The United Arab Emirates' largest project financing to date ? Abu Dhabi's $1.6 billion, 1500MW Shuweihat independent water and power project (IWPP) ? closed successfully in December, 2001. It is the third and most substantial component yet of the Emirate's ambitious IWPP program, spearheaded by the two Al Taweelah projects. It is also set to become the largest desalination plant in the world.

The transaction was lead arranged by a seven strong bank group consisting of Barclays Capital (joint bookrunner), Citibank (joint bookrunner), Bank of Tokyo-Mitsubishi, Kreditanstalt fur Wiederaufbau, Royal Bank of Scotland, National Bank of Abu Dhabi and Abu Dhabi Investment Company. Joining the mix at the senior arranger level were Credit Lyonnais, HSBC Investment Bank and Sumitomo Mitsui.

The lead arrangers are currently working to determine the extent to which senior banks want their holds reduced in a general syndication, to be launched around the beginning of February.

The $1.285 billion debt package comprises two facilities ? a $1.035 billion, 20 year conventional loan and a $250 million Islamic tranche. The former features a step up pricing mechanism, which was raised by 15bp post-September 11, reflecting a slightly more cautious environment.

The 20-year debt facilities are priced at 125bp over Libor pre-completion. Post-completion through to year seven the margin is 115bp, for years eight to 10 the margin is 125bp, for years 11 to 13 it pays 140bp, for years 14 to 16 pricing is 165bp and for years 17 to 20 the loan pays 175bp.

The tenor is the longest yet for a Gulf power deal. And this, despite what many considered to be daunting circumstances post-September 11. The size and tenor of the deal are understood to have been concerns at times for certain lenders during negotiations. But says Sikander Zaman, managing director of global project finance at Citibank, ?this tenor was ultimately the best fit for the deal. The terms for future deals, however, will have to be decided on a case by case basis, based on project strength.? It remains an open question whether the capacity exists for extending tenors of this length (and for such vast amounts) for the abundance of forthcoming Gulf projects.

The Islamic tranche, conceived to reduce the burden on the conventional bank market through tapping a ready source of fresh liquidity, was lead arranged by Abu Dhabi Islamic Bank, which is underwriting $200 million, with Dubai Islamic Bank and Kuwait Finance House acting as arrangers, underwriting $100 million and $50 million respectively.

At $250 million, it is the largest such facility for any project in the UAE. And it is particularly noteworthy for having been arranged in just one month.

Islamic facilities, though not new to project financings, have not been commonly applied. Indeed, the debate about the efficacy of Islamic tools for the industry may now gain new momentum in the wake of Shuweihat's apparent success. The argument against has hinged on the added layer of complexity that Islamic facilities bring to the table ? primarily given intercreditor issues relating to security. But with liquidity constraints looming, this fresh source of capital could yet become a more common project finance instrument, especially in the Middle East.

Says Zaman, ?we showed with Shuweihat that, despite apprehension in some quarters, Islamic tools can substantially increase the funds available to international developers, while easing the burden on the international bank market.?

Another innovative feature of the deal is its 3-year, $352 million equity bridge facility, allowing the sponsors to inject their cash post completion. This marks the first time an equity bridge has been put together for a power project in the UAE. Previously, for Taweelah A1, a back-ended equity structure had been put in place.

The project is being co-sponsored by CMS Energy (20%) and International Power (20%), both well entrenched in the Gulf power market. The former built up its regional presence with Abu Dhabi's first IWPP, Al Taweelah A2. The latter is developing its Al Kamil IPP project in neighbouring Oman.

The 60% priority stake in the project, however, is being kept firmly by ADWEA, the government's corporatised water and electricity authority.

Yet to be wrapped up is the insurance package, though a schedule for its completion is understood to be in place. Post-September 11, insurance cover, particularly terrorism cover for Middle East deals, has been in short supply. To counter this, ADWEA has agreed to provide a backstop for political and other risks uncovered by any standard insurance package.

Aside from being the largest greenfield project in the UAE, it is also the country's largest power project to date. But equally noteworthy is the sheer appetite for the deal in a region supposedly beset by political risk, not to mention global economic uncertainty. As Zaman notes, finalizing a deal of this size was ultimately down to a ?very concerted effort by all shareholders and lead banks.?

The project entails the development of a 1500MW power and 100 million g/d water facility on a build, own operate (BOO) basis. In subsequent phases, however, the plan is to notch power capacity up to 3,00MW to 5,000MW and 200 million to 300 million g/d.

CMS/IPower bid for the project with Siemens as its nominated engineering, procurement and construction (EPC) contractor for the power works, and with Fisia Italimpianti as its nominated desalination contractor. Last year's bidding process was, according to many industry players, highly competitive, with the winning consortium beating close competitors Tractebel and AES after intense negotiations.