The $1.6 billion hard mini-perm financing for the Al Dur independent water and power project in Bahrain is the first Middle East power project financing to reach financial close since Lehman's collapse. Unlike the long-term deals that have struggled to close since then, the $2.1 billion Al Dur project has kept to the same completion schedule set down when it was awarded in August 2008.

Al Dur 1 is 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 unusual because it is a hard mini-perm – the first time the structure has been used for a Middle East power project. Karel Breda, head of acquisitions, investments and financial advisory for Middle East and North Africa at the project's lead sponsor, GDF Suez, says, "The deal uses an innovative structure, and the fact that ECAs have accepted it, makes it even more innovative."

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 they had planned to launch the debt to market in September, but were thwarted by the Lehman's untimely demise. 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.

"We couldn't risk going out with a half-formed structure and so it was critical to have an accurate read of the market," says Quentin Slight, director, power EMEA at Calyon. "In December we approached almost 60 banks, and a shorter tenor was preferred by the majority. Having decided upon a hard mini-perm structure, the original mandated lead arrangers launched the deal in January and then had to work hard with the sponsors to convince the market and the export credit agencies to accept the structure. In the end, the deal was unchanged apart from a slight tweak to the pricing and finished slightly oversubscribed."

The bid documentation did not include a carve-out for the sponsors for a material adverse change, so they were on the hook to provide the project at bid terms. 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.

Three original mandated lead arrangers – Calyon, Mashreq Bank and Standard Chartered – book-built the revised deal from January and were joined by 14 lenders on the international and covered tranches and three banks plus Calyon participated in the $288.5 million Islamic facilities: One bank lent $90 million separately under a Wakala-Ijara facility, with the remaining $200 million structured as a Istisna-Ijara facility.

Unusually, for a dollar denominated transaction, three Saudi banks participated in the deal. Judging by the fate of Al Dur and the Dolphin gas pipeline refinancing, cross-border finance from Middle East banks is likely to become increasingly popular on future projects

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. 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 is 1.25x. Upfront fees were 275bp for a $100 million ticket, 225bp for $75 million and 200bp for $50 million.

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.

"The deal is our first IWPP and our first mini-perm," says Barbara O'Boyle, vice-president structured finance at US Ex-Im. "A big hurdle for us was to get comfortable with the refinancing risk. We decided to go for a longer term, because we were able to offer attractive financing and are more comfortable offering long-term financing on a long-term asset. We are taking refinancing risk either way."

Its board positively reviewed the request for a direct loan of $230 million before financial close and referred the transaction to the US Congress as a part of its process for transactions of this size, but will only become party to the deal after the 35-day review period is over. US Ex-Im is scheduled to join the deal on 1 August but the sponsors have guaranteed to step in with a senior loan to replace this loan if approval is not given.

The sale of equity stakes in the project was run in parallel to the financing and finalised before financial close to enable banks to get comfortable with new participants; three local investors came into the deal, paring down GDF Suez' and GIC's 50% stakes to 45% and 25%, respectively. "It was always our intention to sell," says Breda of GDF Suez. "Most of our equity positions in projects across the region are around 30% to 20%."

Does the Al Dur IWPP financing set precedents for future deals? Yes and no. Principally, the financing illustrates the speed and increasingly flexible approach of ECAs and their desire to fill funding gaps.

The consensual nature of the financial engineering was a product of where the market was at the time. In January 2009 no-one could have guessed how quickly the project market has come back.

Bahrain plans to develop three more power and water plants at the Al Dur site in the coming twenty years. The second phase, Al Dur 2, at a similar size to the first phase, is expected to be launched in late 2009 to cope with the country's increasing energy and water needs.

Al Dur IWPP
Status: Signed 29 June 2009, close and first drawdown due the week commencing 20 July
Size: $2.1 million
Location: Bahrain
Description: 1,234MW and 218,000 m3 of water per day independent power and water project
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
Technical adviser: Stone & Webster
Insurance: JLT
Model audit: PKF
Government advisers: BNP Paribas; Freshfields; Mott MacDonald
EPC: Hyundai Heavy Industries
Equipment suppliers: GE (turbines); Degremont (water services)