Ajman Sewerage: Reworked and wrapped

The restructuring and refinancing of the Ajman wastewater treatment system was a protracted but successful process. Along the way, the sponsors, both old and new, notched up some useful firsts, including the first use of a monoline wrap for an essential infrastructure project in the region. It also features a reworked concession contract that provides lenders with a credit somewhere between full sovereign and full market risk.

Ajman Severage (Private) Company is the concessionaire for the construction of a wastewater collection and treatment system in the Emirate of Ajman, the smallest of the United Arab Emirates. Its original shareholders were Thames Water (60%, also the operator), Black & Veatch and Sixconstruct (the contractors, each 10%), and the government of Ajman (20%).

The concession raised $77.5 million in debt financing from international and local lenders, of which HVB ($22.5 million), BayerischeLB ($22.5 million) and Mashreqbank ($5 million) provided a $50 million dollar tranche and Mashreqbank (AED64.3 million) and United Arab Bank (AED36.7 million) put up a AED101 million ($27 million) local tranche.

But on top of $38 million in equity, the project's capital structure was reliant upon upfront payments from customers for connections to fund construction work. The lenders were aware of this, and had included limits on drawdown based on correction targets. The main comfort for the lenders came from the fact that under the country's sewerage law 95% of the population had to be connected, and that the sponsors could disconnect delinquent payers.

But potential customers were unwilling to pay considerable sums upfront for these connections, and the project, not long after financial close, began to default. Despite waivers, the cashflow from prospective customers was not enough either to fund construction of permit further draws of funds. By mid-2004, the sponsors waited for the Ajman government to take legal action against delinquents.

But this prospect was never politically palatable, and the Emirate and sponsors ultimately looked at a solution that centred towards greater government support for the project's revenue streams as well as a more powerful financing commitment. A complicating factor in the process was the desire of Thames, then owned by Germany's RWE, but now owned by a Macquarie fund, to exit the international business.

By early 2005 ING and a number of monolines approached the sponsor with a wrapped debt solution. The existing lending group was still in place, and prepared to listen to creative solutions, but the wrapped solution would allow for a longer tenor, lower pricing, and certainty of funding. Moreover, the concession still runs for 25 years from substantial completion, in this case till 2033.

The pitch came off the back of a steady increase in monoline activity in the bank market. In the last eighteen months, the monolines have been active in such diverse jurisdictions as Ireland, Norway and Canada. In fact, in May 2000 MBIA and Ambac wrapped $200 million of debt for the NGL-4 financing, which was placed in two commercial paper conduits.

But monolines are more comfortable with essential infrastructure, and Ajman was the first such opportunity to come their way. Most wrapped bank deals have been able to exploit banks' regulatory parameters to access low-cost funding, but monolines have often participated in projects where a troubled history has caused pricing to widen beyond the level at which an insurer can get comfortable.
Ajman is something of a hybrid of the two, and could well have been done either in the bond or bank market. That the bank solution predominated suggests that the monolines could not command an excessive story premium. The successful bidder was Ambac, and the final deal size around $100 million. ING has underwritten and swapped the entire debt into fixed rate, and has not yet syndicated this.

Parallel with the new financing, the sponsors worked to bring in a new majority shareholder to replace Thames, one that could also operate the project. The remaining sponsors brought in BESIX, the parent of Sixconstruct, to take up a 40% holding, and Veolia to take up 20% of the project. The other shareholdings are unchanged. A Veolia/BESIX joint venture is the new operator of the project.

The contractors also agreed to speed up the construction process on the system, in an attempt to demonstrate to potential customers that the connection payments were having a meaningful effect. "It was," notes Ian Barrett, a senior project developer at Black & Veatch, "important for all of the parties that the concession be up and running as quickly as possible."

The final substantial alteration is the increased credit support that the Ajman government must provide to the project. The government must make up in a timely fashion the shortfall in revenues from collections, and its obligations, benefit from a letter of credit, among other instruments. The enhancements have an ad hoc feel, but were sufficient to make Ambac comfortable.

More intriguing is the attitude of the ratings agencies, which guide Ambac, and must provide an underlying shadow rating. Moody's gave the concession an A3 shadow rating, while Standard & Poor's settled on BBB. The difference gives an idea of the difficulty attached to rating an Emirate, even one in the oil-rich Gulf. Ajman, while smaller and less wealthy than some of its neighbours, benefits from implicit support from its fellow Emirates. Moreover, the sewerage system is clearly essential, and few participants doubt the willingness of the Ajman population to pay for an operational system. The country's Emir is understood to have provided personal assurances to the agencies of the country's commitment to the project.

This personal touch, and the unique political system of the Emirates, puts something of a limit on how much of the structure can be adapted elsewhere. Certainly this kind of limited support, possibly with the backing of a multilateral lender, could be adapted. Still, as Neil Cuthbert, managing partner at Denton Wilde Sapte, which advised the sponsors, notes, "Ajman had, and does have, a rather unique capital structure. The concession is a bit of a patchwork of enhancements, but the wrapped bank loan could well be replicated."

The monolines are anxious to diversify their assets outside of Europe, particularly in the more developed Gulf economies. But suitable essential infrastructure assets are still rare in the Middle East, particularly when compared to the plentiful power and petrochemicals projects.

Ajman Sewerage (Private) Company Ltd
Status: Refinancing closed March 2006
Location: Gulf Emirate of Ajman
Description: Restructuring of the concession for a sewerage collection and wastewater plant
Size: $132 million
Sponsors: BESIX Group (50%), Government of Ajman (20%), Veolia Group (20%) Black & Veatch (10%)
Debt: $100 million
Lead arranger: ING
Tenor: 20 years
Monoline: Ambac
Lawyers to the lenders: Allen & Overy
Lawyers to the sponsors: Denton Wilde Sapte
Independent consulting engineer: Halcrow
Lender's engineer: WS Atkins
Sponsors' engineer: Mott McDonald