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$9 million balloon payment due next month

By Giff Johnson MAJURO, Marshall Islands (Marianas Business Journal, May 10, 2010) – The government power utility in the Marshall Islands and the Bank of Guam are negotiating to extend a loan for three years that would reduce by half the US$9 million due from the financially ailing utility on June 1.

Marshalls Energy Co. and Bank of Guam officials have been scrambling to get paperwork completed before the June 1 deadline for a balloon payment on a loan issued in 2007, which helped stabilize MEC by allowing it to pay off high-interest debt to Guam-based Mobil Oil Micronesia.

But while the approximately US$12-million Bank of Guam loan was amortized over 10 years with monthly US$160,000 payments, it came with a balloon payment of US$9 million due June 1, 2010. Neither MEC nor the Marshall Islands government, which guaranteed the loan, has the cash to pay off US$9 million in one go - about 6 percent of the country’s annual national budget.

Following meetings with Bank of Guam officials in Guam and then with William D. Leon Guerrero, bank executive vice president and chief operation officer, in Majuro in late April, MEC General Manager David Paul expressed confidence that details of a repayment extension plan will be worked out before June 1. According to Paul, under the new plan being negotiated, MEC’s debt payment in three years will be reduced to about US$4.5 million.

"Bank of Guam has agreed in principle to extend the loan," Paul said at the end of April. "We’re now providing financial information to the bank to complete the agreement. Both parties understand the urgency."

An MEC board committee negotiated the loan in 2007 "for a period of 10 years and the three-year maturity was the minimum time the loan had to be paid until an early settlement could be made, so that Bank of Guam could recover their costs and profits," said William F. Roberts, former general manager of MEC, in an e-mail to government officials in April when current management and board officials expressed surprise at the balloon payment situation. The loan was essential to stabilizing MEC’s severe financial situation, which was exacerbated by having to pay an 18 percent interest penalty to Mobil for a fuel bill. The Bank of Guam loan allowed MEC to eliminate the Mobil debt, bringing its interest payment down to a more manageable 7.5 percent. But MEC’s cash flow crisis in 2007 meant the company was weeks away from shutting down if the loan had not gone through.

"The committee negotiated under duress insofar as had the loan not been approved and issued in a timely manner the lights would have gone out in Majuro," said Roberts, who managed MEC from its inception in 1986 until last year when he departed the Marshalls three years after submitting his resignation. An April 2007 MEC board resolution, which Roberts said was a key part of the loan package, specifically states agreement for loan payments to be made over 12 years. "If the Bank of Guam had not agreed with the board resolution they would never have issued the loan as the resolution is an integral part of the loan," Roberts said.

The Marshall Islands government pledged tax revenue to secure the US$12-million loan for MEC in 2007, but neither the government nor MEC can raise US$9 million by next month, Paul said. "This could shut down MEC and the government," Paul said. But Bank of Guam, he added, "is willing to work with us."

MEC would have gone bankrupt between 2005 and 2008 without the aid of the government, the confluence of two dramatic events: a dispute with Mobil that led to the first switch in fuel suppliers in 13 years and high-interest debt payments, and the skyrocketing international fuel price.

After years of turning a profit, MEC lost US$14 million from 2004 to 2008. The cash-strapped company had no money for maintenance and was hit in 2006 with a fire that knocked out three of its seven generators, one of which recently went back on line after repairs. Over the past year, Majuro has experienced dozens of power outages as MEC worked to get its engines overhauled and back on line, while juggling limited generating capacity that at times has not been adequate to power the entire atoll, forcing rolling blackouts.

Meanwhile, the Asian Development Bank and the Marshall Islands government are negotiating the Manila-based bank’s biggest loan to the country that would make the Bank of Guam loan an issue of the past.

A possible US$14-million loan is moving through the ADB’s approval process that would be used to pay off MEC’s Bank of Guam debt and support other government fiscal reforms. If it is approved, the ADB loan would give MEC and the government an eight-year loan payment holiday and then charge 1 percent interest over a 32-year repayment period, giving the utility company needed financial relief.

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The most reasonable Bank in the pacific is willing to work with the people's government

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