The successful financial closure on November 20 of Qatar's Ras Laffan independent water and power project (IWPP) demonstrates, among other things, that Gulf power deals still pack sufficient appeal for the international lending community, despite the anticipated rumblings in a purportedly hypersensitive post-September 11 market.

But such success comes at a price ? higher, and harder to find, insurance premiums, for one. Indeed, this fact, given the dearth of insurers willing to extend specialized cover, had cast a spectre of doubt over the Gulf power market. Partly because of this, Ras Laffan's closure is being touted by financiers as the most encouraging sign yet of business-as-usual in this shaken but still dynamic market.

The $700 million transaction incorporates a $572.25 million term debt package, joint lead arranged by ANZ Investment Bank, Arab Banking Corporation, Barclays Capital, BNP Paribas, Gulf International Bank, HSBC Bank Middle East, Qatar National Bank, Societe Generale, Bank of Tokyo-Mitsubishi and Industrial Bank of Japan (IBJ). IBJ acted as financial advisers to AES from the initial bid onward.

The balance is being paid down through sponsor equity, with a 75:25 debt/equity split.

The club deal approach is an integral part of the deal's strength, and should ensure its eased reception in international markets. ?It was a very prudent move on the part of the sponsors to appoint a 10 strong bank group, even though banks were prepared to take on more risk at the outset,? says ANZ's Abhay Ketkar.

The loan backs the construction of a 750MW and 40 million g/d gas-fired combined cycle co-generation IWPP. Originally expected to be around $600 million, the size of the debt package has been reduced somewhat, given savings made under the EPC contract, signed with Italy's Enelpower. The plant is being constructed at the Ras Laffan industrial city, 85km north of Doha, Qatar's capital.

Pricing on the 18-year facility has been altered partly to reflect the changed sentiment post-September 11. The final deal carries a margin of 110bp, before dropping to 105bp from completion to year seven, and then rising to 125bp from year seven to year 11, and up to 150bp thereafter.

This contrasts with the initial pricing: 105bp pre-completion to 115bp post completion, notching up to 125bp, 135bp then 150bp.

Syndication is expected to launch in the first week of December. At present, appetite seems fairly strong for the deal . ?The confidence in this deal has been very high,? insists Ketkar, ?particularly given the world class sponsors and contractors involved, and with the guarantees now in place. The regional market is also very liquid,? he adds.

In a move to inspire refinancing, the Ras Laffan loan will sport a cash sweep at year 12. It pulls a tenor of 18 years, reflecting a 25-year PPA.

The project marks yet another successful financing for AES's expansionary Middle East strategy, the corporation having recently completed the financing of a similar IWPP development at Barka in Oman. AES owns a 55% equity stake in the project and will assume operating responsibility through its subsidiary AES Ras Laffan Holdings Ltd. The remaining 45% stake is held by the Qatar Government owned Qatar Petroleum (QP) and the Qatar Electric & Power Company (QEWC) and the Gulf Investment Corporation (GIC).

Bankers say it is the strength of AES that ultimately urged the deal through to successful closure, particularly against the backdrop of regional market uncertainty.

?Although there's definitely been more caution in the marketplace, it stems mostly from those who don't know the region well enough. The problem is with such fringe banks who might come on board the syndication, and thus demand a powering of the terms,? suggests one international banker.

The plant's entire output will be purchased, under a 25 year power purchase agreement (PPA), by the state's regulatory body, Kahramaa, which distributes power and water to consumers. The PPA is itself backed by a full government guarantee, underscoring the key role of the Qatari government in pushing the deal through.

The difficulty in finding insurance at a reasonable cost against ?incident of sabotage,? following September 11, was the major issue dragging out negotiations. Insurance costs, and the availability of coverage, are all understood to have been resolved satisfactorily ? a terrorism cover package was finally negotiated with Kahramaa, effectively the Government of Qatar, that provides a backstop in the event of terrorism. ?The banks simply aren't willing to take on excessive risks at this stage,? says a lawyer close to the deal.

Going forward, there are obvious concerns about the term of project finance loans in the region. ?There is some question about whether deals will be this long,? says Mike Smith at IBJ. ?I imagine there may be more convergence with other Middle Eastern deals.?

Ras Laffan is the first Qatari plant to offer majority ownership to a foreign firm. The decision to hand control of an key facility to a foreign interests was controversial, but ultimately came down to financial necessity ? Qatar, like many of its Gulf neighbours, faces mounting and expensive electricity requirements, and local developers lack the financial and technological resources to do it themselves.

Power demand is surging at a rate of 8% per year, leaving the country with little choice but to call in private power production, albeit with the end result of, not uncontroversially, reducing subsidies on electricity tariffs. Currently Qataris are exempt from power and water charges, while expatriates and companies pay a highly subsidized tariff. The first power from Ras Laffan is scheduled for March 2003, with full commissioning taking place in May 2004.

In principle the outlook for Qatar and its future dealflow is, other things remaining equal, very encouraging. But with the United States now pivoting threateningly towards Iraq, the entire region may yet suffer another upsurge of potentially lethal risk.