Boos, Dos and Don'ts
Introduction
The Omani power program ? started in 1994 and revamped to further encourage international investors in 1999 ? is beginning to deliver what it promised: installation of new and private generating capacity.
This year two projects have already been awarded and financed ? the International Power (IP) Al Kamil project and AES's Barqa. Both deals have been structured and documented with the degree of sophistication required by lenders to take on future Omani privatization risk. And the long-standing Salalah deal, sponsored by PSEG, is moving forward with PSEG in talks with the government about Salalah's integration into the northern grid.
The Al Kamil power project (a 280 MW Open Cycle Gas Turbine, closed 28 February 2001 with SG serving as lead arranger and Bank Muscat as local lead arranger) was a landmark deal for Omani power ? the first uncovered Independent Power Project (IPP) financing in Oman. It set realistic and repeatable benchmarks in terms of tenor and contractual arrangements as outlined below.
Financing Terms and Tenor
An emerging concern in Oman, and other countries in the Gulf, is whether the bank market will support the growing length of tenor on projects. When the original terms of the Al Kamil financing were proposed, 15.5-year door-to-door tenor was thought of as aggressive, particularly against a PPA of only 15 years. The Barqa transaction carries a 16-year debt tenor (with a longer construction period) and the Salalah deal is likely to have a 15-year-plus tenor.
Admittedly, the $1 billion Al Taweelah deal in Abu Dhabi sold very well at 18 years with general syndication not needed ? but there are real worries that the market will not absorb such lengthy tenors indefinitely.
Some bankers would like to see the introduction of US-style mini-perms in which banks fund for up to seven years and then get taken out in the bond market. But in the Gulf, the lack of a US-style bond market limits banks' exit options. And the terms offered in the Al Kamil transaction were well-received by the market despite the lengthy tenor.
The project is a typical contracted plant, with the life of the PPA and GSA less than the tenor on the debt. The 15.5-year door-to-door tenor incorporates a one-year contracted tail, although the plant can operate under the Usufruct Agreement for up to 25 years. There is an underlying repayment schedule similar to a mortgage-style repayment, robust base case cover ratios with average minimum debt service cover of at least 1.35/1.30, and a creative cash sweep mechanism restoring the cover ratios if needed. The debt-to-equity ratio is 75:25.
Although contractual certainty ceases when the PPA expires after 15 years of operation, a number of other factors give lender comfort:
? the positioning of the plant at the heart of an Omani business development zone.
? the power station's use of indigenous gas reserves.
? the more than 20 years anticipated life expectancy of the gas turbines,
? and consequently the fact that the project will have residual value even after the scheduled expiration of debt facilities.
Finally, SG sought to encourage local bank participation in the transaction. While it was clear at an early stage that there would be strong interest, the high level of local participation in the transaction was due primarily to the strong co-operation between SG and Bank Muscat ? particularly the latter's effective role in co-ordinating with the local banks.
Construction Arrangements
Perhaps the most critical single issue faced by both IP and SG related to the EPC arrangements.
As a result of increasing competition in the region, sponsors are having to call on the most competitively priced solution for them in terms of construction arrangement. This can raise concerns for banks in terms not only of experience and credit worthiness of the EPC Contractor, but also on the extent and their ability to provide acceptable support for their contractual commitments.
The winner of the EPC tender for the Al Kamil project was Hyundai, which experienced certain financial difficulties and thus had to be replaced. While IP reviewed the options for mitigating its risk, having assumed the role of EPC Contractor, SG continued to develop the Loan Agreement, anticipating the likely features of the final EPC Contract as well as the contractual structure for the Operations period.
Construction of the project is now being carried out in association with Arabian International Contractors of Egypt (AIC). The plant will use frame gas turbines manufactured by General Electric (GE). IP will undertake the procurement of the gas turbines and have overall supervisory responsibilities, while AIC will be principally responsible for the civil construction works and engineering, procurement, and installation of the balance of the plant.
Banks took much comfort in the fact that the project is an open-cycle gas turbine plant using proven and environmentally friendly combustion turbine technology, with a comprehensive support package from the EPC Contractor. In addition, the key item of the plant, the turbines, is being manufactured and delivered by GE, a first-class contractor, and the lenders have a cut-through to the GE contract.
Termination Payment
The Request for Proposals for the project made clear that the Government of Oman would make no payment in the event of termination. This demonstrated the highly commercial stance adopted by the Government, anticipating the overall liberalization and restructuring of the Omani power sector, as outlined by the New Sector Law changes, incorporated as an appendix to the PPA. (See Chart B, below).
While the lenders had concerns about the absence of a termination payment, the strong economic performance of Oman, coupled with the 1999 power sector reforms, provided off-setting comfort.
The best guarantee against any termination on the part of the Government resides in the fact that the project is part of the overall plan in Oman to meet growing power demand with significant new plant and diversify from diesel-fired capacity. The timely upgrade from S&P to BBB further enhanced the appetite for a country which SG has long identified as a strong investment opportunity.
IPO structure
Another interesting feature of the Al Kamil power project is that IPPs must be established as Omani joint-stock companies subject to an Initial Public Offer (?IPO?) and be allocated for public sale in Oman within four years of the date of incorporation of the project.
This is not an unknown scheme in the region. But it was challenging given the content of the implementation of a New Sector Law. The lenders have become comfortable with this scheme on the basis that IP has considered the possibility of this being undertaken soon after completion to ensure the success of the IPO, and that the company has a ?Put? option to the Government to purchase any shares remaining unsold following the IPO.
Conclusions
The Al Kamil power project represented a benchmark in terms of tenor and contractual structure and has been followed in rapid succession by two further transactions in Oman. The project presented a number of interesting challenges on the way to reaching financial close which, in our view, have parallels with challenges faced by other projects in the region.
Next year, the power program in Oman will move onto assets sales, with three power plants expected to be sold, one transmission company and two distribution companies on the blocks, without taking into account possible developments on existing sites. 2002 should be another very promising and challenging year for power developers and financiers in Oman.
Contacts:
Delphine Queniart, Director, London 44 20 7676 6592
Peter Conway, Assistant Director, London 44 20 7676 6592
The Omani power program ? started in 1994 and revamped to further encourage international investors in 1999 ? is beginning to deliver what it promised: installation of new and private generating capacity.
This year two projects have already been awarded and financed ? the International Power (IP) Al Kamil project and AES's Barqa. Both deals have been structured and documented with the degree of sophistication required by lenders to take on future Omani privatization risk. And the long-standing Salalah deal, sponsored by PSEG, is moving forward with PSEG in talks with the government about Salalah's integration into the northern grid.
The Al Kamil power project (a 280 MW Open Cycle Gas Turbine, closed 28 February 2001 with SG serving as lead arranger and Bank Muscat as local lead arranger) was a landmark deal for Omani power ? the first uncovered Independent Power Project (IPP) financing in Oman. It set realistic and repeatable benchmarks in terms of tenor and contractual arrangements as outlined below.
Financing Terms and Tenor
An emerging concern in Oman, and other countries in the Gulf, is whether the bank market will support the growing length of tenor on projects. When the original terms of the Al Kamil financing were proposed, 15.5-year door-to-door tenor was thought of as aggressive, particularly against a PPA of only 15 years. The Barqa transaction carries a 16-year debt tenor (with a longer construction period) and the Salalah deal is likely to have a 15-year-plus tenor.
Admittedly, the $1 billion Al Taweelah deal in Abu Dhabi sold very well at 18 years with general syndication not needed ? but there are real worries that the market will not absorb such lengthy tenors indefinitely.
Some bankers would like to see the introduction of US-style mini-perms in which banks fund for up to seven years and then get taken out in the bond market. But in the Gulf, the lack of a US-style bond market limits banks' exit options. And the terms offered in the Al Kamil transaction were well-received by the market despite the lengthy tenor.
The project is a typical contracted plant, with the life of the PPA and GSA less than the tenor on the debt. The 15.5-year door-to-door tenor incorporates a one-year contracted tail, although the plant can operate under the Usufruct Agreement for up to 25 years. There is an underlying repayment schedule similar to a mortgage-style repayment, robust base case cover ratios with average minimum debt service cover of at least 1.35/1.30, and a creative cash sweep mechanism restoring the cover ratios if needed. The debt-to-equity ratio is 75:25.
Although contractual certainty ceases when the PPA expires after 15 years of operation, a number of other factors give lender comfort:
? the positioning of the plant at the heart of an Omani business development zone.
? the power station's use of indigenous gas reserves.
? the more than 20 years anticipated life expectancy of the gas turbines,
? and consequently the fact that the project will have residual value even after the scheduled expiration of debt facilities.
Finally, SG sought to encourage local bank participation in the transaction. While it was clear at an early stage that there would be strong interest, the high level of local participation in the transaction was due primarily to the strong co-operation between SG and Bank Muscat ? particularly the latter's effective role in co-ordinating with the local banks.
Construction Arrangements
Perhaps the most critical single issue faced by both IP and SG related to the EPC arrangements.
As a result of increasing competition in the region, sponsors are having to call on the most competitively priced solution for them in terms of construction arrangement. This can raise concerns for banks in terms not only of experience and credit worthiness of the EPC Contractor, but also on the extent and their ability to provide acceptable support for their contractual commitments.
The winner of the EPC tender for the Al Kamil project was Hyundai, which experienced certain financial difficulties and thus had to be replaced. While IP reviewed the options for mitigating its risk, having assumed the role of EPC Contractor, SG continued to develop the Loan Agreement, anticipating the likely features of the final EPC Contract as well as the contractual structure for the Operations period.
Construction of the project is now being carried out in association with Arabian International Contractors of Egypt (AIC). The plant will use frame gas turbines manufactured by General Electric (GE). IP will undertake the procurement of the gas turbines and have overall supervisory responsibilities, while AIC will be principally responsible for the civil construction works and engineering, procurement, and installation of the balance of the plant.
Banks took much comfort in the fact that the project is an open-cycle gas turbine plant using proven and environmentally friendly combustion turbine technology, with a comprehensive support package from the EPC Contractor. In addition, the key item of the plant, the turbines, is being manufactured and delivered by GE, a first-class contractor, and the lenders have a cut-through to the GE contract.
Termination Payment
The Request for Proposals for the project made clear that the Government of Oman would make no payment in the event of termination. This demonstrated the highly commercial stance adopted by the Government, anticipating the overall liberalization and restructuring of the Omani power sector, as outlined by the New Sector Law changes, incorporated as an appendix to the PPA. (See Chart B, below).
While the lenders had concerns about the absence of a termination payment, the strong economic performance of Oman, coupled with the 1999 power sector reforms, provided off-setting comfort.
The best guarantee against any termination on the part of the Government resides in the fact that the project is part of the overall plan in Oman to meet growing power demand with significant new plant and diversify from diesel-fired capacity. The timely upgrade from S&P to BBB further enhanced the appetite for a country which SG has long identified as a strong investment opportunity.
IPO structure
Another interesting feature of the Al Kamil power project is that IPPs must be established as Omani joint-stock companies subject to an Initial Public Offer (?IPO?) and be allocated for public sale in Oman within four years of the date of incorporation of the project.
This is not an unknown scheme in the region. But it was challenging given the content of the implementation of a New Sector Law. The lenders have become comfortable with this scheme on the basis that IP has considered the possibility of this being undertaken soon after completion to ensure the success of the IPO, and that the company has a ?Put? option to the Government to purchase any shares remaining unsold following the IPO.
Conclusions
The Al Kamil power project represented a benchmark in terms of tenor and contractual structure and has been followed in rapid succession by two further transactions in Oman. The project presented a number of interesting challenges on the way to reaching financial close which, in our view, have parallels with challenges faced by other projects in the region.
Next year, the power program in Oman will move onto assets sales, with three power plants expected to be sold, one transmission company and two distribution companies on the blocks, without taking into account possible developments on existing sites. 2002 should be another very promising and challenging year for power developers and financiers in Oman.
Contacts:
Delphine Queniart, Director, London 44 20 7676 6592
Peter Conway, Assistant Director, London 44 20 7676 6592
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.