Turkey’s largest private hydroelectric project to date took 15 years from award to financing. The $750 million long-term project debt for the $1.2 billion Boyabat dam project finally closed in January 2012 in what was still a difficult lending environment.

Sponsored by Dogan, Dogus and Unit, each providing an equal third of the $464 million equivalent equity portion, the 513MW project is one of 24 plants and storage facilities planned on the Kizil River, in northern Turkey. The dam has been an aspiration for 50 years, and Dogus won the project in 1995, signing a concession with the government in 1998. In 2007 the project was awarded a license to operate on a merchant basis for 49 years, ditching the build-operate-transfer model.

Boyabat is located in Sinop province in the Black Sea region, 15km southwest of Duragan. The dam will be 195m high from the foun­dation, with a crest length of 262m. Upon commissioning the scheme will generate 1.5 billion kWh/year.

The plant is scheduled to start commercial operations in November 2012 and con­struction has been underway since Nov­ember 2008, funded with a bridge loan. The $750 million 10.5-year long-term debt takes out the bridge and was arranged and provided by Garanti, Yapi Kredi, Isbank and TSKB – Garanti and Yapi Kredi each provided 27.5% of the long-term facility, while Isbank put up 25% and TSKB 20%. Dogus has a 31% stake in Garanti Bank and is the bank’s largest stakeholder. The pricing on the 12-year debt is around 500bp over Libor door-to-door, not including arranger fees.

The deal has a debt service coverage ratio of 1.2x, and in the event that the completed project has a capacity below 513MW, there is a buy-down mechanism on the debt, under which the sponsors have to immediately prepay some of the debt. This amount is based on the size of the capacity shortfall, and how that affects the project’s DSCR.

Following a grace period, which was included when the bridge loan was agreed in 2008, the project is to make its first repayment around May 2013, giving it six months from its projected start date to generate cash flow. The project company is to build a connection to the transmission grid, the cost of which is included in the total capital expenditure for the project, though the state will reimburse it for this within 10 years.

Turkey’s power demand is expected to increase significantly over the next 10 years, and the government has said the coun­try’s capacity of around 40GW needs to double by 2020. There is currently over 13GW of hydro capacity online, while fossil fuel-fired plants make up the bulk of the remaining capacity.

The willingness of Boyabat’s lenders to take full merchant risk gives an indication of bank confidence in the deal and power climate. Due to the size of the reservoir, 65.4km2, Boyabat is too large to qualify for Turkey’s offtake price guarantee, which typically provides pro­jects with an offtake agreement at Eu0.055 per kWh for the first 10 years of pro­duc­tion, and the market for long-term bi­later­al offtake contracts has yet to take off.

There is no strict requirement for Boya­bat’s sponsors to sign power purchase agree­ments in time for start-up. Lenders are happy with the merchant profile, even one where revenues are in Lira, since spot mar­ket prices broadly move in line with the move­ments of the US dollar against the Lira.

Demand-side pressure means that power prices in the spot market are above those of negotiated offtake contracts, ac­cord­ing to sources close to the deal. This could change, however, as the mar­ket for PPAs matures following the privatisation of the Turkish generation and distribution net­work, and as more plants come online.

Whilst many of the smaller Turkish hydro plants are run-of-river, Boyabat’s dam-based system gives it the advantage of storing power capacity, and selling at higher peak prices, when demand is great­est. A baseload price forecast of around $90-100 per MWh was projected for the first five years of Boyabat’s operation, close to spot market levels.

There are unlikely to be big changes to the baseload fuel mix any time soon. Turkey’s plans to build its first nuclear power plant have been riddled with delays, although the Turkish government has said a nuclear plant could be online by 2017. But this uncertainty makes it more diffi­cult to forecast power prices beyond 2017, and the banks need to manage this risk. Conglomerates Dogan and Dogus could choose to become offtake counterparties on an arm’s-length basis to cover some of the debt repay­ments. But this decision is at the sponsors’ discretion.

In earlier stages of the negotiations, pro­ject parties talked to ECAs about a possi­ble role, but equipment costs would make up a smaller share of overall costs com­par­ed to, say, fossil fuel projects, and the spon­sors and banks were comfortable mov­ing forward with a merchant struc­ture with­out the extensive negotiations normally required for ECA involvement.

Boyabat Elektrik Uretim ve Ticaret Ltd Sirketi
Status: Financial close 15 January 2010
Location: Northern Turkey
Description: 510MW hydroelectric plant
Sponsors: Dogan, Dogus, Unit
Equity: $400 million
Debt: $750 million
Lenders: Garanti, Yapi Kredi, Isbank, TSKB
Lender legal counsel: Clifford Chance, Verdi & Yazici (Turkish law)
Sponsor legal counsel: Norton Rose, ASC Law (Turkish law)
Construction contractor: Dogus Insaat
Technical adviser: Poyry