The Rabigh IPP is a landmark Middle East deal. Not only was its financing a cyclical first – the first in 2009 to secure long term financing without cash sweeps – it is also the first GCC power project to feature a Chinese EPC contractor and featured the largest Islamic debt component of any IPP or IWPP to date.

The financing closed at the height of the global economic meltdown, which was followed by defaults by Saad Group and AHAB conglomerates in the Saudi markets. Despite the crisis, the Saudi Banks continued to support ACWA due to their belief in ACWA's project rationale and the robust structuring underpinning the transaction.

Nevertheless, sponsors ACWA Power and Kepco were faced with a 21 July deadline to issue a notice to proceed to the EPC contractors (SepcoIII and Dongfang). Had the sponsors missed the EPC deadline the plant would not have kept to the commissioning date of summer 2012, which would have been a source of deep embarrassment to the concession awarder Saudi Electricity Company (SEC). The sponsors were locked in Herculean talks with Saudi banks over three full days and nights up to 21 July to get to financial close and secure first drawdown on a $500 million equity bridge.

The total project cost is $2.55 billion. Financing splits into $1.925 billion of long-term debt and $575 million of equity. The tenor is 20 years door-to-door with a 15% balloon, for a notional tenor of 22 years and an average life of 15 years. The equity is met through a bridge loan of $500 million and early generation revenues of $75 million.

The debt comprises a large Riyal-denominated Islamic component of $1.45 billion and a KEIC-covered $475 million tranche. The Islamic component is divided between a specified lease facility of $1.1 billion and a procurement facility of $350 million. The lead arrangers for the Islamic debt are Al Rajhi, Alimna, National Commercial Bank, Saudi Fransi and Saudi British Bank.

The $475 million international tranche benefits from 90% cover from KEIC – the lead arrangers comprise Standard Chartered, HSBC, Calyon and Bank of China which took a $300 million allocation on the back of Chinese EPC SepcoIII.
The decision to use a Chinese EPC contractor has been vindicated by the sponsors' ability to keep to the same tariff and schedule set down in the bid. ACWA-Kepco's bid undercut its nearest rival by $800 million over the life of the PPA, with a tariff equivalent of $0.04 per kWh compared with $0.533 per kWh posted by a Suez-IP consortium, the next nearest competitor.

The debt margins for the commercial and Islamic tranches start at 300bp pre-construction rising to just 325bp flat until the end of the term. All-in fees for the Islamic facilities were 275bp, and 250bp for the international tranche. The KEIC-covered facility is priced at 260-300bp, increasing in four steps, with a bank margin of 250bp. ADSCR is 1.25x and minimum DSCR is 1.2x. There is a distribution lock up at 1.15x cover.

China Exim was at the advanced due diligence stage and would have made a large participation but could not get internal clearances in time.

The project is backed by a 20-year PPA with SEC which signed on July 11. Rabigh is the first power project in Saudi's privatisation plan where the offtaker is not backed by a direct guarantee from the Ministry of Finance. However, banks are protected by a ratings trigger – if SEC's rating drops below BBB, an investment grade replacement entity must be substituted by the Saudi Ministry of Finance (MoF).

Given the lack of MoF guarantee, and the headline 20-year tenor, the sponsors had to make some concessions to get the deal away. Leverage was decreased from the standard 80/20 during boom times to 75/25, and the contingency funding as a percentage of boilerplate capacity was doubled from around 3-4% to 6%. Also, the original model included a 30% balloon so that the notional tenor matched the 25-year PPA. However, this was unacceptable to some of the banks so the balloon was reduced to 15% to provide a PPA tail of four years over the 22-year notional tenor.

These mitigants worked – the deal achieved an oversubscription of around $250 million. The banks committed $2.207 billion, against the required amount of $1.925 billion – an oversubscription of 14.6%.

The Rabigh IPP deal was a short-term shot in the arm for the market, effectively it shook the market out of putting in sweeps as a lender-right and restored confidence in the Saudi build operate and own model and Saudi's wider plans for privatization after Sumitomo's moribund attempt to finance Ras Al Zour IWPP. The longer term consequences of Rabigh should be more profound, as it marks the first time that Chinese EPC contractors have entered the mainstream in Middle East and North Africa.

In the past, Chinese EPCs have been dismissed because of reliability concerns, but Rabigh IPP and subsequently Salalah IWPP in Oman have shown that through tight contracting and stringent monitoring, Chinese EPC contractors are a viable alternative to established players and they will surely help bring down the unit cost of power in future deals.

Rabigh IPP
Status: Financial close 21 July 2009, first drawdown 20 August 2009
Description: $1.9256 billion financing for 1,200MW Rabigh fuel-oil fired IPP in Saudi
Sponsors: ACWA Power (40%); Kepco (40%); SEC (20%)
Mandated lead arrangers (Islamic): Al Rajhi; Alimna; National Commercial Bank; Saudi Fransi; Saudi British Bank; Samba (documentation bank)
Mandated lead arrangers (Commercial): Standard Chartered (documentation bank); HSBC; Calyon; Bank of China
Lender legal counsel: Baker Botts
Sponsor legal counsel: Allen & Overy
SEC financial adviser: Citi
Lender technical adviser: RW Beck
EPC contractors: SepcoIII; Dongfang