The financing of the of the world's largest independent water and power plant (IWPP) has taken a smoother route to financial close than the sponsors could have wished for. The $3.4 billion debt package backing the Marafiq IWPP closed comfortably oversubscribed at sub-underwriting level at the beginning of May, negating the need for a general syndication.

The success of the deal is largely down 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.

Unusually, the project was tendered by the semi-independent Power & Water Utility Company for Jubail and Yanbu (Marafiq) – the first time an IWPP has been let by an agency other than the Saudi Electricity Company (SEC).

The plant will be built and operated under a 20-year BOOT concession. The sponsor consortium comprises Suez Energy (20%) Gulf Investment Corporation (20%) and the local ACWA Power Projects (20%). The remaining 40% stake is in public hands, split between the Public Investment Fund, Saudi Electricity Company and Marafiq.

The consortium has 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 initialed 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.

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.

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. The banks are: 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.

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.

The margins are richer than Marafiq's comparable benchmarks, and given the appetite at sub-underwriting it is a moot point that the deal might have been banked more cheaply.

The most recent IWPP deals in the Middle East to close are the Taweelah A1/A10 (Abu Dhabi) and Barka 2 (Oman) transactions. Lead arranged by BNP Paribas and Calyon, the $1.2 billion Taweelah A1/A10 expansion and refinancing took out debt from the Taweelah A1 project arranged in August 2005 and extended its tenor from 18.5 years to 22.5 years. The loan pays a margin of 110bp until the project (an extra 250MW of new capacity) is completed in 2009, then it rises to 112.5bp for years 2.5 to 8.5, 125bp for years 8.5 to 12.5 and 145bp until maturity.

Barka 2 comprised a $603.5 million 17.5-year term loan (2.5 year pre-completion) and for the Rusail plant, a 15-year $113 million portion. The term loans priced at 75bp stepping up incrementally to 125bp.

The Marafiq IWPP debt is pricier principally because it is a greenfield IWPP as opposed to an expansion like the Taweelah A1/A10 or a part-acquisition like the Barka 2. Also Taweelah A1/A10 has a stronger sponsor group, with Total a joint shareholder with Suez.

Another reason for the slightly higher pricing cited by a market participant was the strategic importance of the Marafiq IWPP to the Saudi government and the re-scoping of the project: "It was important for all project participants, particularly the sponsors and the initial lead arrangers to make sure the deal didn't bomb. Negotiations for Marafiq IWPP had been going for two years, and towards the end, at the highest levels. The project was also re-tendered after the awarding authority wanted to increase the water capacity."

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. Still, with the 100% sub-underwriting success of all invited banks coming into the deal, it probably means there was some headroom in the pricing. Therefore, good as the Marafiq IWPP deal is, it should be a suitable candidate for an early refinancing.

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: Millbank Tweed
Legal counsel to Marafiq: Shearman Sterling