Middle Eastern PPP Deal of the Year 2013: Az Zour North


The Kuwaiti PPP procurement unit, the Partnerships Technical Bureau (PTB), brought its first project to financial close in December 2013. The $1.8 billion Az Zour North independent power and water project (IWPP) suffered several delays because of political upheaval in Kuwait, but the sponsors managed to assemble a long-dated debt package that featured local and international banks alongside Japanese export credit agencies (ECAs).

Shamal Az-Zour Al-Oula
STATUS
Signed December 2013
SIZE
$1.8 billion
DESCRIPTION
1,500MW gas-fired power plant and 107 million gallons per day water desalination plant in Kuwait.
SPONSORS
GDF Suez, Sumitomo, AH Al Sagar & Brothers, PTB, PIFSS, KIA
DEBT
$1.6 billion
COMMERCIAL LENDERS
BTMU, SMBC, Standard Chartered, National Bank of Kuwait
ECAs
JBIC, Nexi
SPONSORS’ LEGAL COUNSEL
Latham & Watkins
GOVERNMENT’S FINANCIAL ADVISER
BNP Paribas
GOVERNMENT’S LEGAL COUNSEL
Chadbourne & Parke
COMMERCIAL LENDERS’ LEGAL COUNSEL
Allen & Overy
ECA’S LEGAL COUNSEL
Clifford Chance
GOVERNMENT’S TECHNICAL ADVISER
Lahmeyer International
EPC CONTRACTOR
HHI & Sidem
Az Zour North endured intense political challenges on its way to financial close. Kuwait has had six general elections since 2006, and since bids were first submitted for the project in 2011, parliament has been dissolved four times – most recently in June 2013. Despite calls from some sitting MPs that Az Zour be cancelled and the PTB restructured, the sponsors remained confident that the project’s sound economics would protect it from political interference.

The PTB named a GDF-led consortium first ranked bidder when it opened final bids in February 2012. Under the terms of the PPP programme, over half of the project’s equity has to be owned by Kuwaiti entities. PTB takes 50% interest through a closed share offering, while local public bodies PIFSS and KIA each control 5%. That leaves 40% for the sponsor consortium, split between GDF Suez (17.5%), Sumitomo Corporation (17.5%) and Al Sagar & Brothers (5%).

Both PTB and the local entities have deposited their entire equity contributions into an escrow account, because they could not offer letters of credit or any other type of backstop to the lenders. The cash in the escrow account guarantees that equity will be promptly paid in when required.

“Another challenge we had was that the Kuwaiti sponsors did not want to commit their equity in dollars, but the construction costs are fully dollar denominated. So we had to devise a mechanism where the equity commitments of the Kuwaiti sponsors are denominated in local currency and are slightly oversized (in dollar terms) at today’s spot rate to make sure there is an adequate buffer to cover for any change in the position of the Kuwaiti dinar,” says Stefano Terranova, executive vice-president at GDF Suez.

The $1.381 billion debt financing for the deal breaks down into three tranches. JBIC is providing a direct loan of $621 million priced at 125bp over Libor. Nexi, another Japanese ECA, is covering another $273 million of debt from three international lenders – SMBC, BTMU and Standard Chartered. This loan has a margin of 120bp.

The final piece is a $487 million uncovered commercial tranche from the three international banks and National Bank of Kuwait, which took the largest ticket on this facility. NBK did not require a Nexi guarantee and so compensated from its absence from the covered facility with a larger contribution to the main bank loan. The uncovered piece is priced between 180bp and 250bp, with step-ups post completion. All of the debt is denominated in dollars and each facility fully amortises over its 23-year tenor.

The project entails the construction of a 1,500MW gas-fired power plant and an associated water desalination plant with a capacity of around 107 million gallons per day. The plant is expected to become operational by the fourth quarter of 2016. The deal benefits from a 30-year offtake agreement with Kuwait’s Ministry of Energy and Water, which will provide some guarantees to the lenders on behalf of the government. The concession is based on capacity payments without a standard power or water tariff.

PTB has mooted a possible initial public offering (IPO) of the project’s equity on the Kuwait Stock Exchange post-completion, as it looks to sell down its stake. Many Gulf Cooperation Council states require partial state or public ownership of infrastructure projects, and Oman prefers the use of an IPO option. PTB is not required to conduct an IPO for Az Zour North, however, and may choose to dispose of its equity stake in another way, if necessary.

Terranova says: “PTB found that certain features of the PPP law were very counterproductive, and without the comfort we and Sumitomo were able to offer lenders as sponsors with large balance sheets, they may have had bigger problems. I think PTB has learned from that and will make appropriate changes before other projects are undertaken.”