ISTP2 is the second independent sewage treatment plant procured by Abu Dhabi Sewerage Services Company (ADSSC) – at the time of commercial close a subsidiary of ADWEA but now reporting to the general council of Abu Dhabi. The deal is significant because it debunks the widely held view that ADWEA will not countenance miniperm structures.

The long-term financing for ISTP2 is a soft miniperm – a pragmatic approach by ADWEA/ADSSC to the recovering lending environment. Like ADWEA's Shuweihat 2 independent water and power project (IWPP), ISTP2 was awarded in the middle of 2008 and could not get long-term financing commitments. However, unlike Shuweihat 2 – which is near to securing a long-term financing without cash sweeps – ISTP2 took the soft mini-perm route.

Given ADWEA is a sponsor on both deals, why the difference in structuring? Principally because JBIC would not lend to Shuweihat 2 unless the commercial banks matched its 22-year amortizing facility.

To keep to the agreed timetable for ISTP2 the sponsors, Veolia, Besix and ADWEA, began construction after commercial close in December 2008, when raising long-term debt would have been impossible. An $86 million corporate bridging loan was provided by Calyon, Natixis and NBAD, with recourse to Veolia and Besix, to fund the start of construction.

The long-term deal, which took out the bridge, was signed 17 September by a club of eight banks. Unlike the $410 million ISTP1 deal, which was underwritten by Abu Dhabi Commercial bank in June 2008 and distributed to local banks, the long-term ISTP2 debt was arranged entirely by international banks, with the exception of NBAD.

The $404 million debt breaks down into a $384 million 20-year term loan and a $20 million 20-year standby facility. BTMU and Natixis were joint coordinating and documentation banks, SMBC was facility agent, and BNP Paribas advised the sponsors. Pricing is believed to start at 300bp over Libor and rises to 400bp.

Three banks went for the top $75 million ticket – BTMU, Natixis and NBAD. Calyon and SMBC went for $60 million tickets and BNPP, ING and Mizuho went for the $50 million tickets. All were scaled back pro rata.

The deal is structured to encourage the sponsors to refinance by year six. During years six and seven, 70% of the excess cash is swept, during year eight there is a 90% sweep and from year nine onwards there is a 100% sweep.

Three local banks are also providing a dirham-denominated, $106.3 million two-year equity bridge. NBAD is bridge agent, as well as onshore account bank and onshore security trustee for the senior facilities. Assuming the bridge comprises all the equity, the deal has a debt-equity ratio of around 80/20.

The project involves the construction, operation and maintenance of two sewage treatment plants, Allahamah and Whatba 2, with a combined capacity of 430,000 m3 per day and a 25-year sewage treatment agreement with offtaker ADSSC. Revenues are predicated on an availability regime, principally based on the project's ability to deal with the flow of sewage. The private sponsors, Veolia and Besix, are the engineering, procurement and construction contractors.

The contractual structure mirrors ISTP1, but with tightened covenants to appease international banks. The project documentation is based on ADWEA's IWPP template but is stronger from a lender's perspective because the termination provisions are tighter. Unless the project company walks away or repudiates the contract, the lenders are fully repaid in all events of termination.

On termination, the offtaker is obliged to buy back the asset based on a formula that sees the lenders repaid and covers all swap breakage costs, whereas in the IWPP template this is only an option. During the construction period, the termination amount due to the lenders from ADSSC equals the amount of debt drawn down.

While ADSSC was a direct subsidiary of ADWEA during most of the deal, in July it became a standalone entity reporting directly into the general council of Abu Dhabi. Although ADSSC's availability payments are not guaranteed by the government, its obligation to purchase the plants in termination is. Therefore, if a termination came about due to non-payment of the unitary fee by ADSSC, the guarantee ensures that the termination payment is made by the Abu Dhabi government.

The bank market has moved on since the likes of the Al Dur IWPP and ISTP2 soft-miniperms, which were both legacy deals. Cash sweeps have been supplanted by high step-ups in debt margins as the refinancing incentive of choice. However, ISTP2 does offer up an important lesson. It shows that it pays for procurement authorities to be flexible when timely delivery of infrastructure is essential and refinancing risk acceptable.

ISTP2
Status: Financial close 17 September 2009
Description: Financing for Abu Dhabi's second independent sewage treatment project
Sponsors: ADWEA (60%); Veolia (20%); BESIX (20%)
Mandated lead arrangers: BNP Paribas; Calyon; ING; Mizuho; National Bank of Abu Dhabi; Natixis; SMBC; Bank of Tokyo-Mitsubishi
Equity bridge arrangers: National Bank of Abu Dhabi; First Gulf Bank; Abu Dhabi Commercial Bank
Financial adviser to sponsors: BNP Paribas
Legal adviser to sponsors: Dewey & LeBoeuf; Chadbourne & Parke
Legal adviser to lenders: Allen & Overy
EPC contractors: Veolia; BESIX