The signs are good for Bahrain's first independent power project (IPP). Financial advisers for the Al Ezzel project were mandated in October 2003, a preferred bidder was named within 10 months and financial close was reached within a year. Although the arrangers envisaged a syndication, such was the underwriting demand that the deal was done on a club-basis.

HSBC and SG first approached the banks supporting the failed bidders to come in on the sub-underwriting stage and all 10 banks obliged by joining. They are: National Bank of Bahrain, Gulf International Bank, Standard Chartered, Mizhuo, Bayerische, ING, ANZ, Calyon, Royal Bank of Scotland, and Mashreq Bank.

"All the banks approached have reasonable hold appetites, so the syndication was cancelled and the deal done on a club basis. I haven't seen a 100% success rate for a long while, but I guess it just shows the level of appetite in the region at the moment," said one source close to the lenders. The deal is currently going through due diligence and documentation process. Allotments have been made and signatures are expected by the end of September/early October.

The project follows the classic IPP structure: a lumpsum turnkey contract with Siemens; an offtake agreement with a state utility, guaranteed by the state; and long-term gas risk taken by the project company. The project will sell electricity to the Ministry of Electricity and Water (MEW) under a 20-year Power Purchase Agreement (PPA) commencing on 1 May 2007. A first phase will deliver 470MW on 30 April 2006.

The tenor of the debt, 20 years, is unusual for the region, but the three regional banks - National Bank of Bahrain, Gulf International Bank, and Mashreq Bank - are comfortable with the deal because it is generally accepted that post construction the project becomes more like a corporate loan and can be refinanced relatively painlessly. The ratcheting on the loan also becomes more punitive in the later years, effectively applying pressure on the project company to refinance before year 12 when pricing increases from 115bp to 150bp. In the event the debt is not refinanced, a cash sweep operates after 12 years.

The $503 million debt is split into a $378.38 million 20-year term loan, and a $125 million equity bridge loan. Twelve banks took a $31.5 million portion of the term loan.

The 20-year loan ratchets over time, starting at 120bp over Libor during the three-year construction period, 110bp for the next six years, then stepping up on regularly on three-year periods to 115bp, 150bp and 160bp, then 175bp for the final two years. The three-and-a-half-year equity bridge loan has a margin of 40bp over Libor.

As the first IPP in Bahrain, the project has no close comparators, however the pricing and tenor of the senior debt compares favourably (from a borrower's perspective) with the similar sized Tihama IPP in Saudi that reached financial close in February this year. The 1074MW, $645 million Tihama project raised $510 million in debt. The 18-year $488 million term loan component paid a margin of 130bp pre-completion, stepping up to 125bp, 140bp and racheting to 175bp at the end of year 12.

The 1000MW combined-cycle gas turbine (CCGT) plant's owner will be Al Ezzel Power Company, and it is located in the area around the capital Manama. Tractebel EGI and GIC each hold 50% of the project. The Ministry of Finance and National Economy awarded the project following an international tendering procedure. The winning consortium beat off four other bidders: AES Oasis; International Power, Sumitomo and Tepco Group; Kepco and Xenel group; and Marubeni, BTU and Pendekar group. BNP Paribas was mandated to provide financial advice to the Ministry, Freshfields provided legal counsel and Mott McDonald technical advice.

The project will meet one-third of Bahrain's total energy requirements when it comes fully online in 2007 and the confirmation of further investment in power could not have been timelier. Following a countrywide blackout on 23 August, the Ministry of Electricity and Water is asking the government for 700 million dinars ($1.86 billion) to update the distribution network. It is estimated that it will take four years to undertake the work needed to prevent a repeat of the power failure.

With Al Ezzel creating a precedent and Bahrain facing capacity and distribution issues, sweltering in temperatures of 39 degrees during the blackout, a further two or three privately owned power plants to provide a buffer capacity and spread reliance seem inevitable.

Al Ezzel Power Company
Status: Allotments made, in documentation. Signatures expected late September 2004.
Size: $503 million
Location: Manama, Bahrain
Description: Bahrain's first IPP - a 1000MW CCGT
Sponsors: Tractebel and GIC
Lead underwriters: HSBC and SG
Sub-underwriters: National Bank of Bahrain, Gulf International Bank, Standard Chartered, Mizhuo, Bayerische, ING, ANZ, Calyon, Royal Bank of Scotland, Mashreq Bank
Financial adviser to the MoFNE: BNP Paribas
Legal counsel to MoFNE: Freshfields
Technical adviser to MoFNE: Mott McDonald
EPC contractor: Siemens