Hidd: Debt for equity

The $1.3 billion financing of the Al Hidd IWPP acquisition/ expansion project – the biggest privatisation of its kind in Bahrain to date – was both tightly priced and the first project in the region to feature mezzanine debt.

Although more than double the size of the financing for the first independent power project in Bahrain – Al Ezzel – Hidd not only matched the 20-year tenor of the first project, but also came in at 25bp less on the margin.

Hidd also priced below the Saudi Shuaibah IWPP – an achievement given that Shuaibah is 40% state sponsored through SEC and PIF and that Saudi has a better country rating than Bahrain.

The project company, Hidd Power Company, is owned by International Power (40%), Sumitomo (30%), and Suez Tractebel (30%). Hidd Power Co will use the funding proceeds to finance the purchase of an existing power generation and desalination plant (965MW/30 million gallons per day) from the Ministry of Electricity and Water. The plant is located in the Al Hidd district, 20km east of Manama. The plants are currently Bahrain's largest-class power generation and desalination facilities.

Hidd Power Co will also construct a new desalination plant (capacity: 60 million gallons/day) to sell electric power and water to the Ministry of Electricity and Water under a 22-year PWPA (the deal also features a 22-year NGSA with Bahrain Petroleum Company (BAPCO)).

Completion of the new desalination plant is scheduled for November 2007. When operational the complex will have a domestic market share of about 20% for power generation and approximately 65% for water desalination.

The funding package comprises a $600 million direct-loan JBIC facility (the first loan JBIC has extended to a project financing in Bahrain), a $390 million senior commercial facility, a $175 million equity bridge, $102 million in equity from cashflow from existing facilities, and a mezzanine tranche of $35 million.

The senior commercial debt pays 90bp over Libor, rising to 150bp over time. The six banks that equally underwrote the commercial portions are RBS, Mizuho, KfW, SMBC, Gulf International Bank (GIB) and Standard Chartered. BNP Paribas, which also advised on the Al Ezzel IPP, advised the Bahrain Ministry of Finance.

In syndication, bookrunners RBS, SMBC and Standard Chartered received initial commitments on tickets of $30 million, split $17.5 million for the term loan and $12.5 million for the bridge. Banks that joined the deal were ABC, Arab Bank, BayernLB, BBK, BoTM, CIC, Hypo Public Finance Bank (the new bank's first participation), KBC, Natexis, NordLB, Sumitomo Trust, and WestLB.

The key innovation on the deal is the use of a mezzanine tranche to take out the need for greater equity. On an upfront pure-equity only basis the deal is structured at an aggressive 92:8, but taking into consideration the bridge and mezzanine this falls to 76:24. The minimum average debt service cover ratio is 1.2x.

The comparison between Hidd financing (Bahrain's first desalination and second IPP privatization) and Tractebel and GIC's Al Ezzel IPP deal (Bahrain's first IPP privatization) highlights an incremental shift in both the financial and sponsor markets.

As well as coming in under Al Ezzel, Hidd also priced below the Saudi multi-sourced Shuaibah IWPP financing closed in December 2005. This is significant given that Shuaibah is part government sponsored with SEC and the Saudi governmental investment fund, PIF, owning 40% of the project company, and that under OECD's risk classification Saudi (2) is actually rated a lower political risk than Bahrain (3). For Shuaibah, the $875 million 20-year commercial debt and the $210 million Islamic tranche priced at 120bp over Libor pre-completion, falling to 115bp from completion to year seven, and then rising to 170bp (for more details search 'Shuaibah').

Despite the strength of the sponsors and low Bahraini political risk, both Hidd and Al Ezzel feature no local banks at lead arranging level – this is principally a reflection on the Bahraini power sector, and the cultural reluctance to accept long tenors on project financings over shorter corporate deals. For the sponsors to raise $1 billion of long-dated Bahraini debt for Hidd, most bankers acknowledge that JBIC's participation was crucial.

Hidd Power Company
Status: Financial close 4 April 2006
Description: Financing for $1.3 billion acquisition/expansion of IWPP
Sponsors: International Power; Tractebel; Sumitomo
Lead arrangers: RBS; Mizuho; KfW; SMBC; GIB; Standard Chartered
ECA: JBIC
Participants: ABC, Arab Bank, BayernLB, BBK, BoTM, CIC, Hypo Public Finance Bank, KBC, Natexis, NordLB, Sumitomo Trust, WestLB.
Financial advisory: BNP Paribas
Government legal counsel: Freshfields
Lender legal counsel: Clifford Chance
Government technical adviser: Mott MacDonald
Lender technical adviser: Stone & Webster
Principal EPC contractor: Sidem