The key to closing a successful project in 2009 has invariably been flexibility; the $1 billion Zayed University financing is no different. Despite mirroring the contractual structure of the $412 Paris-Sorbonne University (PSUAD) project, Zayed had to contend with raising three times as much debt and sourcing the funding from the relatively limited number of lenders in the market for PPP Middle East assets. Given its size and the limited liquidity for long term debt, it was clear in early 2009 that a different structure would be required.

The $1 billion Zayed financing closed late November 2009. The structure is a 10-year hard mini-perm with pricing starting at around 300bp, comprising dual-currency senior debt, mezzanine debt and an Islamic facility.

Project sponsor Mubadala's strategy is to diversify its funding sources as it rolls out Abu Dhabi's PPP program. This has challenges, particularly in attracting international lenders, which often are asked to get comfortable with local contractors and government related entities without a direct sovereign guarantee. These challenges were overcome on both Paris-Sorbonne and Zayed, which share the same EPC contractors – Al Habtoor/ Murray & Roberts – and have the same availability-payment arrangement with Abu Dhabi Education Council (ADEC).

Zayed threw up a contradiction in terms of structuring because of Mubadala's close relationship with local banks. The deal is more lender-friendly than PSUAD in terms of tenor and pricing, yet managed to secure a mezzanine tranche at relatively attractive pricing from one of Mubadala's relationship banks First Gulf Bank, which enabled Mubadala to reduce its 15% equity to 10%.

Overall, the funding structure is 83% senior debt, 7% mezzanine and 10% equity. The debt features 11 local and international lenders and breaks down into $370 million of international debt and AED2.5 billion ($670 million) of local debt. Within that debt is a $359 million senior tranche, a $437 million-equivalent senior dirham tranche, a $77 million-equivalent dirham mezzanine tranche and a $142 million-equivalent dirham senior commodity murabaha tranche.

The original financing plan had anticipated a greater amount of dollar financing, around 2:1 to dirham debt but this was reversed. Mubadala succeeded in bringing Natixis and Societe Generale (SG) into the deal despite their absence on PSUAD, and BIIS came in as a first time lender to Mubadala.

Pricing for the senior dollar debt starts at 290bp over Libor during construction, rising to 325bp from year four, 350bp from year five and 395bp from years six to 10. The senior dirham debt has the same pricing over Eibor across the tenor, as does the dirham-denominated commodity murabaha debt. Pricing for the mezzanine debt starts at 325bp over Libor during construction, rising to 350bp at year four, 400bp by year six and 425bp by year 10. The minimum DSCR is around 1.25x.

The mini-perm follows an underlying amortization of a 23-year maturity, with a 65% balloon for the dollar tranche and a 70% balloon for the dirham debt.

Lenders were asked to take tickets of between $35 million and $150 million. Upfront fees were 200bp for the smallest commitment level of $35 million and 280bp for commitments above $120 million. As the deal was oversubscribed by around 7% across the tranches, banks were scaled back on a pro rata basis.

The 10-year hard mini-perm structure went out to banks in March 2009. Most banks favoured a hard mini-perm over a soft mini-perm, despite the increased refinancing risk, because 10-year tenors were easier to approve than an 18-year deal with sweeps. On base case assumptions, even if there is no refinancing when the balloon is due, banks will be repaid within 18 years. ADEC has agreed to shoulder any additional costs at the time of refinancing, an important sweetener for banks given the 65% balloon.

ADEC's position vis-à-vis the Abu Dhabi government was closely scrutinized. Banks were ultimately able to grade ADEC at around sovereign despite no explicit government guarantee as Zayed University's availability payments are ring fenced within ADEC's budget and ADEC is essentially regarded as an arm of the Government.

"The successful closing of the Zayed University transaction is proof of the strong relationship that Mubadala enjoys with its debt providers, as well as acknowledgement of our ability to continually innovate even in the most challenging markets," says Derek Rozycki, Executive Director, Project & Corporate Finance, Mubadala. "Our two prior university deals have been previously acknowledged with Deal of the Year awards and we are pleased that Zayed University has achieved the same recognition."

The Zayed project is a 25-year availability-based concession that involves the design and construction of a new university campus on a plot of approximately 75 hectares and will provide educational facilities for 6,000 students as well as related faculty and support staff. The new campus will be located in the New Capital District, near Abu Dhabi International Airport.

Mubadala has a strong pipeline of transactions going forward, and intends to carry on with a focus on broadening the range of debt instruments it uses, in light of conditions in the long-term money markets. PPPs such as Zayed University have developed contractually alongside the same lines as European contracts but with some cultural differences: most notably there is a greater emphasis and rigour on construction and less reserve provisions for maintenance and operation – a shift in risk that international lenders are now getting comfortable with.

The next Mubadala deals to watch will be the Strata Composites and New York University Abu Dhabi projects. NYUAD is expected to be another PPP style project with a debt requirement of around $1 to $1.5 billion. An adviser is expected to be appointed shortly. In the meantime, Abu Dhabi continues to be the Middle East's pioneer for PPP.

Zayed University PPP
Status: Financial close 24 November 2009
Size: $1.04 billion
Description: Development of a new university campus, Abu Dhabi
Sponsor: Mubadala
Financial adviser to Mubadala: Calyon
Joint lead arrangers, senior dollar tranche: Calyon; Natixis; RBS; SG; BIIS; BTMU
Joint lead arrangers, senior dirham tranche: ADCB, First Gulf Bank, NBAD; UNB
Lead arranger, mezzanine dirham tranche: First Gulf Bank
Lead arranger, murabaha commodity tranche: Al Hilal
Lender legal adviser: White & Case; Hadef
Sponsor legal adviser: Allen & Overy
Technical adviser to the lender: Gleeds
Model audit: Deloitte
Insurance: Willis
EPC: Al Habtoor Engineering Enterprises; Murray & Roberts