Tidal Audio Middle East Impressions Book Middle East and Africa
Exciting new trends in Middle East project financings new trends in Middle East project financings...
-
Upload
trinhthuan -
Category
Documents
-
view
223 -
download
6
Transcript of Exciting new trends in Middle East project financings new trends in Middle East project financings...
Overview
• PROJECT FINANCE MARKET
• PPP MARKET SPECIFICALLY
• COMMON PROJECT RELATED ISSUES
• ISSUES FOR CONTRACTOR‟S TAKING EQUITY
• COMMON DEBT ISSUES
• NEW CONTRACTOR FINANCING MODEL
• PIPELINE
Oil/Gas – 25% Industry/Metals
– 34%
Power & Water –
46%
Oil/Gas – 75%
Power & Water
– 15%
Industry/Metals
– 6%
Others
– 4%
Source: ACWA Power
Sectors
Oil/Gas – 83%
Power & Water – 12%
Oil/Gas –
53%
Power & Water
– 37%
Other – 0%
Source: ACWA Power
Sectors (cont.)
Real Estate
- 3%
Oil & Gas - 11%
Infrastructure - 1%
Source: MEED
Petrochemicals
- 30%
2013
Sectors (cont.)
50
10
20
30
40
0
To
tal vo
lum
e $
bn
Nu
mb
er
of
deals
Sourse: MEED, MEED Insight, Infrastructure Journal
Financial Mix – Top 10 MENA Project
Finance ArrangersMENA Project Finance Mandate Arrangers
Rank Mandate arranger Total value ($m) Deals
1 HSBC 2,455 14
2 Standard Chartered 1,334 13
3 Public Investment Fund (KSA) 1,303 7
4 Bank of Tokyo-Mitsubishi UFJ 1,289 11
5 Qatar National Bank 1,162 3
6 National Bank of Abu Dhabi 1,132 9
7 National Bank of Kuwait 1,063 7
8Sumitomo Mitsui Banking
Corporation1,021 10
9 Samba Financial Group 955 7
10 Banque Saudi Fransi 947 5
Source: MEED
Lender Profile
PF Lenders Profile in ME (2004) PF Lenders profile in ME (2011)
European 44% European 18%
Regional 47% Regional 57%
Japanese 5% Japanese; Korean; Chinese 25%
Others 4%
Source: MEED
• $48.7 billion worth of project finance deals closed in the
MENA region last year (Dealogic)
• Record breaking $12.7 billion Sadara Petrochemical
plant project financing
• Four of the top 15 global project finance deals
Top 10 MENA Project Finance deals in
2013Top 10 MENA project finance deals in 2013
Country Project financing ($m) Financial close
Sadara Chemical Saudi Arabia 12,731 Jun-14
Emirates Aluminium (Emal) phase 2 UAE 4,482 Mar-14
Zain Saudi Arabia Islamic Refinancing 2 Saudi Arabia 4,184 Jul-14
Kemya Saudi Elastomers expansion
murabaha financingSaudi Arabia 3,200 Jul-14
Shuweihat 2 IWPP (project bond
refinancing)UAE 2,294 Aug-14
Rabigh 2 IPP Saudi Arabia 1,997 Dec-14
Golar LNG Jordan 1,729 25-Jul
Al-Zour North IWPP Kuwait 1,560 12-Dec
Yanbu refinery expansion Saudi Arabia 1,399 05-May
Noor 1 concentrated solar power IPP Morocco 1,342 30-Jun
Source: Dealogic
Rank Borrower Name Project Name Country Value ($m) Notes
1Sadara Chemical
Company
Sadara
Petrochemical
Plant
Saudi
Arabia 12,731
The financing was raised
to fund the second phase
of the expansion of the
company‟s processing
plant
9Emirates Aluminim
Company – Emal
Emirates
Aluminium
(Emal) Phase 2
UAE 4,482
10
Mobile
Telecommunication
s Co Saudi Arabia
– Zain
Zain Saudi
Arabia Islamic
Refinancing 2
Saudi
Arabia 4,184
Shariah complaint re-
financing
13
Al Jubail
Petrochemical
Company (Kemya)
Kemya Saudi
Elastomer
Expansion
Murabaha
Saudi
Arabia 3,200
4 of the top 15 Project Finance deals
globally were in the MENA region in 2013
Source: Dealogic
PPP/IPP (cont‟d)
• Gulf IWPP model: many projects over more than a decade based on
consistent demand growth and the development of domestic regimes to
attract foreign investment
• Enabling legislation and regulations enabling the participation of the
private sector in electricity and water production
• Most projects designed to produce both power and desalinated water
• Contract with a sovereign offtaker or stand-alone government entity
under take-or-pay arrangements for 100% power and water capacity
output
• Procuring entity releases a RfP attaching Project Agreements setting
forth its preferred risk allocation. Limited opportunity for bidding
consortia to raise departures
PPP/IPP (cont‟d)
• Long term PWPA: term 15 – 25 years
• Classic Two Part Tariff
• Capacity and Output payments
• Capacity payments cover the Project‟s fixed costs:
wages, insurance and other fixed O&M costs
debt service
equity return
• Energy/water output payments cover the Project‟s variable costs:
Fuel
Variable O&M costs (spares, consumables, membrane replacement
etc.)
PPP/IPP (cont‟d)
• Movement away from government guarantees
• Financed on a highly leveraged, limited recourse project finance
basis
• RFP will specify the level of committed funding at bid stage
• But even if less than fully underwritten commitments, Buyer not
likely to accept any reopening of the bid tariff or any other terms of
the project agreements where bidder is unable to achieve its
financing objectives
• Either BOOT projects or BOO projects with merchant tail
DEWA
Project Company
PPAMusatahaAgreement
Loan
Agreements
Turbine Manufacturer
Bidders DEWA
DEWA
O&M
O&MContractor
Supply Agreement
49% 51%
Shareholders'Agreement
IPP - structure
ECA Lenders
Com Lenders
Islamic Banks
EPC Contractor
EPC
Contract
Structure – other project financings
• Project financing for large industrial projects: refinery
and petrochemical projects and expansions, smelting,
manufacturing etc: taking advantage of available
feedstock, low electricity prices and cheap labor costs
• Often local / international JV; between NOC and
international chemicals company for example
• Supported by take-or-pay arrangements under offtake
agreements
• Significant need for ECA and multilateral commitments
Common project related issues
• Political risk and government support arrangements
• BOOT infrastructure termination payments
• Construction defects
• Dispute resolution
• Sovereign immunity
Common Project Related Issues
(cont‟d)
Risk Risk Taker Allocation / Mitigation Tool
Licences and permits Sponsors Good working relationship with
government
Expropriation Sponsors Participation of local sponsors,
international agencies, lenders
Government assurances (no
expropriation without proper
compensation)
Country risk Insurance Agency
Sponsors
Insurance
Feasibility study
Sovereign risk Sponsors Feasibility study
Political Risks
Common Project Related Issues
(cont‟d)
Government Support Arrangements
Government Guarantee
Poorly rated stand-alone entity
Implicit Government guarantee Sovereign State
with ACR
Least
Bankable
Most
Bankable
Payment into budget
allocation account
Explicit guarantee / credit support:
• of monthly obligation to pay the
purchase price?
• of compensation payable on
termination for Proj Co default?
• may fall away
Common Project Related Issues
(cont‟d)PPP Contract Termination
• Highly contentious area
• Key questions
which party can pull the trigger?
when do the lenders get paid out and how?
when does equity contribution/sponsor sub-debt get protected?
when does the Project Co recover lost revenues (i.e. profit)?
are contractors protected (problems under equivalent project
relief provisions)
• Different treatment for different projects, jurisdictions and
depending on cause of termination
Termination
by
Grounds Offtaker
obligation to
purchase (if
terminated by
Offtaker)
Offtaker
right to
purchase
Project
Company
right to
require
purchase
Purchase Price
guarantee by
Procurer Credit
Support
Termination
Costs paid
by Offtaker
Project
Company
Offtaker Event of
Default N/A No Yes Yes Yes
Project
Company
Prolonged EGAI
affecting Offtaker
and Offtaker does
not opt to continue
to pay
N/A N/A Yes Yes Yes
Offtaker Prolonged EFM
affecting Offtaker Yes No No Yes Yes
Offtaker Prolonged EGAI
affecting Offtaker Yes No No Yes Yes
Offtaker Prolonged EGAI
affecting Project
Company
Yes No No Yes Yes
Common Project Related Issues
(cont‟d)
Common project related issues (cont‟d)
Construction Defects
• Architect and construction contractor jointly liable for at least 10 years to
compensate the employer for any total or partial collapse of the structure
Dispute Resolution
• Choice of foreign governing law
• Recognition and enforcement of foreign judgments
• New York Convention
• Local arbitral bodies
Sovereign Immunity
• Immunity from suit
• Immunity from execution and attachment
Issues for contractors taking equity
Jurisdiction Ownership requirement Comments
UAELocal shareholder (an affiliate of the Buyer)
owns 60%
Under SHA international developers exercise day-
to-day control
75% majority required for certain key decisions
Saudi Arabia 50% government shareholdingEoD and put and call linked to termination of the
PWPA for shareholder default
Oman IPO at least 35% of shares on the local bourse
If not disposed of within the requisite period, EHC
may mop up the unsold balance at a pre-agreed
option price.
KuwaitIPO 50% to general public via IPO and 10% to
government
Jordan 100% foreign ownership
• Foreign ownership restrictions in many jurisdictions
• Equity injection arrangements:
pro rata with debt
Back-ended – injected at earlier of completion and occurrence of event of default.
Credit enhancement, e.g. backed by LC
• Guarantees / Equity Support
Debt Issues
• Multi-source financings are usual: mixture of international, regional,
Islamic and domestic banks and ECA / multilateral finance. Some bond
refinancings (Dolphin, Shuweihat 2)
• ECAs are a key feature. Covered or direct loans. Lending amounts
tied to host country procurement; vendor relationships are more
important than sponsor relationships
• 70:30 – 80:20 debt to equity ratio
• Regional variance in Islamic structures but intercreditor arrangements
between conventional and Islamic funders largely settled
• Common project financing techniques are used in the Gulf:
control of cash through project accounts and reserve accounts
payment waterfall
project ratios
Collateral
• Onshore security: take best security possible, no universal corporate charge
and not over future acquired assets, so take specific forms of security over
various project assets, plus share pledges
• Offshore security: fairly standard for PF including security over offshore
accounts, charge over English law project agreements (and any related
bonding and parent company guarantees), assignment of insurance
proceeds and share pledges/mortgages over any foreign companies in the
group structure
• Commonly enter into direct agreements (cure rights/rights to step in and
substitution rights)
• No “companies house”, limited registration systems
• Enforcement by way of a court sanctioned auction. Commonly
acknowledged questions around enforceability and bankruptcy laws
• Bankable but defensive
New Contractor Financing Model
• Government departments looking for contractors to bring their
own finance
GoD
Govt
AuthorityContractor
Interest and “principal”
Fund construction costs
Interest and
principal
Guarantee
Lenders
STRUCTURE 1
New Contractor Financing Model
(cont‟d)
Developer
Consultant
Team
Contractor
X Y Z
Works Contracts
Lender Covered loan
ECA
Support Agreement Certification as to local
content
Disbursement
STRUCTURE 2
Structure 1 – key terms
• Finance Model 1
[84] Month Finance period with a Guarantee from Department of Finance
• Finance Model 3
[84] Month Finance Period without a Guarantee from Department of Finance
• Finance Model 5
Normal Contract: payment of contract price within 60 days of certification
Structure 1 – key terms cont‟d
• 10% Advance Payment (of Contract Price Less Finance Costs)
• Second 10% payment instalment after the Contractor completes 20% of the
Work. Advance Payment is deemed to be satisfied at that point, bond falls
away
• After that no payment on account of the balance of the Contract Price (the
“principal” amount) until the stipulated completion date
• However interest shall accrue on the certified but unpaid balance of the Contract
Price during the construction period and shall be paid monthly in arrears up to
the completion date
• Thereafter, payment monthly instalments of principal+ interest from the
completion date for a period of [84] months
• Principal to be paid/repaid in equal monthly installments over that period
• Contractor to bid the margin it is willing to accept during the interest period
(over EIBOR or LIBOR at its election)
Structure 1 – key terms cont‟d
• RTA may prepay all or part of the outstanding principal without
penalty
• Additional Works arising from a Change subject to the same terms
unless either party objects
• No retention (10% is standard in the Middle East)
Structure 2: Issues
• Amount to be funded by developer?
• Costs overruns
• Is the contractor the head contractor or a conduit?
• Avoid being the meat in the sandwich
Developer
Consultant
Team
Contractor
X Y Z
Works Contracts
Lender Covered loan
ECA
Support Agreement Certification as to local
content
Disbursement
Pipeline – 2014 project finance outlook
• Steady rather than record year
• Deals expected to come to the banking market from
nearly all of the 6 GCC states
• Increasing appetite for PPP
Combining the experience, resources and international reach
of McGrigors and Pinsent Masons
Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by
the Solicitors Regulation Authority, and by the appropriate regulatory body in the other jurisdictions in which it operates. The word „partner‟, used in
relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with equivalent
standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP‟s
registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use „Pinsent Masons‟ to refer to Pinsent Masons LLP and affiliated
entities that practise under the name „Pinsent Masons‟ or a name that incorporates those words. Reference to „Pinsent Masons‟ is to Pinsent
Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2012
For a full list of our locations around the globe please visit our websites:
www.pinsentmasons.com www.Out-Law.com