Taweelah A2: Two for one

The Taweelah A2 independent water and power project (IWPP) refinancing ? the first IWPP refinancing in the UAE ? was priced to mirror a reduction in equity and longer tenor than the original, the incorporation of an Islamic tranche, and most significantly, in a separate but related transaction, a pioneering securitisation of National Bank of Abu Dhabi's (NBAD) project loan to the deal ? the three-tranche $133.75 million Abu Dhabi Power Bond.

The original deal ? Abu Dhabi's first IWPP ? closed in August 1999, backed by a $575 million, 17-year syndicated loan led by Barclays. The project has solid credentials: the Emirates CMS Power Company (ECPC) is 60% owned by the government-owned Abu Dhabi Water and Electricity Authority (ADWEA) and 40% by CMS Energy. ECPC has a 20-year power and water purchase agreement with Abu Dhabi Water and Electricity Company, so as long as ECPC is delivering, debt payments are effectively guaranteed by the government of Abu Dhabi.

The 16.25-year refinancing comprises a $391 million international tranche, a $10 million working capital facility from HSBC and a $150 million Islamic tranche.

With the added complication of a separate securitisation to follow, it took co-ordinating mandated arrangers ANZ and SG 15 months to renegotiate covenants, insurance, and obtain the project company's board approval.

Like the international commercial tranche, the $150 million Islamic tranche (Ijara) ? lead arranged and underwritten by Abu Dhabi Islamic Bank, with Dubai Islamic Bank and Kuwait Finance House coming in as lead managers ? can also be securitised into Shariah compliant Sukuks.

Take-up on the club deal was strong, with Abu Dhabi Investment Co, Arab Bank, Barclays, Bayerische Landesbank, HSBC, NBAD, Nord/LB, and Union National Bank joining the mandated arrangers at arranger level. National Bank of Kuwait also came in at lead manager level.

In addition to a longer overall tenor (up from the remaining 14 years left on the original deal to 16.25 years), the effect of the refinancing and repayments already made on the original debt was to redraw the debt to equity ratio from 75:25 to 80:20. The original deal also had a cash sweep mechanism that was eliminated in the new structure.

The original Taweelah A2 deal closed in a period of record low margins across the region, but because of the new tenor and the higher debt to equity ratio, pricing was a tad higher than the original, which was 105bp over Libor pre-construction dropping to 80bp post-construction. But with the refinanced debt priced at 95bp over Libor, stepping up to 130bp over the course of the loan, the difference reflects the new terms.

But what makes the Taweelah A2 highly significant are the securitisation clauses in its structure. The instrument is consistent with the shift in liquidity patterns in the region, with local banks playing a bigger role in funding debt, driven by the greater liquidity brought on by an increase in oil prices. Asset backed securitization has been explored in the past in the region ? but this is the first time that it has been executed for an infrastructure project.

The $133.75 million bond launched on 28 June 2004, three months after financial close on the project debt refinancing. Led and originated by NBAD with co-managers Standard Chartered, National Bank of Dubai and HSBC, the bond took out $133.75 million of the $163.73 million international loan participation underwritten by NBAD.

The bond is split into three tranches: $23.4 million of floating rate four-year notes, $21.8 million of seven-year notes, and $88.55 million of 10-year notes. The underlying loan has a 16.5-year maturity and pays 160bp over Libor at the top level.

The four-year notes have an expected average life of 2 years, the seven-year notes have an average life of 5.5 years, and the 10-year notes between 7.5 and 8.5 years. The bonds were floated on the Luxembourg exchange.

The terms include a pre-agreed safe harbour that allows banks to sell on their participations without requiring the consent of the borrower, its sponsors or any other bank.

The issue was structured through Abu Dhabi Power Bond Limited, a bankruptcy-remote, special purpose company incorporated in Jersey, which bought the loan from NBAD for an amount equal to the proceeds of the issue of the note.

NBAD provided a $400,000 revolving facility to the issuer, with $300,000 for indemnity obligations and $100,000 to meet any mismatches between loan payment to the SPV and payments to the bondholders.

The deal is not a project bond, but rather a loan participation-type agreement where bond purchasers have no direct legal relationship with the borrower but rely on the SPV to hold the loan collateral in trust and collect and distribute principal and interest payments to the participating lenders.

The asset here is interest on the loan, not the IWPP itself. Therefore, bondholders are taking on project credit risk and are exposed to NBAD's ability to buy back the bonds on maturity (or after eight years on the 10-year tranche via a put option) but have no rights to enforce their security against the project company, Emirates CMS. NBAD is also not obliged to repurchase if Emirates CMS is in default of its loan payments under the contingent repurchase agreement.

This deal sets the template for tapping a whole new pool of investors for GCC infrastructure projects ? pension funds, insurance companies and other institutional investors.

Taweelah A2 IWPP refinancing
Status: Closed 29 March 2004 followed by bond 28 July 2004
Description: First refinancing for an IWPP in UAE
Sponsors: ADWEA (60%); CMS Energy (40%)
Total debt: $551 million
Commercial debt: $401 million
Mandated arrangers: ANZ; Societe Generale
Arrangers: Abu Dhabi Investment Co; Barclays; HSBC; NBAD; Nord/LB; Union National Bank of Abu Dhabi; Arab Bank; Bayerische Landesbank
Lead manager: National Bank of Kuwait
Islamic debt: $150 million
Mandated Arranger: Abu Dhabi Islamic Bank
Lead managers: Abu Dhabi Islamic Bank; Dubai Islamic Bank; Kuwait Finance House
Legal counsel to sponsors: Trowers & Hamlins
Legal counsel to lenders: Shearman & Sterling; Allen & Overy
Legal counsel to Abu Dhabi government: White & Case
Bond take out: $133.5 million
Originator and lead manager: NBAD
Issuer: Abu Dhabi Power Bond
Co-managers: Standard Chartered; National Bank of Dubai; HSBC
Trustee: Bank of New York
Legal counsel: Allen & Overy