Tractebel: Gaining traction

Tractebel was the winner of both the power and water deals in the Middle East. And it closed them on consecutive days. Tom Nelthorpe talks bid mechanics with Rajit Nanda, vice president, corporate and project finance, Suez Tractebel.

Until last year Tractebel Electricity & Gas International, part of Suez Tractebel, had been going through a four-year hiatus in the Middle East project finance market ? despite having a fair claim to be a pioneer in regional power finance (the first independent power producer in Oman, and the second independent water and power producer to win a tender in the United Arab Emirates).

2004 saw this hiatus come to an end with the financing of two landmark projects ? the Sohar IWPP in Oman, and the Al Ezzel IPP in Bahrain. While Al Ezzel marks a watershed ? the first IPP in Bahrain ? Sohar is an indication of how competitive both bidding and financing markets have become in Oman. Sohar's creative solutions to the demands of the bidding and financing process bring it the Middle Eastern Power Deal of the Year, while Al Ezzel's benchmark earns it the Middle Eastern Power and Water Deal of the Year.

Even more impressively, the financings were put together in parallel by Tractebel's financing team, with such a level of coordination that the two financings closed on consecutive days, the first in Muscat on 21 November 2004, and Al Ezzel the following day in Manama. The deals were negotiated during the August holidays in Europe, as well as Ramadan and Eid.

Tractebel's partner on Al Ezzel, a 950MW combined-cycle gas-fired plant, was Gulf Investment Corporation (GIC), which teamed up with Tractebel at the bid stage. According to GIC's head of principal investments and corporate finance, Shafic Ali ?we had a remarkably well-organised process, and the banks stuck rigidly to the timetable, and dealt quickly with the business that arose.? Tractebel applied that rigour to both sets of financings.

Al Ezzel came together in an environment where previous attempts to put together an IPP, as well as other project financings, had been fraught processes. Bahrain, while politically stable, awash with capital, and dotted with sophisticated lenders, had often preferred corporate debt pricing, and this had fed through into project discipline.

But this time the timeline was much faster. According to Rajit Nanda, vice president, corporate and project finance, Tractebel EGI Middle East (Suez). ?the concession awarder, the Ministry of Finance and National Economy, issued a request for proposals on 24 January 2004, bids came in on 5 May, GIC and Suez were selected 23 June, and the deal closed 22 November. To put it in project finance jargon ? a door-to-door of 10 months.?

For Al Ezzel, the bidding process called for sealed bids with a tariff offer, accompanied by technical and commercial proposals that in effect operated as a prequalification process. Says Nanda ?this is the first time that developers have had their bids for the tariff offer opened at 9am in the morning, and a preferred bidder selected by noon.?

While GIC, owned by the governments of the Gulf Cooperation Council, would be relatively comfortable with the process, Tractebel needed to be assured that the government could deliver. Nanda is ultimately very complementary about the process: ?the government had the will and inclination to proceed, and there was no doubt that they could deliver what they promised.?

According one deal participant, this experience compares favourably with other GCC markets in which it operates. ?In Oman the tariff is a complete black box, and in the Emirates, you submit the bid, open the envelope, and then validate it.? By comparison the Bahraini bid process is ?more efficient?. Moreover, Al Ezzel attracted plenty of attention ? AES Oasis; International Power, Sumitomo and Tepco; Kepco and Xenel; and Marubeni, BTU and Pendekar were among the bidders.

No new market

SG and HSBC, the two banks that supported and underwrote the bid, had the titles of initial mandated lead arranger (the latest manifestation of the dangers of title inflation). This was, nevertheless, a bold move for the two banks, since the market for IPP debt in Bahrain had not been tested. As Nanda admits: ?We had to work out how best to approach the market, since we weren't 100% sure about what the response would be.?

So the sponsors decided to approach a limited number of potential lead arrangers, and ultimately carry out a general syndication to international and regional participants. ?We approached ten or so banks that we thought had an appetite to underwrite about $55 million each. We thought we might get five or six responses, but all of the leads came back and said yes, and as result it became a club deal without further syndication.? The lead arrangers are SG, HSBC, Gulf International Bank, Standard Chartered, Mizhuo, Bayerische, ING, ANZ, Calyon, Royal Bank of Scotland, and Mashreq.

By September, the outlines of the financing were all in place, but it took some time to get all the leads to sign up, and stretched through the above-mentioned holidays. One bank ? National Bank of Bahrain ? that had agreed in principle to the terms, was unable to sign within the timeframe. But the leads have not yet needed to carry out a formal general syndication.

The risk allocation would be familiar to most gulf sponsors ? ?it gave us a sense of deja vu,? says Nanda, adding ?we saw a lot of similarities to the Oman and Abu Dhabi templates.? The power purchase is extremely strong, and is seamlessly merged with the supply arrangement with Bapco, the state oil company, leaving the government with little room for wiggle.

The final key strength of the Al Ezzel deal is that the sponsors achieved a 20-year tenor on the debt. This was enough to convince all but the most advanced regional players to stay out of the financing, and is a good indication that the international banks are still competitive. The 11 banks split a $373 million, 20-year term loan priced at 120-175bp over Libor and a $127 million, 3.5-year equity bridge with a margin of 40 bp. For a country first, this is competitive, although it ratchets towards the end of the loan's life.

Sohar seals the deal

Sohar, on the other hand, was relatively simple to price, but very hard to bid. Sohar is a 585MW and 33 million gallons per day independent power and water plant, the first IWPP in the country but the fifth independent power project in the country. AES, with Barka, International Power, with Barka, and PSEG with Salalah, have all been active, although Tractebel with the United Power Company was the first to win a concession.

Oman is a slightly less developed prospect that Qatar or the Emirates, but the pace of growth in the country, and the performance of the projects so far, has made bidding extremely competitive. And most of the bidders had existing operations, so Tractebel's first-mover advantage was largely dissipated. ?We've found that competition, particularly from Asian operators, has become very intense,? says Nanda.

The Sohar IWPP financing, a $550 million deal for Tractebel EGI (Suez) and its local partners, was the first IWPP to come to market since IP's Umm Al Nar deal 18 months previously. ?We needed to control four critical inputs to put in a competitive bid,? says Nanda, ?financing, EPC contract, operational costs, and equity return expectations.?

The sponsors signed a standard EPC contract with Doosan Heavy Industries of Korea, and have been able to realize some savings on operations and management costs by sharing them with existing operations. The length of Tractebel's presence in Oman has helped it in this regard.

The Omani Ministry of National Economy issued a request for proposals on 3 November 2003, bids went in on 22 February, it awarded the concession on 27 April, signed the project on 20 June, and reached financial close on 21 November. As soon as the deal closed, the Tractebel team flew to Manama to sign Al Ezzel.

Its partners on Sohar are National Trading Company, The Zubair Corporation, W.J. Towell & Co, the Ministry of Defence Pension Fund and Sogex Oman, each of which holds 10% of the equity. This extensive use of local partners, all of which worked on Manah, separates the lead sponsor from its peers, and appears to be one factor in Tractebel's success. It is likely that their return expectations would be below those of an international sponsor, although Nanda is too diplomatic to confirm this.

The sponsors will also have to float 35% of the equity in the project company on the Omani stock exchange after the start of operations, or within 4 years of incorporation, but the maximum price at which the sponsors will sell their stakes is laid down in the bidding documents that they submit.

Nevertheless, the IPOs are good ways for sponsors to recycle equity, particularly the smaller partners. Al Kamil and Barka both issued shares while Sohar was moving towards close. There is a likelihood that Bahrain's government would look to institute the same rule, and as Nanda says ?for Al Ezzel, the government has indicated they would welcome a sale of some of the equity, although this is not mandatory.?

Lending ? the pyramid returns

Sohar's lead bid underwriter and structuring bank was BNP Paribas, joined in January by Standard Chartered, which underwrote 33% of the $550 million debt. In May, the initial leads brought in HSBC, KBC, SMBC, GIB, Bank Muscat and Bayerische Landesbank as mandated lead arrangers. Lead arranger titles went to Arab Bank, Mizuho, NordLB and Banca MedioCredito, while co-arrangers were Bank Dhofar, Oman Arab Bank, Natexis, National Bank of Oman and Oman International Bank.

The sponsor rounded out its financing requirements with a $140 million equity bridge from BNP, Fortis, Bayerische, GIB, KBC, SMBC and Oman Arab Bank. Says Nanda ?We approached a few relationship and Omani banks one on one, and of the ten we talked to, all ten came back. We think this heralds the return of the syndication market in the Middle East.? Certainly, the lending group is better balanced than the top-heavy bank lists that have been a feature of other financings, and it has obviated the need for the sponsor to consider an Islamic tranche.

The debt has a 17.5-year maturity, and is priced at 115bp during the 2.5-year construction period, falling to 110bp until March 2010. The next three years pricing rises to 120bp, then 135bp for the following three-and-a-half years and finally to 160bp until 2022. It also features an accelerated repayment schedule ? a cash sweep ? towards the end of the life and, significantly, a balloon repayment at the end of the debt.

So, even with relatively generous financing terms, Tractebel needed to keep debt service and amortization payments as low as possible. While cash sweeps are common in Gulf financings, balloon payments are much more rare ? Abu Dhabi's Taweelah A2 being the sole other example. This refinancing risk does not appear to have dampened enthusiasm for the deal.

For future financings, particularly in Saudi Arabia, international banks are likely to be less vital. While the bank list on Sohar was roughly 37% regional, for any Saudi deal it would likely be 60% local, say some local players. Tractebel is understood to be a bidder on both the Marafiq and Shouaiba concessions, both due this quarter.

Winning two of these would allow Tractebel to repeat the twin-track financing process of Sohar/Al Ezzel. The deals featured the same teams of advisers, and shared many lenders, which made it easier to close the deals, and kept fees, and travel expenses, lower than they would normally be. Again Nanda declines to call this a competitive edge, but for any sponsor that wins big, it will be worth considering.

Al Ezzel Power Company
Status: Closed 22 November 2004
Size: $500 million
Location: Manama, Bahrain
Description: Bahrain's first IPP ? a 1000MW CCGT
Sponsors: Tractebel and GIC
Lead underwriters: HSBC and SG
Sub-underwriters: Gulf International Bank, Standard Chartered, Mizhuo, Bayerische, ING, ANZ, Calyon, Royal Bank of Scotland, MashreqBank
Financial adviser to the MoFNE: BNP Paribas
Legal counsel to MoFNE: Freshfields
Technical adviser to MoFNE: Mott McDonald
EPC contractor: Siemens
Sponsor legal: Milbank Tweed Hadley & McCloy
Lender legal: Shearman & Sterling

Sohar Power Company
Status: Closed 21 November 2004
Size: $550 million
Location: Sohar, Oman
Description: 585MW and 33 million gpd power and water plant
Sponsors: Tractebel National Trading Company, Zubair Corporation, W.J. Towell & Co, Ministry of Defence Pension Fund and Sogex Oman
Lead underwriters: BNP Paribas, Standard Chartered
Sub-underwriters: HSBC, KBC, SMBC, GIB, Bank Muscat , Bayerische Landesbank
Legal counsel to government: Denton Wilde Sapte
EPC contractor: Doosan
Sponsor legal: Milbank Tweed Hadley & McCloy
Lender legal: Shearman & Sterling