The $1.6 billion hard mini-perm financing for the Al Dur independent water and power project (IWPP) in Bahrain was the first Middle East power project financing to reach financial close in 2009. The deal steadied the nerves of sponsors and banks, and spearheaded the path back to project lending in the region. Despite the volatility and changes to the initial financing, the $2.1 billion Al Dur project kept to the same completion schedule set down when it was awarded in August 2008.

Karel Breda, head of acquisitions, investments and financial advisory for Middle East and North Africa at the project's lead sponsor, GDF Suez, says: "In retrospect the two most important elements about the deal are the short-term nature of the loan which helped us to tap a maximum of liquidity and the relatively short time it took us to close the deal."

The deal is unusual because it is a hard mini-perm – the first time the structure has been used for a Middle East power project, and it is also the first time in the region that ECAs have accepted refinancing risk by participating in a mini-perm. Innovative financial structuring was required to enable one of the ECAs, KEIC, to cover the balloon payment that would be due under a default whilst complying with OECD rules that no more than 25% of outstanding debt can be disbursed at any one time.

The $1.6 billion financing splits into a $775 million uncovered international tranche, a KEIC-covered $275 million tranche, Islamic facilities of $288.5 million and a US-Ex-Im direct loan of $230 million.
The deal was awarded to GDF Suez and Gulf Investment Corporation in August 2008, and a planned long-term deal was redrawn as an 8-year mini-perm, and the equity in the deal was lifted from $300 million to $500 million, reducing leverage to 75/25.

The government of Bahrain did not accede to requests to increase the tariff but did allow an increase in the power and water purchase agreement (PWPA) from 20 years to 25 years. In return for lengthening the tariffs, the Bahraini government will partly share the refinancing upside.

The banks in the international/KEIC tranche committed $1.27 billion but were scaled back to $1.05 billion. The $775 million uncovered international tranche is priced at 290bp pre-completion, rising to 315bp at year 5 and then stepping up to 365bp. Unusually, for a dollar denominated transaction, three Saudi banks participated in the deal. The $275 million covered tranche benefits from a 90% guarantee from KEIC, has a margin starting at 260bp pre-completion, and increases through 300bp at year 5 to 350bp. The average debt service coverage ratio is 1.25x. Upfront fees were 275bp for a $100 million ticket, 225bp for $75 million and 200bp for $50 million.

Proceeds finance Al Dur 1, a greenfield, natural gas-fired installation that will deliver 1,234MW of electricity and 218,000 m3 of water per day. Completion of the plant is scheduled for 2011.

The deal is structured to encourage the sponsors to refinance by year 5 or face a 50bp jump in margin across all facilities and 100% cash sweeps for the remaining term. Before the sweeps the deal amortises in line with a 20-year amortising loan. Under the base case model an 80% balloon payment is left at the end of the term. About 10% of the loan is repaid under the schedule and about 10% will be repaid by base case cash sweeps. There is an automatic event of default if the deal has not been refinanced, with KEIC paying out for its covered portion.

The KEIC tranche had to be structured differently to the uncovered tranche to comply with OECD rules. Usually, when an ECA facility is in default, the ECA will repay banks along the same schedule as the original debt, however OECD rules state that no more than 25% of outstanding debt can be repaid at one time. Since KEIC cannot repay an 80% balloon, the deal is structured to split the covered balloon into four, roughly 20% mini-balloon payments spread over 18 months. The mini balloons are payable by KEIC if there is no refinancing by year 8 at year 8, 8.5, 9 and 9.5.

The project benefits from a six-month debt service reserve account, with a lock-up on sponsor distributions if the project's DSCR falls below 1.15x during the first four years of operation. Interest rate swaps were bid out among the bank club on a competitive basis. The swaps extend beyond the eight-year debt term.

While the other debt facilities feature a balloon or a series of mini-balloons, a $230 million US Ex-Im direct loan amortises over a term of 12.5 years. The tranche benefits from the cash sweeps through years 5 to 8 and US Ex-Im has the right, but no obligation, to call a default at year 8. Therefore when the deal is refinanced this facility could feasibly remain in place.

Al Dur IWPP
Status: Signed 29 June 2009, close and first drawdown due the week commencing 20 July
Description: 1,234MW and 218,000 m3 of water per day IWPP
Sponsors: GDF Suez, 45%; GIC, 25%; Capital Management House (Islamic Bank of Bahrain and First Energy Bank), 15%; SIO, 10%; Instrata, 5%
Original mandated lead arrangers: Calyon (global and ECA co-ordination and documentation); Mashreq Bank; Standard Chartered (technical and insurance)
Mandated lead arrangers: Arab Bank; Arab National Bank; BTM; BayernLB; CIC; Dexia; EDC; Fortis; KBC; KfW; HSBC; NAB; SG; WestLB
Islamic lead arrangers: Al Rajhi; Saudi Fransi; Calyon; Islamic Bank of Bahrain
ECAs: KEIC; US Ex-Im
Sponsors' legal adviser: Milbank Tweed
Lenders' legal adviser: Shearman & Sterling; Hatim S. Zu'bi & Partners
Technical adviser: Stone & Webster
Insurance: Miller Insurance Services
Model audit: PKF
Government advisers: BNP Paribas; Freshfields; Mott MacDonald
EPC: Hyundai Heavy Industries
Equipment suppliers: GE (turbines); Degremont (water services)