Export credit agencies, local banks and, potentially, several bond issues are providing the requisite liquidity for project sponsors looking to raise huge levels of infrastructure and project finance within the Mena region, writes Kevin Godier.


Growth is picking up pace at the macro level across the Middle East. Jonathan Robinson, managing director, head of project finance, Mena, at HSBC Middle East, sets the scene: “The surplus story is very strong, with the governments in the region focusing on how to deploy their oil and gas-generated income into greenfield projects. It generally goes into core infrastructure, such as power, roads, rail, ports, airports, water and hospitals, all of which provide the building blocks for sustaining the economy, and, in parallel, into the resources base, spread across petrochemicals, refining, mining and metals.”

He adds that with the PPP (public private partnership) mindset now firmly entrenched in the region, the project finance market is doing very well, and volumes are up over the last 12-18 months. “The challenge of course is a dark cloud of pending regulations, and operational constraints on many eurozone banks that will make long-term project lending more difficult for them as they are forced to reposition their balance sheets toward the shorter term.”

As a consequence, export credit agencies (ECAs) and regional banks are much more important in providing big chunks of liquidity to backfill gaps.

According to Phillip Fletcher, a partner in the London office of Milbank, Tweed, Hadley & McCloy, which is advising on several major transactions, “there will continue to be a range of project deals in the Middle East, certainly as long as oil prices stay at US$100/barrel or greater”.

Fletcher points to considerable liquidity in the region, but also notes that “ECAs continue to be active supporting exporters and investors in the key industries”.

Asian finance is pouring particularly swiftly into this environment to fill the breach, according to Charles Whitney, a partner in Norton Rose’s energy team specialising in advising ECAs and multilaterals on energy and petrochemicals projects. “The energy space is a story where the Asian ECAs, particularly from Japan and Korea, are dominating the market as they support Japanese and Korean exporters that are looking to develop energy projects in the region,” he says.

As an example, Whitney cites the 2,000MW Sur independent power project (IPP) in Oman, where Norton Rose acted as counsel. Japanese lending and insurance covering US$1.26bn of senior debt was provided in late 2011 by the Japanese Bank for International Co-operation (JBIC) and Japanese commercial lenders with support from Nippon Export and Investment Insurance (Nexi).

This theme is corroborated by Jang Hee Park, deputy director at Korea’s K-sure. “A funding gap has been filled by Japanese and Chinese commercial banks in addition to Korean financial institutions,” he says. Among the projects K-sure has supported so far this year are the Rabigh 6 and Tufanbeyli power projects in Saudi Arabia and Turkey respectively.
“We are considering supporting the Sadara petrochemical project in Saudi Arabia within this year, as well as some others at a later stage,” Jang Hee says.

Giant nuclear plant

In the UAE, the Barakah One Company is set to tap a massive US$20bn or so of financing in order to build the first nuclear power plant on the Arabian Peninsula. A staggering US$10bn will come in direct lending from the Export-Import Bank of Korea (Kexim), backing the US$20.4bn awarded to the Korea Electric Power Corporation (Kepco) to build four 1,400MW nuclear reactor power-generating units on a coastal strip along the Arabian Gulf approximately 220 kilometres from the city of Abu Dhabi.

“I expect this project to go to banking markets before year-end”, says a source close to the project, noting that a US$2bn direct loan from the Export-Import Bank of the US (US Exim) and top-ups from commercial bank money plus state co-lending will round off the financing. With regard to the lending security, US Exim’s loan “is ultimately backed by Kepco and the government of Abu Dhabi in proportion to their indirect interests in the project”, remarks US Exim spokesperson Lawton King.

“This is an absolutely core strategic project, marking the largest-ever infrastructure scheme in Abu Dhabi, and as such it ticks the important boxes for banks,” observes Robinson, noting that HSBC expects to be an arranger and lender in addition to advising Abu Dhabi on the nuclear scheme. “It may be difficult however for some lenders because of their internal policies on nuclear lending, therefore the government can be expected to close any financing gaps,” he forecasts.

“Going forward, I see the Asian ECAs continuing to play a leading role, particularly on the projects with sponsors seeking to raise large amounts of debt,” predicts Whitney at Norton Rose, referring to the Rabigh 2 project and the Sadara petrochemicals project, both in Saudi Arabia.

Elsewhere in Saudi, he points to a consortium led by Saudi Acwa Power Projects and including South Korea’s Samsung C&T, which is to build an SR10.7bn (US$2.85bn) 4,000MW gas-fired power plant at Al-Qurayyah, south of the eastern city of Khobar. “More Korean ECA finance can probably be expected in the Saudi power sector,” he adds.

Sadara financing

Among western ECAs, US Exim has made the biggest splash with its September announcement of a giant US$4.975bn direct loan to the Sadara Chemical Company in Saudi Arabia, which will also be carrying as yet unspecified debt support from ECAs in the UK, France, Germany and Korea, plus a variety of other sources of financing.

“We have seen US Exim play an increasingly important role in the Middle East energy sector, as demonstrated by its support for the Al-Qurayyah power project and the support which it has publicised for the Sadara petrochemicals project in Saudi and the Abu Dhabi nuclear project,” says Whitney at Norton Rose.

Located in Saudi’s Eastern Province, the estimated US$20bn Sadara plant in Jubail Industrial City II will be the largest integrated petrochemical complex ever constructed in a single phase. Dow Chemical Company and Saudi Aramco – which are jointly developing the project – “are obviously looking to optimise all their sources of financing, including Islamic finance,” says another source. “The volume of debt financing required is still unclear, and could be anywhere within the US$12-14bn bracket. The precise composition of the financing could be decided very late in the day,” he says.

This point is echoed by Martin Schmerbach, a member of the economic research division at Germany’s Euler Hermes, which is set to participate alongside US Exim, Kexim and France’s Coface in a US$2.8bn expansion financing for Emirates Aluminium (Emal), having covered part of the first phase Emal financing. “Sourcing is one of the key issues in the Middle East project market – it can shift from Germany to another country even at an advanced stage, eliminating our basis for support,” he cautions.

Straight ECA financing

Hermes is also the first ECA involved in a conventional ECA financing structure pieced together in March for the Dubai Electricity and Water Authority (Dewa), comprising a master framework agreement for up to US$1bn which is also likely to involve ECA financing backed by Coface and Italy’s Sace. “The framework agreement allows Dewa to enter into multiple facility agreements on substantially the same commercial terms to finance individual supply contracts backed
by different ECAs,” explains Matthew Escritt, Dubai-based partner at Norton Rose, which advised the mandated lead arrangers, Deutsche Bank, HSBC and Crédit Agricole on this transaction.

“Banks are bullish on the prospects for export finance going forward. A strong business pipeline in the Middle East means that we are likely to see European ECAs in action in water, chemicals, telecoms, transport and other infrastructure sectors where European companies remain key players,” says Escritt.

“There are a number of big deals in the market at the moment, including Emal, and Global Foundries in Abu Dhabi, plus others coming along, including Emirates Steel in the next few months,” underlines Piers Constable, Deutsche Bank’s head of coverage, structured trade & export finance, Middle East & Africa.

“Deals are taking a little longer to close than in the past, possibly for funder and contractual reasons, but the Mena region is full of opportunities, with a pretty good pipeline stretching into next year. All the ECAs are doing business,” says Constable.
Beatrice Arnesson, communications officer at Sweden’s Exportkreditnamden (EKN), remarks that “many Middle Eastern countries are financially sound and are investing heavily in infrastructure projects such as roads and railways – this is generating business opportunities for Swedish machinery and equipment suppliers”.

She notes: “Generally, EKN sees an increased demand from banks for export credit guarantees for transactions in the region. There is a willingness to lend, although not to take the full risk. Banks have moved closer to EKN over recent years
in a partnership in risk management.”

Shariah finance

Deutsche Bank’s Constable emphasises that some of the more complex financing structures include shariah-compliant tranches, either due to borrower stances or to lenders looking to increase the pool of liquidity. For example, when Dubai raised US$675mn (Dh2.47bn) earlier this year to restart the Al Sufouh Tram project that had been stalled for the past three years, a part of the deal arranged through Citibank, Deutsche Bank and HSBC comprised a six-year US$274mn ijara facility, split between US dollars and UAE dirhams, and repaying over six years.

“There are now a handful of ECAs that have experience with shariah structures. For instance, the Swedes and Finns have covered a few regional telecoms deals in this way, and UK Export Finance has a couple of deals ongoing,” Constable adds. “Islamic finance poses different challenges than common project finance,” he adds. But Schmerbach at Hermes comments that “it is more of a hurdle than a barrier to meet the prerequisites to receive cover”.

For some PPPs, Islamic finance covers all, or most, of the funding needs. In late July, a consortium developing Medina Airport secured a US$1.2bn fully shariah-compliant facility from local banks.

Abu Dhabi’s new airport terminal is being funded by a four-year, Dh4bn (US$1.1bn) financing deal, which will be mainly shariah-compliant.

Bond options

Against a background where commercial lending rates have risen in the wake of the 2008/09 financial crisis, project bond options are increasingly being examined by sponsors. In February, regional gas pipeline operator Dolphin Energy attracted eight times the US$1bn sought in a project bond, indicating that investor appetite exists for well-structured and financially robust projects.

As this supplement went to press, bond options were under strong consideration for the expansion at Emal – a joint venture between Abu Dhabi’s Mubadala and Dubai Aluminium – and for a US$2.2bn refinancing underway for Abu Dhabi’s Shuweihat S2 independent water and gas-fired power plant.

Emal paid a 70-130 basis points margin on a US$4.9bn loan that backed the first phase of its Abu Dhabi-based aluminium smelter in 2008, but would have to pay around twice as much this time around to borrow 15-year money from banks to help finance its US$4bn smelter expansion, so has invited banks to pitch for a bond mandate.

At S2, Abu Dhabi National Energy Company (Taqa) and its partners GDF Suez and Marubeni Corporation obtained US$2.7bn in funding for S2 in October 2009 at a margin of between 2.35% to 3.5% above three-month Libor, according to data in Taqa’s annual report. Rising Libor costs would mean paying a higher rate this time around, as a result of which Citi has been mandated to underwrite a bond financing.

“Strong credits will generally open up bond capacity, but the greenfield power sector is a little harder to do in respect of getting the good ratings that investors require. Power sector bonds are more sensible for portfolio deals or refinancings once the plant is up and running,” concludes Fletcher at Milbank, Tweed, Hadley & McCloy.