Dollars and Sense
The remaining half of 2001 is set to be the busiest period of
project financing in Qatar's history. And it is certain to be the
most concentrated pocket of activity within the Gulf region as four
projects come to market and various others continue to be
developed.
The intensity of activity will be all the more noticeable given that the project finance market in the region has had a relatively quiet first half. As such, Qatar is taking centre stage in the Middle East this year and bankers and sponsors feel confident that by the end of 2001 the country will have successfully funded these projects and laid the foundations for more deals next year.
The four deals are very different both in terms of sectors and whether they are new build or expansion financings.
The first of the expansion projects is the $500 million fourth phase for Qatar Fertilizer Company SAQ (Qafco). ABC (regional bookrunner), Apicorp, Barclays Capital (documentation bank), Gulf International Bank (facility agent and technical bank), HSBC Investment Bank (international bookrunner) and Qatar National Bank have been mandated to arrange a $400 million eight-and-a-half year financing.
The lead arrangers are now in the market for banks to come into the deal on a one-stage selldown. Qafco is understood to be priced at 75 basis points over Libor through its maturity with upfront fees of 75bp as well. Bankers have described this pricing level as competitive for Qatar.
The project involves the construction of a fourth plant producing 2,000 tonnes a day of ammonia and 3,200 tonnes a day of urea. Financing for the project comes from the $400 million bank facility as well as existing cash reserves and cashflow from the company's existing operations.
SG is acting as financial adviser to Qafco, which is owned by Qatar Petroleum (75%) and Norsk Hydro ASA (25%)
The second project to come to market this year will be the Ras Abu Fontas B extension project sponsored by Qatar Electricity and Water Company (QEWC). The project involves the addition of a 500MW single-cycle capacity to the existing power plant. Financial adviser Royal Bank of Scotland, issued the information memorandum for the $160 million of debt financing in mid June to potential arrangers. These banks have three weeks to respond and a week after that an announcement will be made on the mandated banks. Syndication is expected to get underway sometime after Europe's August holiday period.
International orientation
The two larger projects are likely to seek the majority of their debt from the broader international markets rather than the regional markets, which are expected to support large chunks of the two smaller projects.
The first of these is the Ras Laffan independent water and power project (IWPP). AES recently won the bidding for the concession and is now forming an expanded lead arranger group after mandating its financial advisor, IBJ, as lead arranger. Financial close is scheduled for mid-September.
The project will require debt financing of around $600 million with a tenor of 18 years. ?The Ras Laffan power project is the first big-ticket IPP in the country,? says one project financier in London. ?It is really a new sector or the country and will set an important benchmark particularly in relation to tenor.?
The largest of the four projects is for the third train for Ras Laffan LNG Company II sponsored by Qatar Petroleum and ExxonMobil.
Around 40 banks have been invited to bid by Goldman Sachs, the financial adviser for the project.
The total cost of the project is around $1.4 billion, with 70% debt and 30% equity. The commercial loan portion will be roughly $700 million with a probable 10-year tenor. ExxonMobil is providing a $285 million direct loan.
The expansion is being undertaken to meet the company's sales and purchase agreements with India's Petronet LNG.
Capacity concerns
With four transactions representing a large combined amount of debts, there are inevitably concerns as to whether market capacity and appetite will be sufficient to meet these demands. Most banks' Qatari lines are not that big, and given the number of previous deals that have been financed in the international market over the past few years, bank line capacity is an issue.
?The Qataris are looking to raise roughly $1.8 billion this year, with more to follow,? says one project financier at a Japanese house in London. ?This is a lot of debt and there are concerns about capacity in the international bank market. However, having said that, there is a positive impact in that a number of earlier projects are beginning to paydown which should begin to ease bank lines and reduce exposure. But this is a small benefit, Qatar is not going to pay down $1.8 billion of debt this year.?
Indeed, the Qataris' management of their own finances has also helped the situation. Their decision to use some of the proceeds of their Eurobond issue to pay down short term debt has helped to free up banks' country limits. ?A few years ago there were concerns that certain international banks were getting full up on their Qatari country lines, but now the outlook seems pretty positive,? says Michael Emery, manager, structured syndicated debt, at ABN Amro in London.
It is a testament to Qatar's status in the market that few bankers are overly anxious about the strain these deals will put on capacity and appetite. ?There is a considerable degree of enthusiasm in the bank market for Qatari projects,? says Michael Crosland, senior director, structured finance, at Royal Bank of Scotland in London.
Reasons to be cheerful
The reasons for this enthusiasm and confidence are various. A key benefit for Qatar is that are no comparable markets to compete with it in the region. ?Qatar is the reliable source of high quality projects in the region,? says one project finance banker in London. ?Banks want to do deals and if the majority of them happen to come from Qatar then so be it. It is difficult to turns these types of transactions away.? While other countries in the region do offer project opportunities, none offer them on the scale or regularity of Qatar.
A further factor specific to the region is the growth in liquidity of the local and regional financial institutions, driven chiefly by higher oil prices over the past year or two. ?There are several projects which could now be financed predominantly with local and regional banks,? says Emery at ABN Amro. ?Many of these banks are highly liquid and are looking for assets to book.?
In addition to increases in overall liquidity, local and regional banks are gradually beginning to be less wary about booking longer term assets. ?Because of their own funding bases, local and regional banks have traditionally had appetite for eight to 10 year tenors, but have found it more difficult to go out to 18 years,? says Emery at ABN Amro. ?However, this is now changing and for a relatively small portion of their total balance sheets, we are seeing more and more local and regional players prepared to extend to the long tenors required for power projects.?
A further factor in Qatar's favour is that banks in the region are beginning to venture into deals beyond their own domestic base. This is happening very gradually but it will have an effect on overall regional liquidity.
Qatar is also working on broadening its funding sources to decrease its reliance on the bank market. One prospect is the insurance market which has some persuasive attractions, as were demonstrated last year on the $400 million third tranche for NGL-4.
?NGL-4 tranche three was an innovative transaction,? says Crosland at RBS. ?It was the first time that the private insurance market had been utilized for a Qatari project and opened up a new funding source for Qatar.? He adds: ?The private insurance market can be developed further and will represent an option for future project funding. Although NGL-4 tranche three used CP as the funding mechanism it effectively tapped the private insurance market for the first time and as such genuinely represents a new source of funds?.
The other key source of project debt, the bond market, has so far failed to take off in Qatar ? nor anywhere else much. ?The market expects to see more project bonds from Qatar after Ras Laffan and there are a number of project bond opportunities in the pipeline,? says Emery at ABN Amro. ?But the market has not really been there for bonds as spreads have been too high and these deals are still waiting for the right conditions.?
Timing is critical
Despite these generally positive trends, the deals looking to be funded this year need to be sensitively orchestrated to succeed. ?The Qataris are aware that they need to take a highly coordinated approach to the international financial markets,? says one banker in Paris. ?Given the number of deals, they need to be managed carefully so they do not conflict in the market and, so far, they are managing their borrowing programme very well.?
But Qatar Petroleum is regarded smart sponsor and is unlikely to allow these transactions to hurt each other by tapping the market at the same time. Indeed, the company has given assurances that the IWPP will have an opportunity to clear the market before RasGas II launches. ?It is important to ensure that both RasGas II and the Ras Laffan IWPP do not come to the general syndication market at the same time,? says one London-based syndications specialist. ?As long as this does not happen there should be plenty of appetite for both.?
Shrewd Qataris
More generally, the Qataris have shown themselves deft managers of their resources ? both natural and financial. The top domestic sponsors now have a serious amount of experience in the financial markets. ?Qatar Petroleum probably has more experience in project finance than some banks in the market,? says the banker at the Japanese house in London. ?Also Qatar Petroleum likes to do its projects on a project finance basis. Some of its big international partners do not necessarily want to fund these schemes through project financings as in terms of cost and structure this is not attractive to them ? they would prefer to simply write a cheque. However, they know that a project finance structure is the only way Qatar Petroleum will do it and the additional costs are simply viewed as a function of doing business there. The upside, of course, for international sponsors is the gas which is cheap and plentiful.?
And it is Qatar's vast reserves of natural resources that keep the international companies coming back. But these companies are also attracted by the Qataris relationship management skills. ?The Qataris have a lot of strong relationships with international companies and banks and are able to spread out their projects among them,? says Emery at ABN Amro. ?The Qataris are adept at managing their relationships.?
The intensity of activity will be all the more noticeable given that the project finance market in the region has had a relatively quiet first half. As such, Qatar is taking centre stage in the Middle East this year and bankers and sponsors feel confident that by the end of 2001 the country will have successfully funded these projects and laid the foundations for more deals next year.
The four deals are very different both in terms of sectors and whether they are new build or expansion financings.
The first of the expansion projects is the $500 million fourth phase for Qatar Fertilizer Company SAQ (Qafco). ABC (regional bookrunner), Apicorp, Barclays Capital (documentation bank), Gulf International Bank (facility agent and technical bank), HSBC Investment Bank (international bookrunner) and Qatar National Bank have been mandated to arrange a $400 million eight-and-a-half year financing.
The lead arrangers are now in the market for banks to come into the deal on a one-stage selldown. Qafco is understood to be priced at 75 basis points over Libor through its maturity with upfront fees of 75bp as well. Bankers have described this pricing level as competitive for Qatar.
The project involves the construction of a fourth plant producing 2,000 tonnes a day of ammonia and 3,200 tonnes a day of urea. Financing for the project comes from the $400 million bank facility as well as existing cash reserves and cashflow from the company's existing operations.
SG is acting as financial adviser to Qafco, which is owned by Qatar Petroleum (75%) and Norsk Hydro ASA (25%)
The second project to come to market this year will be the Ras Abu Fontas B extension project sponsored by Qatar Electricity and Water Company (QEWC). The project involves the addition of a 500MW single-cycle capacity to the existing power plant. Financial adviser Royal Bank of Scotland, issued the information memorandum for the $160 million of debt financing in mid June to potential arrangers. These banks have three weeks to respond and a week after that an announcement will be made on the mandated banks. Syndication is expected to get underway sometime after Europe's August holiday period.
International orientation
The two larger projects are likely to seek the majority of their debt from the broader international markets rather than the regional markets, which are expected to support large chunks of the two smaller projects.
The first of these is the Ras Laffan independent water and power project (IWPP). AES recently won the bidding for the concession and is now forming an expanded lead arranger group after mandating its financial advisor, IBJ, as lead arranger. Financial close is scheduled for mid-September.
The project will require debt financing of around $600 million with a tenor of 18 years. ?The Ras Laffan power project is the first big-ticket IPP in the country,? says one project financier in London. ?It is really a new sector or the country and will set an important benchmark particularly in relation to tenor.?
The largest of the four projects is for the third train for Ras Laffan LNG Company II sponsored by Qatar Petroleum and ExxonMobil.
Around 40 banks have been invited to bid by Goldman Sachs, the financial adviser for the project.
The total cost of the project is around $1.4 billion, with 70% debt and 30% equity. The commercial loan portion will be roughly $700 million with a probable 10-year tenor. ExxonMobil is providing a $285 million direct loan.
The expansion is being undertaken to meet the company's sales and purchase agreements with India's Petronet LNG.
Capacity concerns
With four transactions representing a large combined amount of debts, there are inevitably concerns as to whether market capacity and appetite will be sufficient to meet these demands. Most banks' Qatari lines are not that big, and given the number of previous deals that have been financed in the international market over the past few years, bank line capacity is an issue.
?The Qataris are looking to raise roughly $1.8 billion this year, with more to follow,? says one project financier at a Japanese house in London. ?This is a lot of debt and there are concerns about capacity in the international bank market. However, having said that, there is a positive impact in that a number of earlier projects are beginning to paydown which should begin to ease bank lines and reduce exposure. But this is a small benefit, Qatar is not going to pay down $1.8 billion of debt this year.?
Indeed, the Qataris' management of their own finances has also helped the situation. Their decision to use some of the proceeds of their Eurobond issue to pay down short term debt has helped to free up banks' country limits. ?A few years ago there were concerns that certain international banks were getting full up on their Qatari country lines, but now the outlook seems pretty positive,? says Michael Emery, manager, structured syndicated debt, at ABN Amro in London.
It is a testament to Qatar's status in the market that few bankers are overly anxious about the strain these deals will put on capacity and appetite. ?There is a considerable degree of enthusiasm in the bank market for Qatari projects,? says Michael Crosland, senior director, structured finance, at Royal Bank of Scotland in London.
Reasons to be cheerful
The reasons for this enthusiasm and confidence are various. A key benefit for Qatar is that are no comparable markets to compete with it in the region. ?Qatar is the reliable source of high quality projects in the region,? says one project finance banker in London. ?Banks want to do deals and if the majority of them happen to come from Qatar then so be it. It is difficult to turns these types of transactions away.? While other countries in the region do offer project opportunities, none offer them on the scale or regularity of Qatar.
A further factor specific to the region is the growth in liquidity of the local and regional financial institutions, driven chiefly by higher oil prices over the past year or two. ?There are several projects which could now be financed predominantly with local and regional banks,? says Emery at ABN Amro. ?Many of these banks are highly liquid and are looking for assets to book.?
In addition to increases in overall liquidity, local and regional banks are gradually beginning to be less wary about booking longer term assets. ?Because of their own funding bases, local and regional banks have traditionally had appetite for eight to 10 year tenors, but have found it more difficult to go out to 18 years,? says Emery at ABN Amro. ?However, this is now changing and for a relatively small portion of their total balance sheets, we are seeing more and more local and regional players prepared to extend to the long tenors required for power projects.?
A further factor in Qatar's favour is that banks in the region are beginning to venture into deals beyond their own domestic base. This is happening very gradually but it will have an effect on overall regional liquidity.
Qatar is also working on broadening its funding sources to decrease its reliance on the bank market. One prospect is the insurance market which has some persuasive attractions, as were demonstrated last year on the $400 million third tranche for NGL-4.
?NGL-4 tranche three was an innovative transaction,? says Crosland at RBS. ?It was the first time that the private insurance market had been utilized for a Qatari project and opened up a new funding source for Qatar.? He adds: ?The private insurance market can be developed further and will represent an option for future project funding. Although NGL-4 tranche three used CP as the funding mechanism it effectively tapped the private insurance market for the first time and as such genuinely represents a new source of funds?.
The other key source of project debt, the bond market, has so far failed to take off in Qatar ? nor anywhere else much. ?The market expects to see more project bonds from Qatar after Ras Laffan and there are a number of project bond opportunities in the pipeline,? says Emery at ABN Amro. ?But the market has not really been there for bonds as spreads have been too high and these deals are still waiting for the right conditions.?
Timing is critical
Despite these generally positive trends, the deals looking to be funded this year need to be sensitively orchestrated to succeed. ?The Qataris are aware that they need to take a highly coordinated approach to the international financial markets,? says one banker in Paris. ?Given the number of deals, they need to be managed carefully so they do not conflict in the market and, so far, they are managing their borrowing programme very well.?
But Qatar Petroleum is regarded smart sponsor and is unlikely to allow these transactions to hurt each other by tapping the market at the same time. Indeed, the company has given assurances that the IWPP will have an opportunity to clear the market before RasGas II launches. ?It is important to ensure that both RasGas II and the Ras Laffan IWPP do not come to the general syndication market at the same time,? says one London-based syndications specialist. ?As long as this does not happen there should be plenty of appetite for both.?
Shrewd Qataris
More generally, the Qataris have shown themselves deft managers of their resources ? both natural and financial. The top domestic sponsors now have a serious amount of experience in the financial markets. ?Qatar Petroleum probably has more experience in project finance than some banks in the market,? says the banker at the Japanese house in London. ?Also Qatar Petroleum likes to do its projects on a project finance basis. Some of its big international partners do not necessarily want to fund these schemes through project financings as in terms of cost and structure this is not attractive to them ? they would prefer to simply write a cheque. However, they know that a project finance structure is the only way Qatar Petroleum will do it and the additional costs are simply viewed as a function of doing business there. The upside, of course, for international sponsors is the gas which is cheap and plentiful.?
And it is Qatar's vast reserves of natural resources that keep the international companies coming back. But these companies are also attracted by the Qataris relationship management skills. ?The Qataris have a lot of strong relationships with international companies and banks and are able to spread out their projects among them,? says Emery at ABN Amro. ?The Qataris are adept at managing their relationships.?
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