Hadera Desalination: Open to internationals

The Hadera desalination project in Israel is one of the largest desalination plants in the world and features the first international project financing in the country. The project – Israel's third desal plant and the first to be underwritten entirely by international banks – is sponsored by Housing & Construction Holding and IDE Technologies, and involves construction of a desalination plant in the city of Hadera with a capacity of 130 million cubic metres of water per year.

The primary challenge for the sponsors was securing long term project financing at competitive rates. Although the local bank market would accept construction risk, the norm in Israel is for a construction financing to be taken out by longer term debt over the operating phase. There is little liquidity among local banks for long tenors, and although pension funds could take operational-phase debt – a local bank then pension fund deal would have been extremely complex.

The preferred option then, was to go for international banks, but international financing raised problems: it was unsuited to Israeli concession agreements aimed at shekel-denominated funding and some of the savings made in margins from the European banks are negated by the costs of the more complicated debt structure.

When the concession agreement was signed in November 2006, the concession was not structured to accommodate international banks. The mandated lead arrangers Calyon and Banco Espirito Santo, therefore had to sensitively reopen negotiations with the Israeli government to make the deal work with international banks mindful that s substantial deviation from the original concession agreement would have the losing bidders reaching for their lawyers.

The renegotiations centred on fuller interest rate protection, tweaking of drawdown mechanics and fleshing out commercial terms in the event of force majeure and acts of terrorism. The international deal comprised a basic Euro-denominated bank loan, a 23-year swap and a hedge against interest rate changes, as opposed to the one, fixed, indexed loan that would have existed for an Israeli, shekel-denominated debt.

When the concession was signed the sponsors were given a 10 month deadline to reach financial close, which given the concession changes they missed by a month.

The Eu311 million ($455 million) deal eventually reached financial close on 11 November. Banks were encouraged by the involvement of IDE, who have experience from the Ashkelon desalination plant in 2003.

Joint arrangers Calyon and Banco Espirito Santo provided Eu191 million ($176 million) of the debt, with the EIB putting up the remaining Eu120 million as a direct loan. As is increasingly common for the EIB, its loan is provided without commercial bank guarantees.

The Eu191 million senior commercial facility comprises a Eu105 million commercial loan, a Eu48 million equity bridge, Eu10 million of working capital, a Eu15 million standby facility and a Eu13 million debt service reserve facility. There is also Eu48 million base equity in the deal.

The international approach to financing was facilitated by the Israeli government allowing bidders for the first time to tender tariffs in foreign currency, with the government assessing each bid at the exchange rate at submission.
The preferred bidder took up the option to bring foreign banks in for lower margins – the pricing secured on the debt is understood to be around 50bp lower than anything local banks could offer. A mostly Euro-denominated debt package was sourced given the lower Euribor compared with the Shekel base and Libor.

The tariff paid by the water authority is set in three currencies: The bulk of the tariff is in euros to match the debt, and there is a dollar and shekel component to match the liabilities to suppliers and technology providers.

The average debt service cover ratio (ADSCR) under the base case scenario is 1.26x and the debt margin over Euribor starts at 110bp and ratchets in increments to 140bp across the tenor.

The base case includes the fixed tariff component which meets the fixed costs of the plant around 25% of the maximum dispatch under the variable tariff. The banks are therefore taking a small element of demand risk. The water authority WDA is not obligated to require dispatch of the plant, but banks have taken the view that this is a very minimal risk given Israel's demand for water and the EIB's political sway.

Syndication of the debt was launched in mid-February and around five extra banks are likely to enter the deal. One participant is Israel's largest bank, Bank Hapoalim (unofficial as Project Finance Magazine goes to press).

The deal sets down a marker for other Israeli projects, with advances such as currency flexibility in bids on tariffs and other structural changes to concession agreements opening Israeli infrastructure to the international project finance bank market.

Hadera Desalination Project
Status: Financial close 11 November 2007
Description: Financing of a 130MCM water desal facility in Israel under a 24-year 11 month BOT agreement with the State
Sponsors: Housing & Construction Holdings (50%); IDE Technologies (50%)
Mandated lead arrangers: Calyon; Banco Espirito Santo
Multilateral: EIB
Participant (unconfirmed): Bank Hapoalim
Sponsors' financial adviser: Goren Capital
Sponsors' legal adviser: Gornitzky & Co
Lenders legal adviser: Allen & Overy; Herzog Fox & Neeman
EPC contractor: IDE