Marafiq: Saudi trail blazer

The $3.443 billion financing of the Marafiq IWPP – the world's largest IWPP – represents a catalogue of precedents. It is the largest project finance debt deal in the power sector in Saudi Arabia and the largest Islamic financing in the world.

In terms of financial engineering, the deal is the first to introduce the structured subordinated DSRA facility enjoying senior rights post-foreclosure with no recourse to any of the sponsors. The project also has the longest tenor of project debt for Saudi Arabia and the longest tenor for an equity bridge loan.

Despite the groundbreaking nature of the deal, the debt package closed comfortably oversubscribed at sub-underwriting level at the beginning of May 2007, negating the need for a general syndication. The success of the deal is largely due to the expertise of Suez's in-house structuring team and the willingness of three banks to commit to underwriting at an early stage.

With hindsight the three banks – BNP Paribas, GIB and Samba – made a shrewd move: The debt was put to 29 sub-underwriters and, at the beginning of May, all 29 banks came in as mandated lead arrangers. Such was the appetite for the deal, commitments totaling $5.5 billion were received, which had to be scaled back.

With a capacity of 2750MW and 800,000 m3 per day Marafiq represents approximately 10% of the 29,000MW current total installed electricity capacity in Saudi Arabia – a figure that is planned to increase to 60,000MW by 2020 to meet the Kingdom's rapidly increasing energy demand.

The plant will be built and operated under a 20-year BOOT concession. The Jubail IWPP project company is owned 60% by a consortium of Suez Energy, Gulf Investment Corp, Arabian Company for Water and Power Projects (ACWA Power), 30% by Marafiq and 5% each by the Public Investment Fund of Saudi Arabia and the Saudi Electricity Company.

The ownership structure differs from the generic contractual structure set down by the Water & Electricity Company (WEC) pursuant to Resolution 5/23. Under the generic structure PIF should have a 32% stake and ECI, 8% – this was scaled back because of Marafiq's shareholding.

The consortium appointed an EPC team comprising GE Energy, South Korea's Hyundai Heavy Industries (hence the involvement of KEIC, Shinan Bank and Woori Bank) and Sidem. The plant is scheduled to come online in the third quarter of 2009.

The project is backed by a 20-year power and water purchase agreement (PWPA) that was initialled 20 December 2006 and signed 6 January 2007. Also, the contract features a government guarantee from the Ministry of Finance for both payment and termination.

Sponsors injected around $1.3 billion in equity as upfront share capital, required under Saudi Companies law, and additional shareholder funding is made up with an equity bridge loan of $550 million.

In all, the $3.4 billion debt comprises a seven-year $550 million equity bridge, an Islamic tranche of $600 million, a 22-year commercial loan of $1.6 billion, and a KEIC-covered portion of $650 million. The $600 million Islamic portion was offered to, and taken by, Riyad Bank, Al-Rajhi Bank and National Commercial Bank with tickets of $200 million each.

The KEIC insurance is a 100% comprehensive cover for political and commercial risks.
The Shari's compliant Islamic facility is based on a Wakala-Ijarah Mawsufah Fi Al Dhimmah, wherein the Islamic finance institutions employ the project company under an agency agreement, entitled the Wakala Agreement, to procure the delivery of assets.

During construction, the project company is required to pay to the Islamic Facility Agent advance lease rentals set out in a pre-determined advance lease rental schedule.

A $110 million blended ticket across the remaining facilities was taken by all banks invited. The banks comprise groups of Korean, Saudi, regional and international banks (see info box).

Pricing for the commercial and Islamic facilities is 110bp during construction, dropping to 105bp post-construction and then rising in 15bp steps to 160bp door to door. The offtake and termination liabilities are guaranteed by the Kingdom of Saudi and the ADSCR is 1.2x.

With the banks committing at an early stage, and with the tenor on the term loan 22 years and one month – the longest project debt in Saudi – the deal priced much tighter than the early indicative pricing of 110bp stepping up to 250bp.

As the project is phased into four operational blocks, the project is expected to start generating 'early generation revenues' before the scheduled commercial operation date. The net available cash flow after meeting all operating expenses and applicable taxes during this period will be allocated to project costs.

Other novel aspects of the deal include a subordinated debt service reserve account (DSRA) and a facility to raise more debt. DSRA facility lenders will benefit pari passu with the other secured parties on default but will only have a right to vote in relation to decisions following enforcement and in certain specific default scenarios.

The project company is permitted to raise up to $250 million for expansion in capacity of the plant. Further facilities can only be obtained with the consent of the majority lenders. The project company can push for more leverage with an option to prepay any lender which dissented in the vote to allow more debt.

Marafiq IWPP represents an advance in financial engineering and project scope, the likes of which will continue to be needed if the region is to meet its growing water and energy demands.

Marafiq IWPP
Status: Underwritten in mid-2006, sub-underwritten 17 May 2007
Description: $3.4 billion debt for the largest IWPP in the world
Sponsors: Suez Energy (20%); Gulf Investment Corporation (20%); ACWA Power Projects (20%); 40% split between the Public Investment Fund, Saudi Electricity Company and Marafiq
Original mandated lead arrangers: BNP Paribas, GIB, Samba
Commercial tranche MLAs: Saudi British Bank, Samba, Arab National Bank, Saudi Hollandi, Apicorp, GIB, Arab Bank, Mashreq Bank, Shinan Bank (Korea), Woori Bank (Korea), BNP Paribas, BayernLB, BTM, Calyon, Dexia, DZ Bank, Fortis, HSBC, ING, KDC, KfW, Mizuho, Natixis, RBS, SMBC, SG, Standard Chartered and WestLB
Islamic MLAs: Riyad Bank, Al-Rajhi Bank and National Commercial Bank
ECA: KEIC
Borrower legal counsel: Berwin Leighton Paisner
Lender legal counsel: Milbank Tweed
Legal counsel to Marafiq: Shearman & Sterling
Marafiq's financial adviser: Citigroup