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Regional power projects hinge on recovery of credit markets

Dozens of billion-dollar power stations have sprouted across the GCC in the past decade, nourished by a flow of syndicated loans from western banks. But the current credit crisis has interrupted that movement of funds, leaving project developers scrambling to find alternate sources of funding even as electricity demand continues to rise.

When credit was easily available, banks across the world were happy to commit to power projects in the region since they were viewed as priority investments backed by resource-rich governments. Rolls-Royce industrial engines pump gas from Qatar to the UAE. Power lines in the desert of Abu Dhabi.

Now, dependable entities such as the Abu Dhabi Water and Electricity Authority (ADWEA) have been forced to seek expensive, short-term financing, while some projects across the region are threatened with delays.

Mohammed Abunayyan, the chairman of ACWA Power International , a Saudi firm, said last week that the premium or "spread" of loans above benchmark lending rates had increased markedly, even as the loan duration had shortened.

"We will not see what we have seen," he said. "The spread today is 300 to 400 basis points, whereas it used to be 100. Now we are dreaming of 15 years" for the lifetime of the loan.

The National Power Company , another Saudi developer, was unable to participate in the Rabigh power project last year for lack of finance, says Fareed al Yagout, the company's president. "We have to have the governments step in to support the debt."

Bankers are awaiting the outcome of a handful of deals in the next few months that will serve as measures of the health of the larger credit market because of their size and importance to GCC economies.

Key deals to watch this year include Dolphin Energy 's refinancing of US$3.45 billion (Dh12.67bn) worth of debt, a $1.6bn financing plan for Bahrain's Al Dur power and water plant, and the outcome of negotiations on the fate of the $5.5bn Ras Al Zour power project in Saudi Arabia.

Also this year, bankers will be watching to see how ADWEA addresses its expiring $900 million bridge loan for Shuweihat 2, how Veolia Water finances its water project in Abu Dhabi, and the financing plan that emerges for the $1.5bn Salalah power project in Oman.

If these deals go through at prevailing prices and without too many delays, bankers expect an increase in the number of infrastructure projects from next year. If not, there will be further delays.

The initial signs are that some of the deals are close to completion.

Dolphin Energy , the company producing gas in Qatar and piping it to the Emirates and Oman, is understood to have raised more money than it needs to refinance its debt, including a $1.2bn commercial bank tranche and a $500m Islamic tranche, according to Meed, a London-based business publication. The company will also receive $1.2bn in loans from Total and Occidental , two of its sponsors, a $400m loan from an Italian export credit agency, plus a bond of undetermined size.

The $1.6bn Al Dur project in Bahrain also looks to be going ahead, according to an executive at the project's foreign partner, GDF Suez.

Shankar Krishnamoorthy, the chief executive of the company's Middle East and North Africa division, told Reuters that the company would close financing on the project with international and local banks.

In Dubai, bankers have been cheered by news that the Dubai Electricity and Water Authority (DEWA) has successfully refinanced a $2.2bn loan.

Although full details have not been released, DEWA said last week the new loan would be for three years and involve 15 international and national banks.

Even with these successes, significant question marks remain for the market as a whole.

An executive at ADWEA , seen as one of the most successful utilities in the region, said last week he was looking at offering a bond or seeking help from export-credit agencies when a $900m bridge loan comes due this autumn.

The loan was taken out for 10 months to help pay for the $2.5bn Shuweihat 2 power station, a crucial link in ADWEA 's planned capacity expansions.

"By the end of the year we'll take some initiative," says Abdulla al Nuaimi, ADWEA 's director of privatisation. "The market is still too difficult to give long-term financing."

Deals involving financing from a patchwork of sources will be common this year, says Christophe Mariot, the regional head of structured finance for energy and commodities at BNP Paribas. Islamic financing and loans from export credit agencies will each play an important role in completing large loans, he says.

The essential problem in the current market is that the pool of capital available for syndicated loans had decreased markedly as smaller banks across the world ceased overseas lending, Mr Mariot told an industry conference last week.

"The capital market is the big question mark at the moment," he said. "Finding second-tier banks in Europe has been quite a task. We've been seeing banks retreating to their home markets."

Most arrangements in previous years involved one or two international banks such as BNP or Calydon that took the role of lead underwriter on the loan and arranged tranches with a group of overseas banks. In today's uncertain market, however, most of the big loans are club deals, in which the borrower itself has to arrange each tranche of financing since no bank is willing to take on the role of lead underwriter.

Project developers should not count only on Islamic institutions to meet the need for new finance, says Michael McMillan, a partner at Fulbright and Jaworski, a law firm that helps arrange project finance deals.

Sharia-compliant financing is closely tied to the conventional loan market and has traditionally been limited to short-term deals. "The whole history of the Islamic finance industry has been short-term," he says.

The Islamic finance industry, he says, could raise several billion dollars for regional power projects. "Sharia compliant investors we've spoken with who have held out in the market have started to talk again about infrastructure finance."

Mr Mariot said he saw two scenarios emerging after the credit crunch subsided.

Either the old structure for syndicated loans will re-emerge, or bankers will refinance short-term loans by issuing paper on the developing bond market.

The market will receive an important boost from new sovereign bonds issued by Abu Dhabi and Qatar, which will help to create a yield curve to calculate rates for corporate bonds.

Others suggest that the market for syndicated loans in the Gulf remains stronger than some bankers from the West would suggest.

Even with all the turmoil in the banking sector, the Gulf is still viewed as a safe place for banks to put their money, says Annie McMahon, the head of structured finance loan syndicate at Société Générale.

"It can be overstated the extent to which banks are retrenching to their home markets," she says. "The Gulf remains a very attractive place for long-term finance because of the strength of the projects and their sponsors."

By Chris Stanton

© The National 2009