The Rabigh IPP in Saudi is the first Middle East power deal to be bid since the start of the credit crisis, and the first to feature a Chinese EPC contractor. But more significantly, the sponsors have managed to secure 20-year debt without cash sweeps.

Faced with a 21 July deadline to issue a notice to proceed to the EPC contractors (SepcoIII and Dongfang), the sponsors, AcwaPower and Kepco, were locked in 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. 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 total project cost is $2.55 billion. Financing splits into $1.925 billion of long-term debt and $575 million of equity. The equity is met through a bridge loan of $500 million and early generation revenues of $75 million. A group of Saudi banks provided the bridge.

The deal is notable as the first long-term Middle East financing to close since the financial crisis. Unlike the Al Dur IWPP in Bahrain, which was structured as a hard miniperm, the Rabigh 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 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.

"This is the first time a full Chinese EPC of such magnitude has been used in the Middle East & North African power market," says Rajit Nanda, CFO of AcwaPower International. "The amount of time undertaking technical due diligence by the lenders is also unprecedented in the region. We identified the risks well in advance, and to make all parties comfortable, including the lenders, we allocated a special budget for the close monitoring and supervision of the contractors that goes far beyond normal EPC contract implementation in the IPP industry."

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 on 2 December. 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 $0.0533 per kWh posted by a Suez-IP consortium.

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%.

"We went out to four international banks, and all four came in," says Nanda. "We wanted to bring competitive tension to the bank market by going out to two different pockets of liquidity, and to later optimize after having collected the liquidity. Rabigh is not a legacy deal agreed back when the market was more liquid, but a deal derived from the new lending climate. We achieved optimised pricing and structure despite the jumbo size of the transaction – far cheaper than comparable deals such as Al Dur and Shuweihat 2."

The deal is also notable as featuring the largest Islamic debt component of any IPP or IWPP to date. Barring the forthcoming PP11 tender (bids due 7 December), the Rabigh deal may be an aberration in terms of liquidity and pricing. Given that the deal is in Saudi and the strong reputation of Saudi sponsor Acwa, it is highly unlikely that Saudi banks will write tickets anywhere near as large for non-Saudi Middle East projects going forward.

Shuweihat 2 will therefore offer an important benchmark for deals in the wider region, and is likely to be placed somewhere between Al Dur and Rabigh with a tenor of 22-years and starting at 260bp rising to 350bp with a 325bp fee. Nevertheless, given that Saudi banks received central bank clearance to lend into Dolphin and Al Dur, Saudi banks can have a role in helping revive competitive tension, albeit to a much smaller extent, outside Saudi.

An interesting gauge of Saudi bank cross-border appetite could come if Acwa wins the Barka 3 and Sohar 2 IPPs in Oman. Bids are due in on 19 October.

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: AcwaPower (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