Liquidity constraints in the global banking market have not slowed the infrastructure ambitions of GCC countries such as Saudi Arabia and the United Arab Emirates. Each of them is nearing financial close on truly huge project financings, but the new realities of reduced commercial lending have slowed their progress. Although developers are increasingly able to attract large chunks of debt from export credit agencies (ECAs), they are finding business beyond banks often slow and frustrating.

Sadara’s commercial bank rump

Saudi Aramco and Dow Chemical Company’s Sadara project, with estimated costs of $20 billion, will be the largest single-phase petrochemicals facility in the world. Once complete it is expected to produce an estimated $10 billion in revenue per year, with operations due to start in 2015. A large group of local and international banks is expected to put up a total of around $1.5 billion towards the project’s debt requirement, but ECA commitments will dwarf their contributions.

US Ex-Im is providing $4.9 billion to the project, the largest single loan in its history. Korea’s K-Sure and Kexim, France’s Coface, Germany’s Hermes and the UK’s ECGD are also all expected to participate. The deal will feature a $1.4 billion 16-year sukuk bond, with Deutsche Bank, Riyad Bank, Alinma and Bank Al Bilad as bookrunners, and direct loans from the Public Investment Fund and Saudi Industrial Development Fund of at least $1 billion.

Pricing on the commercial side has risen in recent months but still reflects Saudi Aramco’s dominant position in the market and the appetite of lenders for a deal like Sadara. The international component of the package is expected to have a pre-completion margin of around 125bp over Libor, rising to 185bp over the course of the loan, and the local component, which is likely to be Islamic, will be priced at the equivalent of 75bp, rising to 135bp.

US Ex-Im expands

US Ex-Im has ramped up its presence in the Middle East over the last year, and, along with its commitment to Sadara, is also chipping in on the Emirates Nuclear Energy Corporation (ENEC) and Emirates Aluminium expansion (Emal 2) projects in Abu Dhabi. While the Korean and Japanese ECAs have written ever-larger tickets on GCC projects, their US counterpart, while a long-time presence in the region, had been slow to match their commitments. This is now beginning to change.

“Domestic job creation was the number one priority in the US presidential election last year,” comments Charles Whitney, partner at Norton Rose. “In recent years US Ex-Im was not really doing mega projects, but now they have announced their support of Sadara and for ENEC, and the amounts they are providing to these and other projects have been quite staggering.”

US Ex-Im reportedly doubled the number of projects it worked on in 2012 compared to the previous year, in an attempt to spur the creation of US jobs. In contrast, the main strategy for the Asian ECAs like Kexim and JBIC in lending to projects in the region has been to export expertise in exchange for ownership of infrastructure and natural resources. The Middle East and the major LNG projects around the Asia Pacific have been the main targets for these institutions.

ENEC’s nuclear project also has a total cost of $20 billion. But while US Ex-Im’s contribution to the development ($2 billion) is significant, it is Kexim ($10 billion) that is providing the largest chunk of ECA debt. The ENEC deal will see the construction of the first ever nuclear power plant in the region, and Korea Electric Power Corporation (Kepco) is supplying the plant’s four nuclear reactors. ENEC subsidiary Barakah One Company is the project company.

ENEC hopes to begin operations at the 5,600MW plant, located on coastline 220km from the city of Abu Dhabi, in 2017. The first of Kepco’s four reactors will come online at that point, with another reactor coming online in each of the next three years. US Ex-Im’s commitment is supporting US-based Toshiba subsidiary Westinghouse Electric, the largest exporter to the project, which is providing reactor coolant pumps, reactor components, engineering services and training.

The sponsors of Sadara and ENEC had hoped to sign the financing for their respective projects before the end of last year, but neither will reach financial close until the beginning of the second quarter 2013 at the earliest. Saudi Aramco is notoriously secretive in its dealings, with individual banks kept in the dark about each others’ ticket sizes until the debt is signed, but all the commercial debt is understood to be in place for Sadara, and the involved ECAs got approval on their loans last year. The final hurdle for the deal is putting in place the deal’s Islamic bond, a component that Saudi Aramco is insisting upon despite huge bank and ECA commitments.

HSBC is financial adviser to the sponsor on ENEC, which will feature around $2 billion in commercial bank debt. Standard Chartered, NBAD, First Gulf Bank and Union National Bank are all expected to be in the bank group. Bankers working on the deal insist that a scandal over fake safety certificates at one of Kepco’s domestic power plants, which came to light late last year, is not the cause of the deal’s delay. Instead they suggest that the sponsor is now reassessing the structure of the financing.

Another source from the region suggested that the Korean presidential election in December may have had an effect on the deal. Incumbent president Lee Myung-bak will step down at the end of February, with newly elected Park Geun-hye taking over. Kexim is by far the largest source of financing for the project, with the Abu Dhabi government providing around $6 billion. With so much direct investment from Korea, possible political interference from the new Korean administration cannot be discounted.

Emal 2 emerges

The other mega-project nearing close in the UAE has also suffered from delays causing by structuring issues. Emal 2 is the second phase expansion of the Emirates Aluminium plant in the Khalifa Port Industrial Zone in Al Taweelah, which lies between Abu Dhabi and Dubai. The first phase involved the construction of a 1,950MW power plant and a 700,000 tonnes per year aluminium plant. Sponsors Dubal and Mubadala plan to double production at the site and increase power capacity by 1,600MW to make it the largest single-site aluminium smelt plant in the world.

A total of 22 banks have written tickets on the project, representing a significant oversubscription, and the sponsors have yet to confirm exact debt allocations. The sponsors received additional lending commitments from ECAs Kexim, US Ex-Im, Hermes and Coface. RBS is advising the sponsors on Emal 2.

Banks were tempted into committing to the deal with the promise of a role in the 144A bond that will accompany the senior bank debt, with bookrunners to be picked from participants on the commercial piece. However bank debt commitments already well exceed the $4 billion total debt target set by the sponsors, making the bond issue look less attractive. The sponsors may now decide to use the bond as a refinancing mechanism, rather than a component of the construction financing.

“That is what I would have envisaged straight out of the box, but the sponsors seem to have had other ideas,” commented Jonathan Robinson, head of project finance MENA at HSBC. “I am not sure if those plans have been tempered in light of the oversubscription on the commercial piece, though we have seen that before on projects like Barzan.”

The original $4.67 billion Emal deal, which signed in 2008, offered but did not deliver a bond, though this was not due to oversubscription, but rather a failure to successfully launch it to market. The sponsors used additional equity and ECA contributions to plug the gap and under-leveraging created by cost overruns. US Ex-Im, Hermes and Coface did not sign into the deal until as late as July 2010.

Dubal and Mubadala aggressively structured Emal 2 to favour commercial banks over ECAs, with the agencies only contributing around $500 million of the total. The patchwork financing effort for the first deal may have helped banks on second phase negotiate a better commercial debt margin. Pricing on Emal 2 is noticeably higher than on either Sadara or the $7.25 billion facility signed for Qatar’s Barzan gas project in December 2011.

Emal 2 will have the same pricing for both the commercial and Islamic 15.5-year debt tranches. Beginning at 250bp pre-completion, it will rise to 275bp up until the eighth anniversary of the debt signing, then climb again to 300bp until year 12, and then it will finish at 325bp until maturity.

Although attractive pricing may be of comfort to the banks, Robinson argues that to drop the bond would be a “very short-term strategy. Banks will cotton-on pretty quickly to the fact you have used the carrot of a bond to attract them, and then taken it away when they finally arrive,” he said. “I remain optimistic however that they will do the right thing and carry on with the bond.”

Mubadala recently tried to allay market fears by assuring lenders that a bond remains a part of its financing plans for Emal 2. The sponsors confirmed that the bond issue will accompany financial close or will be launched in October to refinance the original debt. No final decision has yet been taken on its timing but the developers are certain there will be a bond at some point this year.

As a brownfield development that benefits from completion guarantees Emal 2 is suited to a bond. It is, however, still a commodity price-based deal. There is no contractual offtaker and no stream of availability payments. Even if a bond does comes to market sooner rather than later, the sponsors have risked criticism from lenders by taking so long to decide allocations. Debt commitments came in before the end of 2012, but signing of the financing documents could still spill over into the second quarter.

Back in Saudi Arabia, several other significant projects are expected to reach financial close this year. Saudi Aramco has asked banks to pre-qualify for its $7 billion Jizan refinery deal, while Sabic & ExxonMobil are close to launching the debt for their $3.4 billion Kemya elastomers development to the wider bank market.

Saudi Aramco is also developing a $7 billion expansion of the Rabigh Petrochemicals plant in a joint venture with Sumitomo. The Rabigh plant currently uses 400,000 barrels per day of crude oil and 1.2 million tons per year of ethane as feedstock to produce a variety of petrochemical products. The second phase project involves expanding its existing gas cracker and constructing a new aromatics complex.

The sponsors were expected to launch an information memorandum to commercial banks before the end of last year, but that has now been delayed until the second quarter for a very familiar reason. JBIC is expected to contribute to the debt on the deal but the sponsors are still trying to decide on the exact size of the deal’s ECA component.

ECA involvement is the apparent cause of many delays to major projects in the region, but local developers have little alternative. As one regional banker explained, “in the Saudi Arabian market you have no other option, regardless of how painful, slow or difficult it is.”

Attempts by the sponsors of Emal 2 to try and rely primarily on commercial bank debt have led it to promise a bond that it may now have to delay. Although this expansion project received strong responses from the bank market, regional and local lenders do not have the capacity to single-handedly fund the new mega-projects coming up in the region. Expect further delays.