The financing, with a group of Israeli lenders and the European Investment Bank, highlights a turn inward for the country’s infrastructure sector, after a pre-crunch period in which international banks had pur­sued deals aggressively. IDE’s last Israeli desalination deal, the $455 million Hadera plant, raised Eu191 million of commercial debt from BES and Calyon at margins starting at 110bp over Euribor.

Hadera was a 50/50 joint venture bet­ween IDE and Housing & Construction, but for Sorek, H&C formed a joint venture with Shafir, and Veolia with Tahal made up the third bidding group. IDE, with 51% of the project’s equity, and Hutchison, with 49%, were named preferred bidder on the contract in January 2010.

The Hadera financing closed in Novem­ber 2007, with Eu102 million in European Investment Bank debt complementing the commercial debt, just before the crunch worsened. The two commercial banks and the EIB closed on an additional $97 million expansion financing in June 2009. The additional debt, which closed alongside another $27 million in equity, was used to increase Hadera’s capacity from 100 million cubic metres per year to 127.

But by the start of 2009, when IDE started work on getting debt commitments for its Sorek bid, the sponsors were left in no doubt that there would be limited international commercial lender interest in a large greenfield financing. The EIB confirmed its support for the sector and sponsor, by agreeing to provide Eu142 million in debt, but for the roughly Eu135 million remainder, the sponsors looked to the domestic market.

Bank Hapoalim and Bank Leumi came in to provide the rest of the Sorek financing as 22-year shekel debt. In the circumstances, the tenor was impressive, though close to what IDE was able to achieve on its first desalination project – Ashkelon – early in the last decade. The debt commitment underlines the fact that Israeli banks are back in their familiar role of providing high-priced back-up when international appetite vanishes.

The local package has its advantages, not least gearing of nearer 80% (equity amounts to the equivalent of roughly $100 million). Hadera had a very slightly longer tenor, at 23 years, but a debt/equity ratio of nearer 75/25. Even in 2007 Israeli lenders offered fixed rate debt that had an equivalent pricing premium over the international market of roughly 50bp.

Pricing on Sorek, while unconfirmed, is thought to be in the upper-200bp over Euribor equivalent range. It should, however, make for a clean process of selling down the debt to local lenders and particularly insurance companies. Restricting the debt to shekels and euros made it easier for the sponsors to offer an attractive tariff to Israeli Water Authority. The 25-year supply agreement is priced at NIS2.1 ($0.55) per cubic metre.

The two biggest challenges on the fin­anc­ing were using a membrane of un­precedented size and integrating the plant into a development chain that included a new independent power project and gas field development. The plant uses large 16-inch membranes, which have not been used on a plant this size before. The membranes, however, have a long enough two-year operating history in smaller-scale plants to convince the offtaker that the technology is viable.

The plant will be running on electricity supplied from an independent power project developed by Delek Infrastructure. Delek owns 50% of IDE, with ICL owning the remainder, but the process of pro­curing the power took place at arms’ length, and Delek, insist sources at the developer offered the best price. The plant is set to run on gas sourced from the Tamar field, in which Delek holds a substantial stake, and for which a long-term financing is set to close imminently.

The arrangement is not new, since IDE’s Ashkelon plant bought power from a Delek-controlled IPP, which in turn ran on gas from the Yam Tethys field. Minimising the risk to project lenders is the fact that electricity from the Israeli grid is available if the plant does not come online on schedule. Hadera, because of its location inside facilities owned by state-owned Israeli Electricity Corporation, did not use its own power project.

The financing for Sorek demonstrates that financial crises will not temper Israel’s determination to make itself more self-sufficient in water supply. When the 150 million cubic metres per year of capacity from Sorek comes online, 65% of the country’s water will come from desalination plants. The process of procuring such plants has been much less fraught than Israel’s at­tempts at using PPP structures to procure transport assets. Some of this success will come down to the presence of local champions like IDE, and some to more straightforward concession structures, but high-level impetus and generous debt terms from local lenders also look like they are decisive.

Sorek Desalination Ltd
Status: Closed 24 May 2011
Size: $500 million
Location: Sorek, Israel
Description: 150 cubic metres per year reverse osmosis desalination plant
Sponsors: IDE Technologies (51%) and Hutchison (49%)
Debt: Eu142 million EIB loan, NIS660 million local bank loan
Lead arrangers: Hapoalim, Leumi
Tenor: 22 years
Sponsor legal counsel: Tadmor
Lender legal counsel: Allen & Overy
Independent engineer: Arup