IFR Middle East 2009

IFR Middle East Report 2009
11 min read

Racing to the chequered flag

In January 2009, the Abu Dhabi government unveiled their Economic Vision 2030 designed to shape the structure of the fast growing Emirate over the next 20 years. Despite worldwide economic gloom, gross domestic product is forecast to grow by 7% over the next five years and in particular, the plan calls for a diversification away from traditional oil and petrochemical related revenues, with oil planned to contribute only 50% to growth within the next 10 years.

High levels of economic growth and the development of the plan have led to a robust investment programme in infrastructure, industry, real estate, finance and tourism, led by both government institutions and private equity houses, a far cry from the traditional petrochemical industry investment that has been the bedrock of the country’s fortunes. Real estate and tourism projects alone had an estimated value of approximately US$200bn by the end of 2009, causing a surge in the construction sector that is currently still evident despite the downturn elsewhere in the Gulf. The construction sector receives the second largest amount of credit from Abu Dhabi's bank and, according to the UAE Central Bank, this has grown in recent months by 29%.

The Formula 1 motor circuit financing

Financing options have supported this growth through various project, development and structured finance alternatives available to developers and contractors. These bespoke products have been used on several high-profile projects in the last two years. Following the announcement by the Formula One Management that Abu Dhabi had secured the rights to hold a Formula 1 Grand Prix from 2009 to 2016, one of the most high-profile examples of innovative project finance is the development, by Aldar Properties PJSC, of the 5.6km Formula 1 motor racing circuit on Yas Island, a 2,550 hectare natural island.

The cost of project and connected development, designed to host the Abu Dhabi Grand Prix in 2009, is approximately US$ 1.4bn. Aldar awarded the construction project to Cebarco-WCT WLL, a joint venture between Cebarco Bahrain SPC of Bahrain and WCT Berhad of Malaysia. Both these leading construction firms had substantial experience of this type of project, having built the Formula 1 circuits in Bahrain and Malaysia respectively.

AN F1 Grand Prix circuit is seen as a considerable status symbol as well as a huge boost to national profile and tourism, placing a country firmly on the world stage. Historically, the championship tended to focus on the famous tracks from traditional European racing countries such France with the Monaco Grand Prix, the UK with Silverstone, Italy with Monza, and Germany with Hokkenheim, even the Americas and Japan were seen as relative newcomers.

With the economic growth of China in the past decade as well as the consolidation of the economic development of other Far Eastern countries in the Pacific Rim, being awarded a place on the circuit has gradually become an article of national pride, much like having a flag airline carrier was in the late 1950s. Countries such as China and Malaysia have expended enormous efforts to be awarded a prestigious place in the Championship, closely followed by Bahrain, the first Middle Eastern country to join this exclusive club. Since losing "first place" in the region, the Abu Dhabi track has strived to be striking and impress the world both from a sporting and an architectural point of view.

The challenging 5.55km circuit will include a high-speed permanent race track for multiple racing use, as well as a non-permanent section that can be split in two, snaking through a 2,500 hectare tourism and leisure development comprising residential properties, mixed developments, and commercial spaces, including the first Ferrari Theme Park in the world. The permanent/non-permanent design can be split into smaller tracks of 3.1km and 2.4km in length, which will operate simultaneously as well providing the F1 race with all the drama of a street circuit such as the Monaco Grand Prix. This also allows the use of the permanent track for other motorsports throughout the year.

The full track design allows for an average speed of 198 km/h, and incorporates a marina and state-of-the art stadia. This will allow more than 150 yachts to berth alongside the track as it wraps around the island marina, again emulating one of the most exciting portions of the Monaco Grand Prix. The designers have incorporated the latest technologies and safety features from the most advanced circuits in the world and the spectator sections will be able to hold more than 50,000 spectators, each with a guaranteed 40% view of the whole track, which is more viewing span from a single position than any other track in the world. The Emirate is hoping that the track and surrounding development will attract up to 3m people by 2015 and plans to market the whole of the Yas Island development as an international tourist destination, attracting visitors from across the Gulf and worldwide.

The contractor financing structure

As is common in Middle East construction contracts, Aldar stipulated that the contractors issue certain bank guarantees to the approximate value of the construction costs on a milestone basis. In order to spread the construction risk, Cebarco WCT approached banks and financial institutions to underwrite the risks of the project, and agreed terms with Mashreq Bank PSC, BNP Paribas and HSBC Bank Middle East Ltd for a facility of Dh750m (US$204m). Mashreq Bank acted as lead arranger and both facility and security agent, while BNP and HSBC equally participated in the master finance facilities.

The broad structure of the financing entailed guarantee facilities of approximately Dh500m (US$136m) and included advance payment guarantees, performance guarantees and retention guarantees to be issued in favour of Aldar. The remaining Dh250m (US$468m) was allocated by the banks to a letter of credit facility and a short-term loan for civil works and the procurement of equipment and materials. The short term facility is to be utilised for any refinancing under the letters of credit and drawn against the progressive payment certificates submitted by Cebarco WCT.

The margin for the advances under the short-term facility was set by the lenders at 150bp over the Emirates interbank offered rate corresponding to the selected interest period by Cebarco WCT. Mashreq Bank, in its capacity as the facility agent, issued the bank guarantees and letters of credit, on the basis of the participating lenders-funded counter-guarantees and indemnities, and the relevant commissions were divided proportionally between the participating lenders.

As this was one of Cebarco WCT's first projects in the UAE and given that Cebarco WCT was a single purpose entity, with limited credit history, the lenders required both the principal members of the joint venture to support the project facilities by signing the master facilities agreement, in their capacity as corporate guarantors, and by maintaining the required tangible net worth and gross gearing ratios as stipulated by the master agreement. The lenders also required the joint venture to submit periodic financial statements, project progress reports and other cash collateral connected with the project's progress.

Interim financing arrangements

In 2009, Abu Dhabi will hold the final race of the Formula 1 season, supplanting Brazil's Interlagos circuit, which has traditionally had the honour of hosting the closing race of the season. To do so, it was imperative that construction began on time, therefore the lenders agreed to issue certain bank guarantees while the master agreements were still being negotiated and even before the formal signing of the construction contract. At that stage, Cebarco WCT was awarded the tender on the basis of a letter of award that was valued at 10% of the contract price. After various negotiations, the lenders entered into a short-term interim arrangement to secure the bank guarantees by agreeing a syndicated assignment of the project proceeds arising out of the value of the letter of award. Once the construction contract and master project facilities agreements were finalised, the interim assignment would fall away.

Securities and collateral

The master facilities were secured primarily by the corporate guarantees by Cebarco Bahrain and WCT Engineering, as the lenders were mitigating the credit risk by relying on the stable financial condition of the two principal companies and their improved credit assessment. The lenders obtained an assignment of the project proceeds arising out of any payments made by Aldar under the construction agreement as secondary security, and stipulated that the assigned proceeds should be deposited into to the project collection account maintained by the joint venture with Mashreq Bank, as security agent. The lenders also obtained assignment of the project insurances in place by Cebarco WCT, and the bank guarantees issued by the subcontractors appointed by Cebarco WCT for the project as further security.

Facility documentation

The master facility documents and the security assignments were governed by UAE law, given that substantial assets of Cebarco WCT, as well as the project itself, are based in Abu Dhabi. The corporate guarantees issued by Cebarco Bahrain and WCT Engineering were prepared under the laws Bahrain and Malaysia respectively.


The financing arrangements lasted approximately three years from the issuance of the guarantees under the master facilities arrangement, and conclude on the issuance of the final acceptance certificates by the project consultants appointed by Aldar. As the construction project draws to a close with official commissioning of the circuit scheduled for the last quarter of 2009, the master project facilities will also mature and will be successfully terminated.

Middle East 09