Project Finance and Guarantees June1998 Project Finance and Guarantees Department Resource Mobilization and Cofinancing Vice Presidency TheSeaLaunchGuarantees RussianFederation/Ukraine The Sea Launch project is an international venture · PO Yuzhmash (Ukraine) (10%) for launching commercial satellites into earth orbit · KB Yuzhnoye (Ukraine) (5%) whose principal sponsor is The Boeing Company of Seattle, Washington. The venture will use rocket KB Yuzhnoye/PO Yuzhmash will produce the two- components manufactured in Ukraine and Russia, stage Zenit launch vehicle in Dnepropetrovsk, which will be transported to Long Beach, Califor- Ukraine, and will provide operations support to Zenit nia, where they will be united with commercial pay- processing and launch operations. RSC Energia will loads and loaded onto a Launch Platform. An manufacture the Block DM-SL upper stage in Mos- Assembly & Command Ship will escort the Launch cow and play a key role in Sea Launch vehicle inte- WorldBank Platform to a remote launch site in international wa- gration, launch operations, and range services. ters near the equator in the Pacific Ocean and will Guarantees Boeing Commercial Space Company acts as inte- control the launch from a safe distance. It will then grator of the project and will produce the payload fair- helpconvert escort the Launch Platform back to Long Beach to ing and interface hardware, develop the Home Port theaerospace repeat the cycle. facility, and provide spacecraft integration and overall industry in In response to requests from the Government of mission operations. Kværner Maritime a.s is re- the Russian Federation and the Government of sponsible for the design and construction of the Russiaand Ukraine to provide partial risk guarantees to help Assembly & Command Ship in the United Kingdom Ukraineto mobilize commercial bank financing for the Sea and the modifications to the Launch Platform in Norway; in addition, Kværner will integrate the ma- commercialuse Launch project, the World Bank executed two es- sentially identical but legally separate Guarantees rine elements of Sea Launch and perform marine on December 30, 1997. These two instruments operations. guarantee the project lenders against debt service default caused by a breach of obligations (Covered The Zenit rocket is the worlds most automated Events) of the Russian Federation and Ukraine to launch vehicle, with 24 successful prior launches. the project under their respective Project Support All the rocket engines will burn liquid oxygen and Agreements with the Sea Launch venture. Thus, kerosene and the first stage will provide 1.6 million the World Bank Guarantees underwrite the com- pounds of initial thrust, sufficient to place a 5,000-kg mitments of the two Governments as regards the payload into geostationary orbit. The Block DM payment of damages arising from the occurrence upper stage has had 167 successful prior launches; of the Covered Events specified in the Project Sup- the Sea Launch version includes computer and port Agreements. guidance platform enhancements. The Zenit and Block DM-SL stages will be transported by rail to a The Project port in Ukraine on the Black Sea, for shipment by cargo ship to the Home Port in Long Beach, Cal- Sea Launch Limited Partnership, the developer and ifornia. The Home Port will provide the facilities, operator of the Sea Launch project, is an exempt equipment, supplies, personnel, and procedures limited partnership registered in the Cayman Is- necessary to receive, transport, process, test, and lands. It has five partners, each of which owns both integrate the spacecraft with the launch system, as general and limited partnership interests: well as docking facilities for the 660-foot Assembly · Boeing Commercial Space Company & Command Ship and the 436-foot Launch Platform. (United States) (40%) A payload processing facility at the Home Port will · RSC Energia (Russia) (25%) test and encapsulate the payload in a graphite com- posite fairing. The payload will be then transferred · Kværner Maritime a.s (Norway) (20%) to the Assembly & Control Ship for integration with ProjectFinance the rocket; the entire assembly will then be trans- both companies have sought to diversify into other and Guarantees ferred to the Launch Platform for the journey to the activities, thousands of high technology jobs are launch site. presently at risk due to the contraction of the tradi- June 1998 The Launch Platform, a converted North Sea oil rig, tional Government market for space and space-re- is self-propelled and will carry the rocket to the lated activities. As prospects for Government launch site, which is at 154ºW at the equator. This funding of such activities are dim, entering the com- site was chosen to reduce the amount of fuel mercial space launch business is of key strategic needed for orbit maneuvers, thus maximizing the importance for these companies. potential payload weight. The benign weather at the The project provides a long-term market to Energia site allows for year-round launches. For stability, and Yuzhnoye/Yuzhmash and incentives for the ef- the Launch Platform will submerge to a draft of about ficient production of launch vehicles. The rocket 70 feet, and tilt the rocket upright for launch. The components will be sold to the Sea Launch joint Assembly & Command Ship, which has accommo- venture pursuant to the terms of long-term supply dations for up to 240 persons, will position itself contracts. By increasing the effective demand for about 5 km away from the Launch Platform and will the Block DM-SL and Zenit stages, the Sea Launch remotely fuel the rocket and control the launch. project will generate close to $2 billion of incremen- The sponsors expect the revenue earned by tal exports for Russia and Ukraine, thereby helping SeaLaunch launching satellites to cover the expenses of the to preserve thousands of high skill, high wage jobs in Russia and Ukraine. tapsthebest partnership, including debt service, and provide a return to its investors. Barring unforeseen delay, technologyfrom the first rocket is scheduled for launch in the fourth throughoutthe quarter of 1998, carrying a communications satel- FinancingPlan world lite for Hughes Space & Communications Interna- The financing for Sea Launch Limited Partnerships tional, Inc. to geostationary orbit. development phase consists of: · equity from Boeing and Kværner; Russian and Ukrainian Sponsors · export financing from Garanti-Instituttet for Energia is one of Russias largest aerospace com- Eksportkredit (GIEK) of Norway, in the amount of panies. It currently employs roughly 20,000 work- US$85 million, for the refurbishing of the Launch ers, down from a peak of 34,000 in 1988. Since its Platform; creation 50 years ago, Energia has played a lead- · export financing from Department of Trade and ing role in the development of launch vehicles and Industry (DTI) of the United Kingdom, in the the former Soviet Unions manned space flight pro- amount of US$100 million, for the construction gram. Energia registered as a joint stock company of the Assembly & Command Ship; and in July 1994 and is scheduled to be fully privatized · two loans from a syndicate of banks led by The in the near future. Its stock is currently traded on Chase Manhattan Bank, in the amount of the Moscow stock exchange. US$100 million each. One loan is for develop- ment expenditures in Russia and the other is for Yuzhnoye/Yuzhmash is now the largest aerospace development expenditures in Ukraine. The enterprise in Ukraine. Yuzhnoye/Yuzhmash has loans carry floating interest rates and will be been a highly diversified conglomerate since its repaid in two equal installments in years 9 and creation in 1944. At its peak, it was staffed by 50,000 10. The repayment of principal and scheduled employees. It is currently a 100% state-owned en- interest on these loans is covered by the World terprise with approximately 34,000 employees, of Bank Guarantees. which 19,000 are employed in aerospace-related activities. Virtually all of the recent employment decline has occurred in the aerospace sector. Project Support Agreements (PSAs) Both enterprises have suffered from a sharp de- The two Governments issued separate Project Sup- crease in employment and production stemming port Agreements to Sea Launch Limited Partnership from declines in state orders for their goods and describing each Governments agreed commit- services. For example, Yuzhnoye/Yuzhmash pro- ments to the project. As noted above, the duced only one Zenit rocket in 1995, although at goverment obligations under each PSA are sup- the height of production in the mid-1980s, it was pro- ported by the corresponding World Bank Guaran- ducing 10 two-stage Zenits and 16 first stages per tee, payments under which must be applied to repay year. The production decline of Energias Block the commercial bank loan used to finance Sea DM is not as severe, although still significant. While Launch development phase investment expendi- ProjectFinance tures related to that country. final binding arbitration award under UNCITRAL and Guarantees Covered Events. The PSAs define specified forms rules. June 1998 of Government interference with the production and WorldBankGuarantees export of launch vehicles and components from the Russian Federation and Ukraine. The Covered Guarantee Agreements. The World Bank entered Events are limited to the following: into two Guarantee Agreements with the commer- cial banks funding the Sea Launch projects devel- · deprivation by the Government of property, opment phase expenditures one for up to resources, or services required by a local en- US$100 million of expenditures funded for the terprise for the performance of its contractu- Russian Federation and another one for up to tual obligations to Sea Launch. US$100 million of expenditures funded for Ukraine. · the introduction of limitations on transfers of Pursuant to the Guarantee Agreements, the com- foreign exchange into or out of the country; mercial banks may claim on the World Bank Guar- · the imposition of unusual or discriminatory antees only if (i) Sea Launch has obtained a final new or increased taxes, duties, or fees; binding settlement or arbitral award upholding its · revocation or suspension of, or failure to re- claim to payment pursuant to the PSA against the new, licenses or permits; Government and (ii) the Government failed to pay WorldBank · prevention of shipping and embargo; and the specified and ascertained damages awarded by arbritration or agreed by binding settlement. coverspolitical · war and civil disturbance. risktosupport Indemnity Agreements. In compliance with its Ar- ticles of Agreement, the World Bank entered into exportofspace The commercial and technical performance of Sea Launch is not covered. separate Indemnity Agreements with the Russian launchvehicles Federation and Ukraine, under which each Gov- Government Liability. The respective Govern- ernment agrees to reimburse the Bank for any ments would be required to pay damages to Sea claims made against the Bank under its World Bank Launch if (i) a Covered Event occurs in its territory Guarantee or otherwise arising from the Banks in- and (ii) as a direct result of the occurrence of that volvement in the project. Each Government also Covered Event, Sea Launch is unable to pay the covenants not to permit or require any Sea Launch scheduled debt service payments on the applicable assets to be used for military purposes and to ap- commercial bank loan. Thus, the fact that a Cov- ply its environmental laws and regulations to project ered Event occurred and damaged Sea Launch fi- activities in its territory. nancially is, by itself, not sufficient to trigger any Government liability. Liability will be triggered only Project Agreement. Sea Launch Limited Partner- if the Covered Event is severe enough that it impairs ship entered into a Project Agreement with the Sea Launchs ability to service the commercial bank World Bank, in which the partnership covenants, loan that funded eligible development phase expen- among other things, to use the proceeds of the ditures in that country. Each Governments maxi- commercial loans only for authorized purposes in mum liability for damages pursuant to its PSA would the Russian Federation and Ukraine, as the case equal the actual debt service on the loan disbursed may be, not to permit any military usage of assets in that country and used to meet project expendi- or facilities owned, controlled, or developed by the tures. Sea Launch venture for the project, and to comply with all applicable environmental and safety regu- Dispute Resolution. Before any payment is required lations. Noncompliance with these covenants en- to be made under a PSA, the Government that is titles the World Bank to terminate coverage under alleged to have caused the Covered Event would its Guarantees. have an opportunity to correct the problem and avoid any liability. If the problem is not cured to Sea Benefits of the World Bank Guarantees Launchs satisfaction, Sea Launch may take its The World Bank Guarantees are part of a series claim to arbitration to establish that (i) a Covered of operations being developed to encourage pri- Event occurred and (ii) but for the occurrence of vate capital flows to help existing enterprises in the the Covered Event, Sea Launch would have been Russian Federation and Ukraine to increase pro- able to service the commercial bank loan disbursed duction and employment. The Guarantees were in- and used to meet project expenditures in the country strumental in attracting long-term private capital to that caused the covered risk. Sea Launch must sub- these countries without investment grade sover- stantiate its claim through a dispute resolution pro- eign debt ratings, mitigating risks that commercial cess leading to a legally binding settlement or, if that lenders were not able to bear or adequately evalu- procedure fails to yield a satisfactory resolution, ate. ProjectFinance and Guarantees June 1998 )LQDQFLQJ 3ODQ :RUOG %DQN :RUOG %DQN :RUOG %DQN *XDUDQWHH *XDUDQWHH ,QGHPQLW\ &RPPHUFLDO *,(. ,QGHPQLW\ /HQGHUV DQG '7, 3URMHFW $JUHHPHQW 5XVVLDQ )HGHUDWLRQ *XDUDQWHH *XDUDQWHH 8NUDLQH 7KH %RHLQJ .Y UQHU 3URMHFW &RPSDQ\ $6$ 3URMHFW 6XSSRUW /RDQ 6XSSRUW $JUHHPHQW *XDUDQ $JUHHPHQW (TXLW\ /RDQV (TXLW\ WHHV 6XSSO\ 6XSSO\ &RQWUDFW &RQWUDFW (QHUJLD