Saturday, 23 June 2018

PF takes stock

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There has only been one project finance deal transacted this year in the Gulf and that was a corporately backed bridge loan. Yet actual activity in the market has been far from muted and some has set the groundwork for a recovery. By Rod Morrison.

The deal that has been signed was the US$100m five-month bridge loan to fund initial construction on the Abu Dhabi Sewerage Services Company (ADSSC) sewage treatment plant being built in joint venture with Veolia and Besix. The deal is priced at 190bp with fees at around 100bp. The funding banks are Calyon, NBAD and Natixis.

The funding is following a similar template to the larger Shuweihat 2 independent water and power project (IWPP) scheme in Abu Dhabi, being developed by ADWEA and Suez. A bridge loan first, given the need to raise money quickly, then a longer-term project finance take-out. The Shu 2 loan was put in place late last year with six banks.

Both the ADSSC and Shuweihat 2 long-term loans are now being pitched to banks – ADSSC is a US$400m nine-year mini-perm that terms out into a long-term 20-year financing. Shuweihat 2 is a US$2.2bn 22-year deal half funded by JBIC with commercial banks being asked to stump up the rest. ADWEA, the state power and water utility, is running both fundings. Marubeni is expected to join the Shu 2 team, hence the involvement of JBIC.

Both these deals will test the market and provide new benchmarks in the recovery. There is some guidance from the market activity this year as to whether they will be successful. The project finance market globally has been taking stock in 2009. Last year saw record volumes transacted but sentiment dropped dramatically after the Lehman collapse on 9/15. Liquidity disappeared for all but the shortest tenored deals and, of course, project finance is a long-tenored business. Some deals were still finalised – such as Mubadala's Sorbonne university in Abu Dhabi and the Sanmar petrochemical deal in Egypt (profiled in this supplement) – but these were mainly legacy deals pre-9/15.

The activity this year has been very much "new era". Sponsors and government-linked entities have been testing what is available from the market and concentrating on getting deals done – rather than aggressively seeking finance. It is in the spirit of bookbuilding and consensus building that both ADSSC and Shu 2 will go out.

The two big Gulf project finance deals thus far this year – Ad Dur and the Dolphin refinancing – have proceeded successfully. But they have proceeded slowly, certainly a lot more slowly than they would have done even a year ago. In addition, the terms and conditions of the loans have changed remarkably. The fees and margins are much higher and the tenors are limited. The deals that follow these two will hope tenors can be lengthened, now the concept of longer-term lending has been re-introduced. As for margins and fees, perhaps they will fall too but no-one is expecting a big re-correction downwards.

Ad Dur has been very much a book and consensus exercise and it has taken nearly all year to put together. But the finishing line is in sight. The US$1.7bn deal will fund an independent water and power project (IWPP) in Bahrain won by Suez and its local partner GIC last year.

The French giant had proposed a long-term financing but had to alter its plans following 9/15 and, after a market sounding, offered the banks market an eight-year mini-perm in January with high pricing, compared with what could have been achieved a year ago. To compensate Suez for the extra financing costs, the Bahrainis have increased the power and water purchase agreement (PWPA) by five years in return for a share of the gains from refinancing the loan that is now being put in place. However, no tariff increase has been agreed.

The pricing initially offered to banks was 250bp flat but even this had to be increased during the spring to 290bp during construction, 315bp for the 2.5 years post-construction then 365bp. The fees remain the same at 200bp to 275bp. The deal has a full cash sweep starting 2.5 years after construction.

The debt totals US$1.7bn. Islamic funders are providing US$300m and US Ex-Im, US$200m. The US$1.2bn commercial bank tranche is one-third covered by KEIC. The 15 banks currently in the deal are Al Rajhi, Arab Bank, Bank of Tokyo-Mitsubishi, Banque Saudi Fransi, Bayerische Landesbank, Fortis, KBC, KfW-Ipex, NAB, Riyad Bank, SG and WestLB, plus three original mandated lead arrangers – Calyon, Mashreq and Standard Chartered.

Dolphin has been a more formalised funding raising, through the Crosland-Fairburn RBS advisory team, but it too was only launched after a full consultation, has taken a little longer than planned, has a limited tenor, has an increase in pricing on from what was initially launched and is very expensive compared with a year ago. Another constant is the presence of an important French sponsor – Total. The US$3bn deal refinances the four-year bridge loans put in place to fund the construction of the gas pipeline between Qatar and Abu Dhabi. The sponsors are Mubadala, Occidental and Total.

The new loan is a 10-year deal. Given that the project is constructed, the loan will fully amortise, which helped in the sales process that began in February. Pricing on the 10-year loan was upped in April to get the deal over the line. It was increased by 50bp across the board from the original model pricing and now stands at 275bp to year three, 300bp to year six and 350bp to year 10. Fees are 200bp to 275bp.

Twenty-three banks joined the deal – NBAD (commercial loan facility agent), EDC, SG (intercreditor and Sace agent), Abu Dhabi Commercial Bank, First Gulf Bank (onshore agent), RBS (offshore agent and financial adviser), Calyon, BTM, BNP Paribas, Bayerische Landesbank, Samba, SMBC, WestLB, Standard Chartered, Natixis, KBC, Lloyds TSB, National Australia Bank, Union National Bank, CIC, ABC, Europe Arab Bank and HSBC.

The deal includes an extra US$1.2bn shareholder loan. Sace is covering US$400m within the US$3bn commercial loan. The commercial loan could be reduced in size if a bond issue is launched against project (see article in this supplement on Gulf bonds) and if an Islamic tranche is raised.

The two key elements of both these deals is, simply, that they have got done. In the depths of winter that looked challenging, to say the least. But the project finance market now faces new challenges. There are a whole range of projects that need funding and will be seeking their own terms. Now the global bank market dislocation appears to have subsidised, we will see over the rest of the year what the new era of project finance will look like.

Abu Dhabi is leading the way. It has been the home of the project finance market in the Gulf for a decade although Saudi Arabia has caught up and overtaken it. Now, the focus is on Abu Dhabi again as projects in the Kingdom have stalled. The Emirate has not just ADSSC and Shuweihat 2 in the market. Mubadala has put its next university private finance initiative (PFI) deal in the market, Zayed, and at US$1bn it is nearly three times the size of Zayed.

The debt will total US$938m with the indicative split between dollar and local dirham funding US$704m and US$234m. Senior debt will total 83% of the financing and, unlike on Sorbonne, there will be a 7% mezzanine tranche, mainly aimed at the local banks to give them some yield. On top of that, will be the 10% equity piece. The loan will run for 10 years with 64% of the principal outstanding at year 10 on both the senior and mezzanine tranches. On Sorbonne, the tenor was an amortising 20 years. Both deals have a 28-year concession. The average debt service cover ratio (ADSCR) is the same on both deals at 1.25x. Mubadala has another deal in the works, a US$300m long-term deal for its solar power project being developed with Total and Abengoa.

The Abu Dhabi Department of Transport (ADDOT) has just launched the tender for its US$2.65bn Mafraq road project. However, bids are not due back until September 30.

The projects market in Saudi has stalled. The problems with the US$5.5bn Ras Al Zour IWPP have shown some of the market strains, although the deal had actually got its long-term financing in place and was hit by the equity. Akin to Ad Dur, a Sumitomo/Al Jomaih/Malakoff team won the deal before 9/15. Half of the debt was to have come from JBIC. But increases in the rest of the cost of debt and the fact that the deal was bid tightly originally meant the equity IRRs were reduced. Malakoff pulled out and the government cancelled the IWPP and reverted to an EPC procurement.

What happens now is an open question. Saudi Electricity Company (SEC) has two IPPs in the market. If ACWA Power/Kepco can reach financial close on the US$2.5bn Rabigh IPP project this will restore some confidence to the market. The plan centres on a US$1bn Islamic tranche, US$900m of which has already been underwritten by Al Rajhi, Alinma and Samba. There is a US$400m 24-year international bank tranche covered 100% by KEIC. The final tranche is a new to the region, and to the project finance market in general, and its success or otherwise will be keenly watched. China Exim is providing a US$500m 24-year loan. The second scheme is a 2,000MW IPP for Riyad. Bidders have been prequalified but the tender has yet to be launched.

The Chinese are looking at the Salalah IWPP in Oman. Again, this project has been hit by increases in funding costs and the bidders are being asked to rebid to justify new tariffs. However, a SembCorp-led team, backed by the Chinese, remains the favourite to win.

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