Barka 2/Al-Rusail: Conjoined but no cross-collateral

A regional project financing first on multiple levels, the combined $810 million Barka 2 greenfield IWPP and Al-Rusail power privatization/rehabilitation project has the lot – size, tenor, complexity (both project and acquisition financings), innovation with a real impact on debt pricing, and an element of merchant risk.

But it is the conjoined structure of the deal, and the speed at which it was closed (just 70 days from signing of the project documents to signing of the financing agreements) that makes it unique in the GCC.

The deal is two separate project financings in a linked package that ring-fences each project from a security perspective whilst also creating a mini-portfolio effect – dividends are pooled at holding company (holdco) level and can be used to fund the costs of either project, subject to the donating project having serviced its debt and operating costs.

Sponsored by Suez Energy International (47.5%), Mudabala Development Co. (47.5%) and National Trading Company (5%), the project is a combined privatization that is both the first 100% share sale of a power asset to a foreign investor in the Middle East and the first Omani power privatization.

The sale included 100% of the shares and shareholder loan of Al Rusail Power Company – which owns and operates an existing 666MW open cycle, natural gas-fired power generation facility at Rusail – and the greenfield development of the Barka 2 independent water and power plant (IWPP), a gas fired power generation and seawater desalination plant that will have a power capacity of 677MW and water capacity of 120,000 m3/day (the seawater desalination plant is based on reverse osmosis proprietary technology to be supplied Suez subsidiary Degrémont).

The project was awarded to the sponsors by the Omani government through the Oman Power and Water Procurement Company in June 2006, with the proviso that the projects not be cross-collateralized (there could be no potential threat to the generating capacity of Al-Rusail) and that the structure allow for an IPO (35%), forecast for the end of 2010.

While the government proviso spawned the conjoined holdco concept, the benefits of the structure went beyond just meeting those terms – two IPOs become one thereby saving on future arranging costs; leverage is maximised with 87.5% of project cost funded out of non-recourse debt; and most significantly the deal achieved competitive debt pricing based on the conjoined credit structure.

The structure features the usual covenants and reserve accounts equal to six-months debt service, but with excess cash fed to the holdco. The holdco has a reserve account and may release shareholder dividends if an aggregate distribution test is met (the average DSCRs of both projects are beyond a specified threshold).

However, if a project triggers a DSCR event, the lenders to that project have security over the excess cash in the holdco. Conversely, if the banks enforce their security against an individual project the charge over the excess cash falls away.

Given the 87.5% leverage on the deal, the debt pricing benefits of the structure are significant. The financing comprises a $594 million 17.5-year term loan (plus a 2.5 year term out option) and $9.165 million standby for Barka 2, and a 15-year $113 million facility for Al-Rusail – both priced during the operating period at 70bp until year five, stepping up to 90bp for the next four years, 120bp for the following four years and 125bp for the final two years. Pricing goes up to 160bp if the deal is termed out. There is also a 3.5-year $77.3 million equity bridge loan at holdco level priced at 20bp plus a $1.3 million equity standby (all standbys are priced 10bp higher).

Both projects benefit from the guaranteed sale of electricity and potable water for 15 years via a 100% power and water purchase agreement (PWPA) – both agreements backed by guarantees from the Ministry of Finance of the Government of Oman.

The $113 million Rusail portion of the debt is amortized as a balloon, but if the project hits base case it is paid off in its entirety. On the Barka 2 portion there is also a balloon, but given the base case includes a residual amount that goes beyond the 15 year tenor of the PWPA there is an element of merchant/recontracting risk – the first time lenders have taken such a risk on a greenfield power project in the Middle East.

The deal proved popular in syndication achieving a 33% oversubscription out of a possible 42% maximum. Fourteen banks joined at arranger level: KBC, Calyon, Natixis, BNP Paribas, Mashreq Bank, Arab Bank, GIB, Bank Muscat, National Bank of Abu Dhabi, KfW Ipex-Bank, BayernLB, WestLB, Standard Chartered and Mizuho.
Barka 2 and Al-Rusail are a regional innovation in GCC project financing that is certain to be repeated – partly because bundling assets for auction makes sense for many GCC states, but also because the financial engineering spawned by the requirement that those assets not be cross-collateralized has benefits on multiple levels, most significantly cost.

Barka 2 and Al-Rusail
Status: Syndicated 26 February 2007
Description: $708 million debt financing for acquisition and rehabilitation of Al-Rusail power plant and development of greenfield Barka 2 IWPP
Sponsors: Suez Energy International, Mubadala Development Corporation, National Trading Company of Oman
Mandated lead arrangers/bookrunners: HSBC; SMBC
Arrangers: KBC, Calyon, Natixis, BNP Paribas, Mashreq Bank, Arab Bank, GIB, Bank Muscat, National Bank of Abu Dhabi, KFW Ipex-Bank, BayernLB, WestLB, Standard Chartered, Mizuho
Legal counsel to borrowers: Millbank Tweed
Legal counsel to lenders: Shearman & Sterling
Government financial adviser: ABN Amro
Government legal adviser: Berwin Leighton Paisner
Technical adviser: Black and Veatch
EPC: Doosan Heavy Industries