The Turkish project market – one of the most active in Europe – had, until recently, escaped much of the fallout from the global financial crisis. But with the crisis in the Eurozone and a vast programme of privatisation and greenfield projects to be financed, local bank liquidity is beginning to look stretched.

There have been some local project financing highlights. In August, Garanti Bank sole lead arranged and closed the first Turkish Lira-denominated financing – a 10-year (seven years amortisation and three-year grace period) L120 million ($69 million) deal for Altek Alarko’s L200 million 76MW Karakuz hydro electric project in southern Anatolia.

The deal was followed by Standard & Poor’s increasing Turkey’s Turkish Lira long-term credit rating to investment grade (BBB-), which makes future similar financings more likely. But even an adolescent Lira project debt market – and that is some way off – could only meet a tiny proportion of the vast volume of debt required to upgrade Turkey’s infrastructure: In the next year alone between $6-8 billion will be needed just to finance two deals in the roads sector.

Turkey needs international banks to take up more of the slack between demand for debt and availability, but that is becoming increasingly difficult as the cost of dollar funding rises for both international banks and Turkish domestic lenders.

Eurozone fallout is also having an impact on the shape of the domestic lending market. Dexia has put Deniz Bank up for sale and there are rumours that Finansbank may also be sold off.

New funding

The lending gap could be filled by bringing in new banks on the back of export credit agency (ECA) financings – a policy that Enerjisa is set to repeat with its upcoming Enerjisa 2.5 portfolio financing and Acwa Power/Eser with its Kirikkale 800MW combined-cycle gas-fired independent power project. And the majority of equipment for Turkish projects is foreign manufactured. But to date ECA backed project financings have been largely restricted to the major power deals.

Even for deals with partial ECA cover, some international banks are still wary of certain aspects to the market. For example, in the power sector they struggle to get comfortable with the unwillingness of BOTAS to enter into anything longer than one-year gas supply agreements for power projects. At the same time, the long history of power projects without PPAs and the unwillingness of Turkish power sponsors to enter into them whilst demand for energy outstrips supply also creates lender discomfort.

On the plus side there have been a number of deals that indicate a growing maturity in the domestic lending market, and changes to law that are nearer to, though not yet at, international lender security standards.

In July UNIT Investment and Ansaldo Energia reached financial close on the $1 billion Gebze CCGT project – the first truly limited recourse project financing of a gas-fired plant in the merchant operational phase (the majority of Turkish project deals come with corporate guarantees and are not limited or non-recourse in the strictest sense). The 14-year debt was split between four Turkish banks, Yapi Kredi, Is Bank, Garanti Bank and Vakif Bank. They also together supplied a further $80 million in guarantee letters of credit.

Legal changes

There have also been both a new Turkish renewables law (for more details see “Is Turkey’s new renewables law the boost required”, April 2011 issue) and BOT law – both of which have had limited impact to date.

The new renewables law brought in the following tariffs: Hydro and wind facilities $0.073 per kWh, geothermal $0.105 per kWh, and solar and biomass plants $0.133 per kWh. This compares with a tariff of Eu0.05-0.055 for all types of non-fossil fuel generation in previous legislation. The tariffs apply for 10 years for projects that commence operations between 2005 and 2015.

The law has been a positive boost for the market, but the feed-in prices are too low, given a weakening currency. The Turkish lira has fallen 23% against the dollar in the last year, which has particularly dented the attractiveness of solar projects.

The 2011 BOT law effectively simplifies the project authorisation process, and defines step-in rights and termination agreements. Its effectiveness has yet to be tested – the Bosphorus Tunnel/Eurasia Link project had some of the changes to BOT Law incorporated into it before the law’s enactment but the deal has yet to reach financial close and now looks likely to slip again into 2012. And although the BOT regulation brings Turkish law more into line with international standards, according to Turkish legal counsel, it does not yet meet all those standards.

The real test for the new regulation will be Turkey’s $5 billion hospital programme, particularly since some local lenders are still reticent about the bankability of the local sponsors on the schemes that have been awarded to date.

Privatisation

Confidence in Turkey’s privatisation program has been hit by a number of setbacks in recent months. The tender launch for the $5-6 billion roads privatisation – 2,000km of highways and two bridges – has been postponed to February 2012 and even if it does go ahead there is speculation that sponsors will struggle to meet both the equity and debt requirement for the single package on offer.

Furthermore, the tender for the 1,200MW gas-fired Hamitabat IPP earlier this year was shelved after generating only one bid. Consensus in the market is that it was the wrong asset to kick-start power privatisation because it came with no energy sales agreement and the plant is old. Many believe the project is not a viable long-term economic prospect once the cost of upgrading is taken into account.

The 2010/2011 electricity distribution privatisation has, in the majority of instances, failed and will have to be retendered in 2012. The government attempted to max out returns from the sale and many of the licenses were bid at rates that are not economically viable and therefore unbankable.

For example, the bidding for the Bozagici grid on the European side of Istanbul started at $1.01 billion and rose to $2.99 billion after five elimination rounds. The winner, MMEKA, then failed to meet the final payments for both the Bogazici grid and the Anadolu grid on the Asian side of Istanbul, which it also won, by the 31 October payments deadline: MMEKA had also failed to finalise the privatisation of Baskent Dogalgaz, Anakra’s gas grid.

IC-Içta, the reserve sponsor with the second-best bid for Trakya Elektrik, the electricity distributor in the Thrace region, was the only company to pay additional collateral of $11.5 million to extend its final payment for two more months by the 31 October deadline for payments.

Greenfield financing

In the greenfield project sector the benchmark deals for the coming months will be Enerjisa 2.5, Kirikkale IPP and the Gebze-Izmir toll road. The first two, both power deals, are unlikely to have too much trouble reaching financial close. Enerjisa has pursued a successful portfolio financing strategy, employing cashflows from other projects to offer lenders comfort about new additions. Acwa Power also has longstanding bank relationships to call on beyond Turkey and will have ECA and multilateral support.

However, the ambitious $9 billion Gebze-Izmir toll road project has already hit a snag. Awarded by the Turkish government as a single concession to be financed in one deal, the sponsors – Nurol Holding, Astaldi, Ozaltin, Makyol, Yuksel and Gocay – are struggling with both the debt and equity requirement, given the nature of the concession, and have started negotiations with the government to split the deal into two phases.

Under the terms of the concession there are no subsidies. However it does include a dollar-denominated minimum revenue guarantee from Turkey’s Highways Directorate – KGM. Furthermore, although the Turkish government is entitled to ask for additional project spending of up to 1%, and any cost overrun caused by that is to be met with an equity injection from the sponsors, if the cost overrun is equivalent to up to the NPV of 2.5 years of guaranteed revenue, the concession will be extended by 2.5 years. If the cost overrun exceeds the NPV of 2.5 years of guaranteed revenue the sponsors can cancel the contract and the state will reimburse the equity and the Highways Directorate assume the project debt.

Commercial banks are concerned that in regards to making a payment in the event of a termination, KGM is not as strong a counterparty as the government. The banks are therefore asking for the government to either replace KGM or provide an explicit guarantee.

The issue is compounded by the fact that the cost of Turkish project debt has spiraled to 500bp-600bp over Libor for all but the strongest credits. And at least some of the equity for Gebze-Izmir was expected to be sub-debt, an avenue no longer open, given the cost.

The key construction risk in the project will be completion of the ‘cash cow’ portion of the project – a suspension bridge over Izmit Bay – in an earthquake zone. However, this is mitigated to some degree by the prospective EPC contractor, Japanese firm IHI, and the relatively short 48-month planned construction period of the bridge and surrounding motorway, (in total a 44-45km stretch). IHI has built the largest suspension bridge in the world and has experience in Turkey from working on the second Bosphorus bridge.

If the project is split the first phase will include the bridge and a portion of the motorway, and the second phase the remaining part of the motorway.

The original financing broadly comprised $1.5 billion of export credit agency facilities; a $400 million International Finance Corporation and European Bank for Reconstruction and Development tranche structured as an A/B loan; a $2-$2.5 billion Turkish bank tranche and a $1.5-$2 billion international bank facility. All facilities were set to have a 16-year tenor.

The sponsors are being advised by Citigroup, BIIS and Akbank, and have five MLAs in place – Dexia, Unicredit, Credit Agricole, WestLB and BNP Paribas. Given three French banks are in the line-up and the problems of the French banking sector, the deal may yet get hit by Eurozone fallout.

More change needed

The Turkish project sector is full of opportunity. But the privatisation process does not appear to react to changes in the depth of bank liquidity, cost of debt or sponsors’ ability to raise equity. On the plus side, the longstanding argument about admittance to the EU and the eurozone appears to have resolved itself – Turkish lenders are pleased it never happened, for the moment. However, to get the required deal volume financed in the coming years means attracting new international lenders, a rethink of tender processes and economically viable asset valuations.