SingSpring is controlled by Singapore based water company Hyflux Ltd, which early in 2003 won the tender to supply the Public Utility Board (PUB) with 30 million gallons of desalinated water per day via a Build Own Operate project. The plant is scheduled to commence supply of water to the state owned PUB by the second half of 2005.

The project financing's arrangers comprised: DBS Bank as lead arranger, facility agent, security trustee and account bank; KBC Bank as co-lead arranger and insurance adviser; ING Bank as co-lead arranger; and Standard Chartered Bank as co-lead arranger and technical adviser bank.

The syndicated senior project loan totalled S$158.5 million, or 80% of the total project cost, and there was also a S$6.5 million standby loan to fund 70% of any cost overrun. Hyflux is providing S$35 million worth of equity.

The loan carries construction risk, and for the two year construction period pays 110 basis points over Singapore Interbank Offered Rate (Sibor). From years 1-3 of operation the margin is 105bp, rising to 115bp in years 4-8, and 137bp in years 9-12. For the final four years of the 16-year operational period the loan will pay 142bp. SingSpring has fixed its interest payments for the first 10 years of the loan by entering into an interest rate swap agreement with DBS Bank.

"The 18-year tenor was the longest that has ever been achieved for a project financing in Singapore, and that was driven by the 20-year concession agreement with the PUB, which is a government-owned entity," comments Jackie Surtani, head of project finance Asia-Pacific at KBC Bank.

"The credit quality of the SingSpring project is really outstanding because of the quality of the offtaker, and we also took a lot of comfort from the fact that the legal and regulatory environment in Singapore is second to none," Surtani says.

The signing ceremony for the loan took place on 12 December, and according to Hyflux the loan was around 30% oversubscribed. The success of the syndication came in spite of the fact that the 18-year tenor is too long for many regional banks to consider. Even after monthly principal repayments the average life of the loan will come in at around 11.1 years.

The plant will be located at Tuas, on a piece of reclaimed land that is itself on a 30-year lease. The plant will produce around one-tenth of Singapore's water drinking water requirements. Singapore imports around half of its water from Malaysia, but is in the process of lessening its dependence upon its neighbour, especially since some of the water agreements between the two states are due to expire in 2011.

Water supply has been a common source of friction between Malaysia and Singapore over the past decade, with the two countries arguing about the price being paid for water being piped into Singapore.

Thus the SingSpring plant, which uses a reverse osmosis desalination process to process seawater, is of considerable strategic importance to the government. Since the PUB, which has signed a 20-year take-or-pay water purchase agreement (WPA) with SingSpring, is a government agency, lenders are basically viewing the deal as a quasi-sovereign credit. Singapore enjoys a triple-A sovereign rating from Standard & Poor's

While there are no guarantees being given by Hyflux on the loan, the SingSpring project is of crucial importance to the company, which will therefore be expected to offer very strong support.

The EPC contract was initially going to be French utility Ondeo Degremont, originally a 30% shareholder in SingSpring. But after a review of its global operations Ondeo decided to exit the project, which subsequently became a wholly-owned subsidiary of Hyflux.

Hyflux has appointed Hydrochem as engineering, procurement and construction contractor, and Hyflux Engineering as operations and maintenance contractor. Both are subsidiaries of Hyflux, which was set up as a specialist water company in 1989, and is listed on the Stock Exchange of Singapore. It has operations in Singapore and China.

The debt to equity ratio of 80:20 is quite strong by the standards of many European projects involving government or municipal entities as offtakers. There are also tight financial covenants setting out parameters for the debt service ratio over the life of the deal, and a cash sweep mechanism which will partly channel extra cash into a cash surplus account, and partly repay the lenders, and which could therefore shorten the tenor of the loan.

The Singapore government has strong public finances, but is nonetheless interested in using the Public Private Partnership model for some of its infrastructure requirements. Pricing of the water will be based on two elements, one involving a fixed component based on dependable quantity, and the other payment varying according to the amount of water actually distributed.

According to PUB, the original bids for the project were highly competitive, and SingSpring was selected as it offered the lowest cost of supply over the twenty-year period from 2005 to 2025, while its bid was also able to meet various technical standards. The basic price for the water will start at S$0.78 per cubic metre in 2005, and thereafter will vary according to prevailing fuel prices and be annually adjusted with inflation according to a pre-defined formula.

SingSpring Desalination

Status: Closed 12 December

Size: S$200 million

Location: Singapore

Description: desalination plant with a 20-year offtake contract with the Singapore government

Sponsor: Hyflux

Debt: S$158.5 million

Arrangers: KBC Bank, DBS Bank

Tenor: 18 years

Margin: 105bp-142bp over Sibor, stepping up over loan life.