Hajj Terminal: Islamic BTO

Hajj Terminal is the first Shariah-compliant build-transfer-operate (BTO) project in the Middle East and the deal is likely to set a precedent for future infrastructure projects across Saudi and the region, particularly where authorities are reluctant to transfer the ownership of a public asset to the private sector and the Islamic bank market is tapped.

The BTO structure presented unique challenges for Shariah compliance given that the deal is not backed by a tangible asset, so the Islamic financing adopted for the project is also novel and has never been adopted before in the region for any project financing. The project also has significant religious importance given its linkage with Hajj and Umrah pilgrims visiting the two holiest places for Muslims worldwide – Makkah and Madinah.

The $205 million debt financing for the project at the King Abdulaziz International Airport in Jeddah, Saudi Arabia signed on 11 December 2007.

The General Authority for Civil Aviation (GACA) awarded the 20-year BTO concession for Hajj Terminal to the Saudi Binladin Group in January 2007. A 100% subsidiary, Hajj and Umrah Terminals Construction and Development Company (HTDC), is the project company.

A club of three banks is providing the funding – Islamic Development Bank, Bank Aljazira (agent and account bank), and Credit Suisse. A limited syndication may occur on an individual bank basis.

The financing splits into two 12.75-year facilities comprising senior debt of $203.9 million (with $1 million headroom, taking the total to just under $205 million) and a subordinated shareholder loan of $37.3 million. The senior term loan will be amortized with sculpted quarterly repayments, with higher payments due at times of high pilgrim traffic. The subordinated loan is structured as a bullet. There is $13.3 million of equity and pre-completion revenues of $60.5 million. The total project value is $325 million.

The deal comes with no cash sweeps, although lenders do benefit from a construction account, a debt service account, a debt service reserve account and a maintenance account. The ADSCR including cash is 6.04x, and 1.58x excluding cash.

The precise debt pricing has not been disclosed but the margin is at a discount to comparable international airport deals (the recent Antalya airport deal in Turkey was priced, for example, in the range of 250bp-275bp).

The debt is priced competitively because the lenders have added protection from a full compensation package from the Saudi authorities in the event of termination, equal to the amount of debt outstanding – such guarantees are relatively rare in airport concessions although a portion of senior debt backing the Budapest airport concession benefits from a similar compensation package.

The deal also benefited by launching to the bank market in mid-summer on 7 July, so it just escaped the beginning of the fallout from the US sub-prime troubles. And banked as a club, can avoid distributing most of the debt in a patchy syndication market.

The project company's revenues will mainly be in the form of a fixed terminal building charge (to be paid by GACA) directly based on the number of incoming and outgoing passengers. The project company also has a free hand to make additional revenue from aeronautical sources such as security and handling fees, and from non-aeronautical sources such as car parking, advertising fees and rental payments from shops and restaurants in the terminal.

The financing covers new ground because it is a BTO structured on a fully compliant Ijara Islamic basis. The deal posed a significant challenge because the asset (the terminal) is transferred under the BTO concession to GACA after the initial 18-month construction period. Under a usual Ijara project financing the deal is structured in a similar way to a lease against a tangible asset. Although Shariah scholars were nervous about the BTO structure, compliance was obtained because the intangible asset or 'right to use' the terminal was deemed a viable asset.

The terminal has significant religious importance given its linkage with Hajj and Umrah pilgrims visiting Makkah and Madinah. The financing therefore sets a precedent for other Saudi infrastructure projects such as other airports and rail projects that will seek private investment and ask banks to accept pilgrim traffic risk.

The Hajj – the pilgrimage to Makkah – is a religious obligation for every able-bodied Muslim who can afford to do so at least once in their lifetime. The Umrah is also a pilgrimage to Makkah, although among some Islamic schools of thought the Umrah is not compulsory but highly recommended.

The King Abdulaziz International Airport had 15.1 million passengers in 2006, 1.72 million of which were Hajj travellers and 2.26 million Umrah travellers. Umrah has been the fastest growing traffic segment over the last 10 years and Saudi embassies and consulates abroad have issued over 3 million Umrah visas in 2007.

Hajj and Umrah Terminals Construction and Development Co (HTDC)
Status: Financial close 11 December 2007
Description: A BTO project for building, maintaining and operating the Hajj Terminal Project in King Abdulaziz International Airport in Jeddah, Saudi Arabia
Sponsor: Saudi Binladin Group
Mandated lead arrangers: Islamic Development Bank, Bank Aljazira (agent and account bank), Credit Suisse
Financial adviser to HTDC: Gulf One Investment Bank
Legal advisers to HTDC: Trowers & Hamlins, Hassan Mahassni
Financial adviser to GACA: IFC
Legal adviser to banks: White & Case, Mohammed Al-Sheikh
HTDC external auditor: KPMG Al Fozan & Al Sadhan
Financial model auditor: Deloitte & Touche Bakr Abulkhair & Co.
Technical & traffic adviser to HTDC: SH&E (London)