The Shuweihat S2 project in Abu Dhabi is Suez' second major Middle East IWPP to reach financial close this year. Like any big transaction to achieve that in 2009, its financing is a story of perseverance and creativity in the face of financial adversity. IJ Power reporter Tom Bowker takes up the story…

Project background

S2 - the second IWPP at Shuweihat, in the Arab Emirate of Abu Dhabi - was first put out to tender in July 2007. 20 international firms were invited to bid to build, operate and own a 40 per cent share in the 1,600MW, 100MIGD gas-fired facility. A 20-year PWPA offtake agreement was on offer from ADWEC, an affiliate of the project's promoter, the Abu Dhabi Water and Electricity Authority (ADWEA). ADWEA would retain 60 per cent ownership of the project.

Suez submitted the lowest tariff bid, on the basis that its electricity tariff was lower than the other two bids submitted by Marubeni with Osaka Gas, and International Power with Sumitomo. The Marubeni-Osaka Gas bid offered a lower water price, but was more expensive overall.

The Suez bid was named preferred bidder in June 2008, when few were yet predicting the calamity that would hit the financial markets later that year. The bid came with US$2.1 billion of debt commitments underwritten by three MLAs - BayernLB, Calyon and Natixis - with pricing said to be Libor +110bp during construction, and then starting at Libor +115bp during operation. The bid was backed by a Korean and German EPC team, made up of Samsung, Siemens and Doosan.

At the time, ADWEA was also working on the next in the Shuweihat series, S3 - and Suez was also bidding on what was to be the world's largest IWPP, at Ras al Zour in Saudi Arabia. Neither project was to come to fruition, with S3 being canned entirely and Ras al Zour going EPC-only.

The project financing

Once the 20-year PWPA was signed in August, the course looked clear for Suez and ADWEA's MLAs to start building a club in advance of financial close, projected for November 2008. But the financial markets soon took a radical turn for the worse.

As early as mid-September, the three MLAs - BayernLB, Calyon and Natixis - made it clear to Suez and ADWEA that the deal in its current form was unsellable. Their main demand was for the sponsors to eliminate the merchant tail which would exist on the deal, as the term loan was designed to outlive the 20-year PWPA.

In IJ's report from the time, we described Suez as having "a reputation as a hard-nosed sponsor but also a realistic one" - something that would be borne out as the deal wore on.

ADWEA was equally realistic, agreeing to extend the project's PWPA to 25 years. But that was not, on its own, the silver bullet that could save the project. A more radical plan was required.

The two sponsors and ADWEA's financial advisor, HSBC, got together in September and cooked up a plan aimed at buying time to build a long-term solution. The first part of the plan was to ask the original three MLAs for a bridge loan, to allow construction to begin on schedule.

The second idea was to - in the nine months afforded by the bridge financing -speak to the second-placed bidder on the project, Marubeni, about it taking on half of Suez' equity stake, and bringing JBIC financing into the deal.

By the end of December 2008, a US$900 million bridge loan had been provided by a six-bank club:

• BayernLB
• Calyon
• KfW
• National Bank of Abu Dhabi
• Natixis
• Standard Chartered

The bridge would run until the end of September. If long-term financing was not by then in place, ADWEA - in its own example of hard-nosed realism - would re-nationalise the whole of the project.

But the extra time was key to the deal getting financed. The deal has much in common with the one behind Al Dur, but with the bridge giving the sponsors an extra nine months, they were able to launch the financing in a much improved market.

Karel Breda, GDF Suez' head of acquisitions, investments and financial advisory for MENA, says: "It was an important element of the financing, that we could launch it in a much better market and get very different results. So that was a major driver, although not the only driver to get the long-term financing as opposed to Al Dur's short-term financing."

What price long-term money?

With Marubeni's participation secured - and half of the US$2.2 billion debt portion promised by JBIC - the sponsors could go back to the long list of banks keen on lending to the deal. Another side-effect of Marubeni and JBIC coming in was that that list now also included Japan's top commercial lenders.

The project itself was not a hard sell to the banks - and the sponsors were well aware of the strength of their hand. The project had always been attractive to the banks, which had long made clear their preference for the Abu Dhabi project over Al Dur in Bahrain.

The success of the Al Dur financing, therefore, gave Suez a good idea of which banks were playing in the market - working on the principle that you judge someone on what they do, rather than what they say.

The structure had to be simple to comply with the demands of the project's biggest lender, JBIC. Despite nay-saying from some quarters of the banking community, Suez and ADWEA were confident that they could get 22-year money without any cash sweeps - and were ultimately proved correct.

The remaining variable was pricing. There was very little benchmark at the time; Al Dur had closed, but six months on the market had clearly changed. In May there had been a big turning point in the market - looking at Libor rates, for instance - so more and more, the sponsors calculated that the high prices banks were asking for were less because the cost of funding was so high, but because there was a limited number of banks in the market.

In the end, banks were brought round to accept the sponsors' requested pricing - starting at 260bp, rising to 350bp over the 22-year tenor. The base case cover ratio (ADSCR) was just 1.2. The MLAs pocketed an up-front fee of 300bp on their tickets, which averaged just short of US$80 million.

The lender line-up was as follows:

• Bank of Tokyo-Mitsubishi - US$125m
• Bayern LB - US$125m
• KfW (technical and insurance bank) - US$125m
• National Bank of Abu Dhabi (onshore trustee) - US$125m
• SMBC (documentation bank) - US$125m
• HSBC - US$100m
• Mizuho - US$100m
• Natixis - US$100m
• Samba - US$100m
• Standard Chartered - US$100m
• Société Générale - US$100m
• Sumitomo Trust - US$100m
• BNP Paribas - US$50-75m
• Calyon - US$50-75m

A refinance is likely, says Breda, "somewhere after construction, and after you see the plant running for a year in a very decent way. We see banks coming back; next year will be better than this year and then 2011 should be reasonable again, so if the plant is running well, as soon as we can we will refinance."

Advisory roles

ADWEA was advised on the deal by HSBC, and retained the services of Charlie Seymour when he moved to Investec before ending up on ADWEA's payroll. Its legal adviser throughout the deal was White & Case.

Suez engaged Chadbourne & Parke as legal counsel and handed the lenders' mandate to Ashurst. However, when JBIC joined the deal they insisted on the advice of Milbank Tweed, meaning Ashurst was dropped after closing the bridge financing. Norton Rose advised Marubeni when it joined the deal. The lenders' insurance adviser throughout was JLT Group.

A boost for the model - and the region

For the second time this year, Suez succeeded in getting a huge power and water project in the Middle East through to financial close, on a project finance model. Doing so required some brinkmanship but also pragmatism, and a willingness to share the spoils of the project with Marubeni once it became clear it could not go it alone.

In a region awash with cash, the IPP and IWPP models may have been under threat in the credit crunch - with authorities wondering why they should depend on western, crisis-hit banks when they could fund their infrastructure projects themselves. The success of Shuweihat 2, among others this year, provides a welcome boost to the private investment model - and one which, instead of dying, appears now to be gaining ever more currency throughout the Middle East.

The project at a glance