Robust Deal Flow In Energy Project Financing

Robust Deal Flow In Energy Project Financing

Financing activity in the energy sector is robust and multi-billion dollar MENA projects are continuing to attract funding. Both sponsors and lenders are encouraged by conditions which are considerably more stable than the immediate aftermath of the financial crisis. They expect the deal flow to remain robust through the rest of the year and into 2011. In fact, many are predicting that volumes will be even greater next year,MEESsoundings indicate.

So far this year a number of major project financings have been signed and others are set to follow. In late June lenders agreed to provide the Saudi Aramco Total Refining and Petrochemical Company (Satorp) with $8.5bn in funding for its 400,000 b/d export refinery project in Jubail (MEES, 28 June). Earlier that month the financing agreement for the $2.1bn gas-fired Riyadh independent power project (IPP), PP11, was also inked (MEES, 21 June). And when the $2.6bn debt package was signed for the Musturud refinery in Egypt on 5 August, it became the largest project financing in Africa (MEES, 16 August).

In Saudi Arabia other deals are progressing, with the Saudi Arabian Mining Company (Ma'aden) $7.5bn aluminum project being implemented with US company Alcoa expected to sign its financing this month (MEES, 12 July). The Abu Dhabi Water and Electricity Authority (ADWEA) has attracted five consortia, backed by banks, to develop its Shuweihat S3 independent power project (MEES, 2 August). And banks are due to respond to a request for $600mn of financing from the 100mw Shams solar project later this month. And both Dubai Electricity and Water Authority (DEWA) and Kuwait are embarking on programs to implement independent water and power projects (IWPPs) that will need bank funding.

Waiting To Hear On Yanbu'

Potential financiers are waiting to hear whether a project financing will go ahead for Saudi Aramco’s 400,000 b/d Yanbu' export refinery, after the request for funding was pulled when US partner ConocoPhillips dropped out of the project earlier this year. The massive $20bn-plus Saudi Aramco/Dow Chemical joint venture petrochemicals project, which had its location switched this year from Ras Tanura to Jubail, is not expected to seek funding until 2012.

However, financing activity in the petrochemical sector in Saudi Arabia is expected to step up in 2011. Sipchem is planning to seek financing in 1Q11 for its $1bn-plus ethyl vinyl acetate project in Jubail. Also the $700mn Sahara/Ma'aden joint venture to produce caustic soda and ethylene dichloride will approach lenders in the first quarter. PETRORabigh 2, which is expected to cost around $10bn (a similar cost to the original PETRORabigh that secured funding in 2005) is expected to approach lenders in 2Q11.

In the wider Gulf, the 1.5bn cfd Barzan gas project being sponsored by Qatar Petroleum and ExxonMobil is also expected to seek funding in 2011. These represent just a selection of the energy and energy-related projects coming to market within the next year, and there will be more, especially in the infrastructure sector. Currently banks are eagerly awaiting the outcome of bidding for the Mafraq road project. When the financing is completed, it could set a benchmark for public-private partnership (PPP) deals in the Gulf.

And in the Caspian region, banks and export credit agencies (ECAs) will probably be approached in 2011 to provide funding to the Nabucco pipeline after multilateral agencies signed an agreement to start appraising it last week (page 1). Outside the project finance sphere, there are other types of energy financing activity, such as a reserve based lending program for BP (page 15).

Market Steady

“The market appears steady and deals are getting done. There are fewer project finance players, but there is appetite out there,” said one project finance expert. He forecasts that some deals hoping to close this year may be delayed until 2011. “If we do see some spillage, added to the deals already gearing up for a market approach next year, it could be very active,” he said.

Bankers agreed that margins (the profits that banks make on deals) remain high, primarily because the cost of funding post-crisis is still elevated. “Liquidity is expensive at the moment. For many banks the cost of funding is in excess of 100 bps for long term loans,” said one.

As a result, lenders say that it will be hard to replicate the lean margins Saudi Aramco and Total secured for their refinery financing. All in (including margins and fees together) they were under 200 bps, dramatically undercutting most post credit crunch financings, which had seen starting margins at around 250-270 bps (MEES, 21/28 December 2009). Such low pricing is generally thought to be a function of sponsor strength and, say some financiers, sponsor pressure.

However, the good news for sponsors is that margins appearing to be edging down slightly across the board. Those recently agreed for the Ma'aden aluminum smelter and rolling mill were at 165-245 bps for the riyal tranche and in 205-275 bps for the dollar tranche. This undercuts pricing agreed earlier for Saudi Electricity Company’s (SEC’s) PP11 power project (being implement by a GDF Suez-led consortium), where margins are 250-340 bps across the 20-year tenor of the international and local tranches. “There is some movement downwards, but with banks’ funding costs still high, we’re not going to get to the sub-100 bps seen in the boom times before the crisis,” said one banker.

Underwriting Comeback

Underwriting, which disappeared during the financial crisis, is making a tentative comeback, but recently appeared more often in corporate deals than project finance. A number of banks were looking to provide an underwriting commitment to the Shams project and Shuweihat S3 IPP, but it appears they will go ahead as club deals instead. In club deals, terms are agreed with the whole group of banks, rather than in underwriting where a few take control and then sell down the debt to a syndicate of lenders.

“It’s not that banks don’t want to do underwriting, but for sponsors there are very few deals at present where it makes sense. A club deal typically costs less. It’s only when they need the money fast and discretely and need to know they’re going to get it they will pay for an underwriting. And there just aren’t many projects that meet those criteria,” said a project finance expert.

In addition to elevated margins and a paucity of underwriting, another legacy of the credit crunch remains: namely that as a result of reduced bank capacity project finance sponsors and their advisers are forced to seek financing from multiple sources. In addition to banks, financing is being secured from ECAs, multi-lateral lenders and where possible via the bond market. With the tendency of projects to increase in size, this was also the case before the crisis, and most project finance experts do not expect any change in the near term. “Banks are very liquid in Saudi, and we’ve seen them stepping up aggressively to contribute to domestic projects, but even very large financings in the kingdom need input from other sources,” said one project finance adviser. “Generally, in this environment, multiple sourcing is the way forward,” he added. 

Copyright MEES 2010.