The past 12 months have seen some of the most difficult financing conditions in living memory, and major projects getting to financial close have been few and far between. Any US$1 billion-plus project hoping to close in the current climate has to have something special - and the deal which financed the Al Dur IWPP in the Kingdom of Bahrain was exactly that.

The IWPP model in the Gulf is becoming a tried and tested one, but it took a rare level of creativity - not to mention cool heads in adversity - on the part of the major actors behind this deal to raise US$1.6 billion in debt for the 100 per cent privately-owned plant in the Kingdom of Bahrain.

A total of 21 lenders ended up on the deal which saw debt come from commercial banks, Islamic banks and two export credit agencies - one of which was making its debut in the Middle East IPP sector. Here, IJ Power Reporter Tom Bowker investigates how the deal got done…

The project

The Al Dur IWPP will produce 1,234MW of power and 218,000m3 per day (48MIGD) of water when it is completed in 2011, with the first phase due to come on stream in the summer of 2010.

The project was won by a joint venture of GDF Suez and Bahrain's Gulf Investment Corporation in August 2008, pipping an Acwa-Kepco joint bid by a narrow price margin. The Suez-GIC bid, unlike Acwa-Kepco's, was fully underwritten - but events would later overtake the financing plan in place at that time.

The team signed up to a 20-year PWPA, a term that was set to be matched by long-term lending underwritten by MLAs Calyon, Mashreqbank and Standard Chartered.

Hyundai Heavy Industries was wrapped EPC contractor, with GE supplying turbines and Degremont supplying and installing the reverse osmosis desalination facility.

Post-Lehman realities

When the project's three MLAs and sponsors took a market sounding in early December 2008, it became clear that lending capacity for the project as planned had evaporated - leading the project sponsors, their advisors and banks to go back to the drawing board.

The team worked through Christmas to get a package together to present to banks after the winter break. They came up with an eight-year hard mini-perm, and set about selling it to the project finance market.

Quentin Slight, heading up the team at Calyon working on the deal, emphasises that timing was of the essence.

"The teams pretty much spent Christmas putting the PIM together in order to be first out of the blocks in the New Year - they knew they'd be fighting for limited balance sheets with Shuweihat 2 [Abu Dhabi IWPP] and Dolphin Energy [gas pipeline from Qatar to Abu Dhabi and Oman]."

Despite the teams working over Christmas, Cathy Marsh - leading the sponsors' legal advisory team at Milbank - insists it was "a really fun deal to be working on - a great deal, and very complicated against the backdrop of very limited money available."

The mini-perm structure was inevitable, according to Slight: "The only real debate was between a soft or hard mini-perm. In the end we decided soft would have been too hard a sell for some banks."

For Karel Breda, GDF Suez' head of acquisitions, investments and financial advisory for MENA, the only debate was between eight and 10 years - but again, a mini-perm was inevitable.

Despite an apparent improvement as 2009 has worn on, Breda insists they would use the same structure if they were financing the project now, driven by the risk allocation of the transaction and the lack of local liquidity for the transaction. Slight goes further, saying: "Had Al Dur gone out after Shuweihat 2 and Dolphin, it might not have got funded even on this structure. Timing was all-important."

Shearman & Sterling were lenders' counsel on the deal, which led eventually to three teams within the firm working on separate parts of the deal. As well as the London-based team headed up by Ben Shorten, Gregory Tan in New York advised US Exim and Sanja Udovicic advised KEIC.

Shorten was working in the same building as his colleague Kenneth MacRitchie, who was advising the sponsors on Dolphin Energy - leading to a "friendly sense of competition", according to Shorten. "In the end, Al Dur signed [its financing] first, and Dolphin drew down first."

The structure presented to the market in January 2009 was an eight-year hard mini-perm. Pricing starts at 290bp for the first 2.5 years; steps up to 310bp for the next 2.5 years; and hits 365bp for years five to eight.

The base case DSCR stands at 1.25. A 100 per cent cash-sweep was later incorporated into the structure to reduce the balloon at the end of the eight-year tenor from 85 per cent, to 80 per cent.

At financial close, 20 lenders had signed up to provide commercial debt - all but three from outside of the Middle East.

ECAs and mini-perms - unnatural bedfellows

The structure was designed to appeal to commercial lenders - but it had also to be sold to ECAs, whose money was vital to the project - but who are known to be allergic to short-tenor, non-amortising loan structures.

"It was very difficult to sell a hard mini-perm to the ECAs," says Slight. "Until recently [pre-Lehman] they were actually lending shorter than commercial banks, but they do like to match the tenor to the length of the concession."

"We had to persuade them that their long-term debt cover was of no value to commercial banks on this deal."

In the end, Korean ECA KEIC was persuaded - for the first time in its history - to come in on a hard mini-perm, providing cover on US$275 million of the US$1.05 billion commercial tranche.

According to Karel Breda, "The KEIC tranche could have been even larger, but some banks were full up of Korean sovereign risk."

In order to comply with OECD rules on ECA lending, KEIC could not commit to pay out its entire liability in year eight. In order to get around the requirement that not more than 20 per cent of lending is paid out in one go, it will - should it need to - pay out in four instalments, each six months apart. This means that the banks on the KEIC-covered tranche are effectively lending over 9.5 years.

The other ECA to join was US Exim, which lent direct to the deal to the tune of US$229 million. Its tranche is structured differently - fully amortising over 12.5 years, though it retains the right to call a default on eight years if the other lenders do so.

According to Gregory Tan: "The main concern that Exim had with the mini-perm was the refinancing risk to the commercial tranche - particularly as the Exim tranche extended beyond the maturity date of the commercial banks.

"That gave rise to two related issues: allocation of the cash sweep that the commercial banks introduced in the final years of their facility to the various tranches - bearing in mind, from Exim's perspective, OECD requirements regarding average loan life and minimum amortization profile; and inter-creditor voting matters, bearing in mind the different risk profiles (due to tenor and amortization) for the different tranches."

Completing the lending structure was an Islamic tranche of US$288.5 million, including an istisna-ijara facility from Calyon, Banque Saudi Fransi, and Islamic Bank of Asia, and a wakala-ijara facility from Al Rajhi.

Ben Shorten at Shearman's says the most complicated aspect was co-ordinating all the lenders. "It was a broad church of lenders," he says, "and it was constantly challenging to find a structure that worked for everybody

"We'd get a long way down the road with the existing set of lenders when another would come in with its own set of constraints, so we were constantly working to accommodate the whole diverse group."

PWPA extension

The sponsors are justifiably proud that the deal they originally struck with Bahrain's ministry of finance has been stuck to - the documents signed had no get-out in case of material adverse change.

The project is, indeed, still on its original schedule, thanks to the sponsors' spending their equity portion on starting construction before financing closed. This had the added benefit of allowing potential lenders to have a site visit before they committed to the deal.

The one point where any flexibility was possible was the PWPA, which was extended at the sponsors' request to 25 years.

Karel Breda says: "It helped us sell the deal to the banks, in that when we come to re-finance in five years' time, we will still have 20 years' PWPA ahead of us."

Conclusion

Writing in October 2009 with GDF Suez' Shuweihat 2 IWPP about to close on US$2.2 billion of 22-year debt, it's tempting to wonder whether Al Dur might have rushed in to its mini-perm solution too early in the year.

But in this case, hindsight does not in fact provide a better answer. The mini-perm was the right solution for this project, and credit goes to the sponsors and their team for that vision - and for having the wherewithal to implement it.

Having settled on the financing structure, reaching financial close was a significant achievement - involving as it did an unprecedentedly disparate group of lenders.

Of course, the pressure is on to re-finance in five years; but how many deals closed in 2009 will not have refinanced by then? The market is almost unanimous in thinking that pricing will fall - indeed, is falling - from its 2009 peak.

In the meantime, Bahrain gets its much-needed power and water capacity, Korean and US firms get big construction contracts in the midst of a worldwide recession, and GDF Suez reinforces its reputation as one of the global power sector's most effective dealmakers.