IMF World Bank 2006: Sponsor power
Yank the bank is the latest phrase to hit the project finance market. Charming language indeed but it is all getting very competitive and the sponsors are on top - for the moment. Banks not playing ball are getting yanked. Rod Morrison reports.
The idea of 'yank the bank' is simple enough. In old banking language it simply means avoiding paying underwriting fees for refinanced deals. Banks in the existing loan syndicate are asked if they would like to join the new deal under a waiver procedure on the existing documentation. This waiver is usually nothing more than dropping the loan margin. Banks which do not agree are yanked out of the deal and in their stead, a new bank has to be parachuted in or an existing bank needs to put up more cash. This means there is still a role for the mandated lead arrangers on a refinancing – either they have to sell it to the syndicate or find others.
The saving for sponsors makes the whole exercise worthwhile. No new underwriting fees, just a small recommitment fee of, say, 25bp. And no piles of costly new documentation. And if you can get away with it, why not? The market is hot for assets.
The exercise is now being carried out on a range of GCC financings. It was used on Omifco in Oman last year and is now being used on the Sohar refinery and the Alba smelter deal in Bahrain. It is in the Gulf power sector, however, that the procedure is now in full flow. All deals signed up to 2003 are now being refinanced – with the curious exception of Shuweihat – under the amend and restate waiver principle. The local banks are now just standing and watching, unable to match the international banks.
Refinancings are now attracting margins in the 65bp range, then stepping up to 100bp and beyond. It is the tenor, however – 20 years and beyond – which the local banks find most difficult to live with.
However, there must be a limit, which perhaps may become obvious from Sembcorp’s US$1.275bn Fujairah independent water and power project (IWPP) syndication. This is not a refinancing, it is a new asset financing. But the margins and fee are not excessive (starting at 65bp) and there is a large amount of paper to shift. Barclays Capital and SG are the mandated lead arrangers. Abu Dhabi utility ADWEA is the offtaker of the power and water and has 60% of the project equity.
ADWEA has a number of independent water and power project (IWPP) refi deals in the market. Banks have bid for the refinancing mandate on the Taweelah A1 scheme. Both amend and restate and fully underwritten options are under consideration. The sponsors hope the deal can be done on an amend and restate basis to save on underwriting fees, while having the underwritten option as an safety net. The sponsors hope to make a decision shortly. The target is to have the refinancing in place by the next repayment date on the loan, October 31, although this could prove challenging.
The scheme is sponsored by Total and Tractebel, which hold the other 40% in the project company. The new deal will total US$1.2bn, with US$900m of debt refinanced from the existing loan and US$300m of extra leverage and new capital expenditure on the plant. A further 250MW of power capacity is being added but there will be no more water. The original 2000 loan has an 18-year tenor with pricing at 120bp rising to 145bp. Banks will be asked to bid aggressively on price but the debt service cover ratio (DSCA) on the deal has been kept at 1.6x. ADWEA wants to ensure the deal to maintain good coverage levels, given that it is the offtaker of the power as well as a 60% shareholder.
Three firms are bidding for a financial advisory mandate on the Taweelah B refinancing – a scheme sponsored by Marubeni, BTU, Powertek and Tanjong – Advisorm, Citigroup and HSBC. The scheme is still in construction and was financed last year but the sponsors want to see if they can lock in the new cheap loan rates available. The US$2.1bn 20-year deal is split between a US$1.2bn JBIC loan and a US$900m commercial loan priced at 115bp moving to 110bp then up to 170bp. Advisorm is the consultancy joint venture between Harold Fairfull and Andrew Elliot that has been advising Marubeni on its Middle East IWPP deals.
Increasing leverage, reducing ratios
In Oman, Calyon is out to the syndicate of banks on AES's Barqa IWPP deal with a refinancing on an amend and restate basis. The new deal involves increasing the leverage, reducing the cover ratios and reducing the margin.
The original US$332m deal was put in place in 2001 and the plant is now operating. Last year, there was an IPO of 35% of the project equity on the local stock exchange. The new debt financing is for US$390m and is now based on debt service cover ratios of 1.2x, down from 1.3x. The new margin is 65bp stepping up to 120bp, compared with 112.5bp to 155bp on the old deal. The tenor is now 11.5 years. As an amend and restate, the sponsors will avoid underwriting. Banks are being offered 25bp to recommit to the deal.
The sub-100bp margin on GCC power deals was first established on the QEWC's Ras Abu Fontas B US$485.5m deal in Qatar. It has now has been syndicated, with US$175m raised from seven banks taking US$25m each. The deal has a 25-year tenor and pricing at 65bp during construction, dropping to 55bp then moving up eventually to 150bp. But the scheme is not a pure project financing. It is backed by a government-guaranteed 180-day put option to buy back the debt. Nevertheless it has set a precedent this summer for other power projects to follow.
There are six mandated lead arrangers on QEWC – Bank of Tokyo Mitsubishi, Calyon, Commercial Bank of Qatar, GIB, HSBC and QNB. The seven new banks are Bayerische Landesbank, Deka Bank, Dexia, Doha Bank, DZ Bank, Woori Bank and SMBC.
Margins of over 1000bp are still available on Saudi power deals. But at a price. On the latest IWPP scheme, the prospective MLAs are offering US$2bn of 20-year plus debt uncovered, non export credit agency-backed debt.
The evaluation of the Shuqaiq independent water and power project (IWPP) bids is now beginning. The Acwapower-led team has come out on top but the scope of the deal is not entirely precise so there could be some changes. The client is Water and Electricity Company (WEC) and HSBC is advising.
Enhanced energy deals
The US$2bn scheme will have a capacity of 850MW and 48m gallons a year. There are, however, some additional features of the project that are required due to the fact that the energy infrastructure in the largely tourist area is not that well developed. There will be an offshore oil import facility and electrical grid connections needed. Therefore, it is possible that once what is in the bids is levelled, a different result could emerge.
However, the Acwapower team appears well placed. It has been involved in all the Saudi IWPPs. On Shuqaiq, it is bidding with GIC with turbines to be supplied by Mitsubishi and desalination equipment from Doosan. It bid SR0.1027 (US$0.0274) per kwH and SR3.85 per cu m of water. The Marubeni-led team bid SR0.12 and SR4.99 while the Powertek-led group bid SR0.16s and SR5.32.
The Acwapower bid is backed by Bayerische Landesbank, GIB, Samba and Riyad. They are offering fully uncovered debt with a 20 to 22-year tenor. Given that the debt is uncovered, the loan pricing will be similar to last year's Shuaibah IWPP deal, which came in at 120bp to 170bp but had export credit cover. The senior debt to equity split on the deal will be 80/20 but the banks will provide 5% sub debt, making the debt split 85/15. The financing could be split between conventional and Islamic debt. Marubeni and National Power have a JBIC direct loan/commercial debt package. It is being advised by Mizuho. The preferred bidder should be announced on September 15.
The other scheme in the Saudi market is the huge Marafiq scheme which will provide power and water to the kingdom’s industrial giants, Aramco and Sabic. A new timetable for the scheme has been sent out and the bidders have been given the final version of the state guarantees being offered on the scheme. The preferred bidder is now due to be selected on September 20, with the power and water project agreement (PWPA) signed on December 20 and financial close on March 20 next year, three months later than originally planned.
The guarantee will cover termination and ongoing payment. It will be provided by a wholly owned subsidiary of Marafiq. The rating trigger idea, whereby if Marafiq's credit rating was above BBB+ for three years the guarantee would fall away, has been dropped. This trigger is used on ADWEA schemes.
A Suez/GIC/Acwapower team bid lowest for the US$3.5bn scheme in May. It is backed by BNP Paribas, GIB and Samba. Mitsui/Kepco/National Power Company/Kyushu Electric is the main rival. It is backed by Arab Bank, Riyad, Saudi Hollandi, SMBC and Standard Chartered. Citigroup is advising Marafiq.