) issued and promulgated the Green Finance Action Plan 2.0 to achieve the objectives, such as guiding the funds to be injected into green and sustainable industries by establishing a framework for facilitating the effective operation of relevant financial markets and guiding the financial institutions to pay attention to ESG issues and manage the climate change risks. In 2016, the FSC stipulated and introduced the Program to Encourage Lending by Domestic Banks to Enterprises in Key Innovative Industries to encourage domestic banks to actively extend loans to seven innovative industries (including green energy technology) under the precondition of conducting proper risk control, and providing rewards to banks for participating in the Program. As mentioned, there has been a rise in global institutional investors’ participation in project financing. The reason behind this trend is due to the fact that banks and insurance companies currently active in providing debt finance to or investing in renewable energy project sponsors have almost reached their respective limits. Project sponsors, therefore, would have to seek other sources of funding. For instance, green bonds and sustainability bonds are the project sponsors’ alternative sources of funding.

In addition, complying with international standards such as Principles for Responsible Investment and the Equator Principles, lenders gradually incorporated ESG concepts into their internal policies. Sustainable and responsible lending in ESG-related industries (eg, solar photovoltaic and wind power generation) has become prevalent. This trend also corresponds to the policy promoted by the governing political party, the Democratic Progressive Party. We anticipate that the policy for electricity generation from green energy will remain in place and even dominate, and that project financings will continue to be of keen interest to the relevant market players.

The Inside Track

What three things should a client consider when choosing counsel for a complex project financing?

The counsel must have adequate experience in the relevant project financing. Moreover, since this is a relevant new field in Taiwan, the standard norm for project finance relating to renewable energy has yet to be established. Therefore, it is important for the project sponsor to choose a counsel who has sufficient resources to liaise with the Taiwanese government and be able to hold negotiations with the government. Lastly, the counsel must be familiar with the local laws and regulations.

What are the most important factors for a client to consider and address to successfully implement a project in your country?

In Taiwan, various permits and approvals must be obtained from the Taiwanese government to successfully implement a green energy project. Therefore, it is important for the project sponsors to have a team and outside counsel that are capable of managing the timeline for the applications for such permits and approvals, so that such permits and approvals could be obtained in a timely manner to avoid any delays in such projects.

What was the most noteworthy deal that you have worked on recently and what features were of key interest?

Our firm participated in various offshore wind farm projects, in which we acted as the Taiwan counsel to the sponsor/borrower as well as the lenders. Most of the deals involve not only complicated financing structure but also foreign exchange and hedging issues with multiple parties, the local law issues required to be addressed by solid legal advice and seamless communication with the government authorities, which are features of key interest to the relevant participants.