On 25 March, Calyon, BNP Paribas and SMBC reached financial close on the US$637 million refinancing of Tanjong's Suez Gulf and Port Said East gas-fired IPPs in Egypt.
It was never going to be a simple affair - seeking as it did to pay off two separate financings - but the deal ran into choppy water when syndication of the loan ran foursquare into the credit crunch.
Chaminda Jayanetti looks at how the sub prime crash impacted on the refinancing, and what it tells us about the prospect for future refi deals in the Middle East power sector.
The Suez Gulf and Port Said East 682.5MW power plants were originally developed by EDF in a joint financing that closed in 2001 with almost US$500 million of borrowing. An early Egyptian IPP development, the power plants benefited from IFC funding as well as a loan note from insurance firm John Hancock. The debt was structured by Barclays Capital, Credit Lyonnais (now Calyon) and Société Générale, and split as follows:
IFC A loan - US$90m
IFC B loan - US$305m
John Hancock loan note - US$100m
The IFC loans had a 16-year tenor and were priced at Libor +175bp rising to 275bp in step-ups. The loan note was a 20-year bond issued at a fixed rate.
The plants came online in 2003, and EDF held onto them for three more years before selling them to Malaysian firm Tanjong. The acquisition reached financial close in 2006, aided by US$150 million of debt financing split equally between BNP Paribas and SMBC with a 10-year tenor, maturing in 2016.
It was not long before the new sponsor started looking at refinancing options. Talks began in 2006, and in early 2007 Calyon, BNP Paribas and SMBC agreed to equally split US$637 million of debt financing, with each bank providing just over US$212 million of underwriting (Projects database ).
The refi pays off the entire US$570 million of outstanding debt from the 2001 and 2006 financings, comprising:
US$80m IFC A loan
US$240m IFC B loan
US$100m John Hancock loan note
US$150m acquisition loan from BNP Paribas and SMBC
After accounting for refinancing costs and pre-payment penalties, this leaves around US$40 million to be paid upfront as cash to Tanjong for corporate expenditure, leveraged against the power plant project holding companies.
The refi loan came in two tranches - a 15-and-a-half-year term loan initially priced at Libor +85-135bp, and a 10-year term loan priced at Libor +125-165bp.
The longer term loan is around three times larger than the 10-year loan - roughly US$475 million of long-term financing, and US$160 million of 10-year debt.
On top of the US$637m refinancing, Egypt's Commercial International Bank (CIB) arranged a domestic guarantee facility worth around US$15 million, covering the PPA letters of guarantee and deferred sales tax guarantee. CIB closed this facility as part of the refi, and will syndicate locally.
Shearman & Sterling (international) and Helmy Hamza & Partners (local) advised the lenders, with Norton Rose (international) and Shalakany Law Office (local) advising Tanjong.
Here comes the crunch
The MLAs for the refinancing were mandated prior to the credit crunch taking hold on the global debt market. The originally sanctioned debt pricing represented a significant reduction on the 2001 and 2006 financings while other Middle Eastern power refis - Taweelah A1/A10 - were pricing at ever-more aggressive levels.
Syndication of the refi package was expected to be a fairly straightforward downselling to a hungry market. But with Tanjong officials busy with other projects, launch of syndication was delayed until August - not ideal timing with many European bankers off for the summer. And by this time the credit crunch was beginning to take hold and banks were becoming increasingly nervous, turning the pre-financial close syndication into a much more difficult process.
Normally a process lasting a matter of weeks, syndication dragged on for three months. German banks - which were already experiencing the bite of the sub prime crisis - stayed out completely, with the sole exception of KfW.
Middle Eastern banks were also less enthusiastic in purchasing tickets than had previously been the case. Mashreqbank and HSBC's local subsidiary British Arab Commercial Bank were the only local banks to come in on the syndication - although as one banker close to the deal said: "If it had gone on any longer, the Middle Eastern banks would have had more trouble with liquidity constraints."
In many ways, the MLAs got the deal away just in time.
However, concessions were necessary in order to close the syndication. The participation fee paid to the syndication banks rose as a result of the worsening market conditions. But the most significant impact on the deal was on the debt price.
In order to get the syndication away, the price of the 15-and-a-half year term loan had to be flexed upwards by 10bp, rising from the originally agreed Libor +85-135bp, to the new price of Libor +95-145bp.
Finally, the debt was syndicated to the following banks:
British Arab Commercial Bank (HSBC subsidiary)
Royal Bank of Scotland (RBS)
Société Générale (via local subsidiary)
Standard Chartered Bank
HSBC, KfW, Mizuho, SocGen and Standard Chartered each took US$50 million tickets, with smaller banks opting for US$35 million tickets. British Arab Commercial Bank took a separate ticket to its parent bank HSBC.
The sponsors and refinanciers had to work through a number of documentary intricacies and local law issues, including the application of Egyptian notarisation fees to any amendment or replacement of an existing real estate mortgage. There is a cap on such fees, but this only applies to new mortgages which local notaries have interpreted as excluding refinancing mortgages.
To get round this, the transfer of the original loans allowed the refinanciers to maintain the original real estate mortgages.
Shearman & Sterling advised the lenders on Sidi Krir, Egypt's first IPP, in 1997, and the plant's refinancing in 2006. This refinancing was structured as a transfer of existing loans, followed by an amendment and restatement of the loan documents. Port Said East and Suez Gulf followed a similar refinancing structure, although the task was made slightly more complicated because the starting point was a collection of bilateral financing documents, some of them without transfer mechanics incorporated, rather than syndicated facility agreements incorporating the usual transfer mechanisms.
Further intricacies arose as a result of the sheer volume of letters of credit - more than 800 - either supporting various deferred sales tax obligations or the projects' obligations under the PPA. The new onshore letter of credit provider, Commercial International Bank, provided one PPA letter of guarantee and one deferred sales tax letter of guarantee per project to replace the hundreds that had existed previously.
The process was synchronised, with escrow and pre-funding agreements signed up well in advance of financial close. These agreements established a mechanism by which the refinancing steps would all take effect on the same day. The documents went into escrow, various funds flowed, releases were handed over, and then everything was released from escrow at the same time.
While none of these things in themselves were terribly complicated, when put all together the sponsor and refinanciers were looking at a significant logistical exercise - dealing with original financiers such as the IFC and institutional investors, each with their own sets of financing documents; liaising with EDF to ensure that their guarantee was taken out of the equation; the replacement of PPA letters of credit and hundreds of deferred sales tax letters of credit; plus (with two different projects being refinanced simultaneously) all the documentation was duplicated - and all of this happened on the same day.
The chill winds blow
Despite all the complexities and the impact of the credit crunch, the sponsor managed to secure a competitive debt price, well below those of the previous debt facilities. Tanjong managed to get its refi away just in time - and it was not alone. In the same week that the Egyptian IPP refi closed, Suez completed a US$450 million refinancing of its Sohar plant in Oman, lead arranged by HSBC and Standard Chartered.
As the gloom of the sub prime crisis lengthens and the price of lending rises, will we see their like again? Not for a while, it seems.
Calyon, which has been a leading player in recent Middle Eastern refis such as Barka 1 and Taweelah A1/A10 (Projects database), believes current market conditions make new refinancings challenging. "Higher funding costs coupled with weaker appetite for aggressively-priced, long-term Middle Eastern power assets may make it difficult for new refinancings to be competitive," said Quentin Slight, a director in Calyon's EMEA power division who worked on the Suez Gulf/Port Said East refi.
"They'll probably be the last refis we see for a while," said Allan Baker, global head of power at SocGen. "The sort of margins that banks are looking at now to cover their funding costs and get the returns they need is pushing the pricing up to near where it was three or four years ago when these deals were done, so I don't think you'll get enough of a discount on the pricing to make it worthwhile."
So far, so self-evident - but there is another factor here, and it is a regional one. During 2006 and 2007, pricing on Middle Eastern power deals dropped to tight levels as banks fought for mandates. Debt on Middle Eastern power projects that closed in the last two years is among the cheapest in the world - which makes these projects far harder to refinance than those in other regions.
"The levels of pricing achieved over the last two years even on new-builds such as Mesaieed and Fujairah 2 make it unlikely that pricing will be the driver for any new refinancings," said Slight.
"Probably the last 18 months to two years, the deals that have closed have been done at starting margins of 65-70bp, and that's what you would have expected projects to be refinanced at," noted Baker. "I think even in a better market it's difficult to see how some of those deals will be refinanced. Deals like Fujairah 2 had the sort of pricing that would have been a good refinancing in Europe.
"The only other thing you could do is push out the term beyond the end of the concession agreement, which could give them some value because you could effectively refinance the full debt with an amortising tranche plus a balloon at the end. That was where the market seemed to be headed before this all kicked off."
Projects that had been thought of as potential refi opportunities have gone off the radar in recent months. Tanjong was rumoured to be considering a refinancing of its acquisition of Sidi Krir, but now all bets are off for the foreseeable future.
The whole approach sponsors take to primary debt and refinancing might also have to shift back to the more conservative model that previously existed in the Middle East - rather than fighting for every last basis point, close the deal now and refi later. Developers bidding for the Shuweihat S2 IWPP in Abu Dhabi are understood to be struggling to persuade banks to offer 2007 levels of pricing on the deal.
One banker close to the Middle East power sector said: "In a difficult market, it's sometimes better to close a financing, and then you have got the option of refinancing when things get better. I know one or two sponsors now are saying, we'll close in a difficult market because we want to do this project, and we fully anticipate being able to refinance in a couple of years' time when it's complete. They're taking a bit of a refinancing risk but it's a pragmatic way to approach it.
"Maybe the next two or three deals will get done on terms somewhere near to where they were two or three years ago, before the prices really crashed, and then they'll look to refinance again when things get better."
Suez Gulf and Port Said East are two well established Egyptian power plants that should have represented a safe refinancing - and they did, until they ran into the credit crunch during syndication.
Nevertheless, the parties to the deal secured a favourable outcome, especially given the circumstances. The bulk of the refi loan comes with a healthy 15-and-a-half year tenor, and the pricing represents a worthwhile mark down from the previous rates, even after the 10bp syndication rise.
But the relief of those involved at getting the mandates away before the credit crunch hit is palpable.
Slight said: "In the end it's a good deal for the sponsor. The market has progressively got worse since last autumn, so we were lucky that we'd already launched the process. If we launched this now, the pricing wouldn't be anywhere near the levels we've been able to get this transaction away at."
Tanjong's Egyptian IPPs - plus Suez's recent Sohar deal in Oman - look set to be the last major refis in the Middle East power sector for a while. The difficulties experienced in syndicating the debt and finding Middle Eastern banks to buy tickets will not have passed unnoticed by the market, which will be wary of refinancing at a time when the price of debt is rising across the board.
But the heady days enjoyed by Middle East power plant sponsors in the last two years makes the region uniquely tough to achieve worthwhile refis - debt priced so low it could hardly be reduced at the best of times might not have any potential to refinance in what is likely to be a more cautious market when the sub prime clouds have passed.