The $2.1 billion financing of the PP11 gas-fired independent power project in Saudi Arabia is the first time international banks have taken on uncovered risk on a project since the country’s Ministry of Finance stopped providing a direct guarantee to offtaker Saudi Electricity Company (SEC). The deal is also notable for its speed of execution: the GDF SUEZ-led team was appointed preferred bidder in mid-March, and close was reached within three months. PP11 is the quickest closing of any project financing involving US Ex-Im.

“The deal is also significant because it shows that non-Japanese bidders can get deals financed competitively.” Karel Breda, head of acquisitions, investments and financial advisory for Middle East and North Africa at the project’s lead sponsor, GDF SUEZ.

Sponsored by SEC (50%) and a consortium of GDF SUEZ (20%), Al Jomaih Group (15%) and Sojitz (15%) total project costs are $2.1 billion, with a $1.553 billion debt package and a $500 million equity bridge loan that will repaid after construction.

The Rabigh IPP, sponsored by Acwa and Kepco, which closed 21 July 2009, paved the way for international banks to get comfortable with SEC as an offtaker without a direct government guarantee, but PP11 goes further, with international banks lending directly without cover from an export credit agency. For Rabigh the $475 million international tranche had 90% cover from the Korea Export Insurance Corporation. Like Rabigh, PP11’s 20-year power purchase agreement obliges the Ministry of Finance to replace SEC with an entity rated BBB or above if SEC’s rating falls below that level.

Quentin Slight, director, power EMEA for Crédit Agricole (global documentation and coordination bank) says: “The speed of the transaction and the relatively smooth ascent to financial close was helped by the fact that the majority of the financing team had worked together on the Bahraini Al Dur IWPP deal – GDF Suez, US Ex-Im, EDC, Crédit Agricole, Standard Chartered, Societe Generale, KfW, CIC, Banque Saudi Fransi, Milbank, HHI and GE.”

The financing splits into a $378 million direct loan from US Ex-Im, a $530 million commercial tranche provided by Credit Agricole, EDC, KfW, Societe Generale, Standard Chartered, Intesa and CIC, and $645 million split across two Riyal-denominated Islamic facilities, a $382 million Istisna Ijara facility provided by Saudi Fransi and Samba and a $263 million Wakala Ijara facility provided by Alinma Bank and NCB. The $512.2 million equity bridge loan is provided by Sumitomo Trust, KfW and NCB.

The commercial and Islamic facilities have a door-to-door tenor of 20-years with a 20% balloon payment at maturity. Both facilities carry a margin starting at 250bp over six-month Libor rising 15bp every three years to an eventual 340bp. Upfront fees are between 250bp and 300bp. The US Ex-Im tranche has a 17-year tenor (construction plus 14 years) with an average loan life after construction of 7.25 years to conform to OECD guidelines on ECA support, and a fixed margin. Ex-Im’s involvement comes on the back of GE’s sale of seven 7FA.4 turbines to the project.

The 20% balloons on the commercial and Islamic facilities will be repaid fully under base case projections, with an 85% cash sweep starting after 10 years of operation, although if no cash is swept the 17-year pos-completion tenors leave a 3-year tail on the PPA, which will fully repay the debt.

The project’s leverage, at 75/25, is lower than recent benchmarks to accommodate the higher debt margins while maintaining debt service. The average debt service coverage ratio is 1.2x, a distribution lock-up kicks in at 1.10x and the default trigger is 1.05x. The loan life coverage ratio (LLCR) is 1.3x. And there is a 6-month liability reserve account. These compare favourably, from a sponsor’s perspective, with Rabigh’s metrics of 1.25x ADSCR and 1.2x minimum DSCR and distribution lock up at 1.15x.

For PP11 the GDF SUEZ-led group posted the second-lowest bid, but the lower Marubeni/Kansia/Masader bid of SR0.0777 per kWh was non-compliant – it included a 100% dispatch figure, rather than the 70% in the bid documents, a 0% return for the government shareholder in the scheme and an unrealistic cost of debt. The GDF SUEZ group bid SR0.1079 per kWh and has kept to the tariff.

Combining agency, international and local lenders with different maturity dates involved delicate inter-creditor arrangements. Once US Ex-Im is repaid, on a pro rata basis local banks would have greater voting rights than international banks. The financing documents therefore include a rebalancing that affords the international banks more comfort.

The next Saudi power deal will be the oil-fired 2,000MW Qurayyah IPP, for which a request for proposals will be out by the end of July. Elsewhere in the Gulf, the Abu Dhabi government is returning to its past practice in not guaranteeing ADWEA’s PPA obligations on the S3 IPP, after making this concession on S2. The success of PP11 in bringing in commercial banks uncovered without a direct government guarantee is further evidence, along with falling margins and longer tenors, that competition is intensifying again among banks in the Middle East power market.

PP11 IPP
Status: Signing 16 June 2010, financial close 22 June
Size: $2.1 billion
Location: Riyad, Saudi Arabia
Description: financing of 1,730MW gas-fired IPP in Saudi
Sponsors: SEC (50%), GDF Suez (20%), Al Jomaih Group (15%) and Sojitz (15%)
Equity: $512.2 million via an EBL from Sumitomo Trust, KfW and NCB
Debt: $1.553 billion
Commercial debt lead arrangers: Credit Agricole (global documentation & coordination), Standard Chartered (technical, insurance and modelling) EDC, KfW, Societe Generale, Intesa and CIC
Islamic lead arrangers: Alinma Bank (Wakala documentation), NCB (Wakala documentation), Saudi Fransi (Istisna documentation), and Samba
Agency: US Ex-Im
SEC financial adviser: Citi
SEC legal advisers: Muhannad al-Rasheed and Baker Botts
SEC technical adviser: Fichtner
Sponsors’ legal adviser: Milbank Tweed
Lenders’ legal adviser: White & Case
Lender technical adviser: Shaw Group
Insurance: JLT
EPC and equipment: HHI (EPC) and GE (turbines)