The closing of the US$1 billion Zayed University PPP project, sandwiched between the global financial crisis and the full realisation of Dubai's credit woes, is a testament to the ongoing confidence of both lenders and the Abu Dhabi government in the PPP model for developing infrastructure in the region.

In a market where even the most straightforward schemes have been treated with a degree of caution, that such a large scheme was not only oversubscribed but also had the confidence to implement financial instruments for the first time is an achievement to be celebrated.

Whilst the current economic climate will inevitably have a bearing on the speed of future procurement, the Zayed University scheme has further strengthened the case for PPP as a key driver in developing social infrastructure in both the Emirate and wider MENA.

Background

In recent years the Emirate has made no secret of its ambition to develop its academic institutions to international standards as part of its 'plan 2030.'

Examples of this ambition being realised via PPP can be seen first with the expansion of UAE University in 2007 and in the subsequent partnership with Paris Sorbonne University in France to build an extension of its university in the Emirate a year later.

The success of such schemes in a market that was far from buoyant encouraged the Abu Dhabi Education Council to push ahead with the far more ambitious Zayed University expansion.

The project was clearly a viable proposition with its sponsor - Mubadala - being solely owned by the Emirate and having a track record of delivering similar projects through the preferred method of financing.

However the sheer scale of the project - at over US$1 billion - coupled with many international banks level of exposure to the project financing market, meant that a long term commitment akin to that seen on previous projects was unpalatable.

Project and corporate finance adviser to Mubadala Kelly Thomson, said: "The financing structure for the project differed quite markedly from what was originally envisaged, particularly with the movement towards a hard mini perm structure.

"However this should be viewed in context, the equity tranche was very competitive considering the state of the market. The decision to look at alternate financing methods was more to do with the state of the market rather than Mubadala's attractiveness as a sponsor."

The Zayed University scheme has heavy strategic significance for Mubadala as it looks to increase the level of private investment in large scale projects, particularly in areas such as transport where schemes such as the Mafraq-Ghweifat Highway are already gathering pace.

The Project

The Mubadala driven scheme will provide education facilities for up to 6,000 students, as well as related facilities for faculty and support staff.

In November 2008, the D&B contract was awarded to a JV between local contractor Al Habtoor and South African firm Murray & Roberts.

Buildings within the new campus include:

• convention centre with capacity for 1,000 people
• library and administration offices
• multi-purpose halls
• faculty office buildings
• classroom buildings
• laboratory buildings
• dining halls
• recreation centres
• residence halls
• promenade
• child care and development centre

The new campus will be located in new Khalifa City near Abu Dhabi international airport and will cover and cover an area of 80 hectares (213,000m2). The existing university is located on two campuses in Abu Dhabi and Dubai and provides courses in sciences, business, communication and media, education, and information technology.

The project is expected to be completed during July 2011.

Calyon acted as financial adviser to the sponsor, with legal advice came from Allen & Overy. White & Case was legal adviser to the lenders while Gleeds provided technical advice.

Financing

The transaction was financed successfully with 11 MLAs:

• Abu Dhabi Commercial Bank (ADCB)
• Al Hilal Bank
• Banca Infrastrutture Innovazione e Sviluppo
• BTMU
• Calyon
• First Gulf (FGB)
• National Bank of Abu Dhabi (NBAD)
• Natixis
• RBS
• Société Générale
• Union National Bank

The tranches were:

• Term loan - US$796 million
• DSRF loan - US$28.88 million
• Mezzanine debt - US$76.85 million
• Islamic loan tranche - US$141.87 million

The deal is the first transaction in UAE social infrastructure financing where mezzanine financing has been used - highlighting lenders belief in the quality of the operating and contracting parties.

• Abu Dhabi Commercial Bank (ADCB): Term loan tranche - US$113 million
• Al Hilal Bank: Islamic loan tranche - $141.87 million
• Banca Infrastrutture Innovazione e Sviluppo : Term loan tranche - $57 million
• BTMU: Term loan tranche - $95 million
• Calyon: Term loan tranche - $95 million
• First Gulf (FGB): Term loan tranche - US$110 million, Mezzanine tranche - $76.85 million
• National Bank of Abu Dhabi (NBAD): Term loan tranche - US$110 million
• Natixis: Term loan tranche - US$33 million
• RBS: Term loan tranche - $US33 million
• Société Générale: Term loan tranche - US$47 million
• Union National Bank: Term loan tranche - $95 million, DSRF tranche - $28.88 million

The debt has a 10-year maturity, structured as a hard mini perm with banks taking the refinancing risk.

The senior debt margins start at Libor +290bp, with step-ups to Libor +390bp at maturity. The average debt service cover ratio is around 1.25x and the debt-to-equity ratio is 90:10

Project and corporate finance adviser to Mubadala Kelly Thomson, said: "That this deal was not only completed but vastly oversubscribed is further proof that Mubadala is seen as a valued sponsor for large scale infrastructure projects.

"The project has faced difficulties, but these stem primarily from the global climate rather than the viability of the project. I think changes to the financing, particularly its restructuring to mini-hard perm can be seen in this light."

The project reached financial close on 24 November 2009.

Further Developments

The Mafraq-Ghweifat Highway PPP is already in the pipeline. The proposed 327 km highway will link Mafraq to the border post with Saudi Arabia in the western part of the Abu Dhabi Emierate. The highway will reach eight lanes at its widest -the al Ruwais junction- before being reduced to six lanes nearer to the Saudi Border.

US$2.65 billion project is currently at the shortlist stage with four bidders currently in the running for the 25-year DBFO project.

The bidders are:

Anite - Autostrade Per l'Italia, Al-Naboodah Construction Group, Impregilo, Todini Costruzioni Generali, and Emirates Utilities Company Holding

Bouygues consortium - Bouygues Travaux Publics, China Harbour Engineering Company, Consolidated Construction International Company (CCC)

CCCC-MTD - China Communications Construction Company and MTD Capital

Irtibaat - Macquarie Capital Group, Abu Dhabi Commercial Bank, Al-Jaber Transport & General Contracting, Besix, Mouchel, and Transfield Services International

Mafraq Motorway Group (MMG) - Strabag, Joannou & Paraskevaides, J&P Avax, Saif Bin Darwish, and Egis Projects

A preferred bidder is expected to be named in Q1 of 2010 with financial close reached over the summer. Commentators believe that the project may pave the way for similar deals for the road corridor from Abu Dhabi to Dubai, the Abu Dhabi to Al-Ain highway, and the entire Western region corridor

Looking more specifically at education the Abu Dhabi Education Council (ADEC) has recently announced plans to build 300 schools in the next eight to 10 years, as part of its 'Abu Dhabi plan 2030'. The AEDC is currently inviting contractors to prequalify for the as yet uncosted programme, which may also include a PPP dimension.

Conclusion

Considering the continuing challenges that both local and international markets face, the successful financial close of such a large PPP project indicates the ongoing confidence that lenders have in projects in the Middle East.

The fact that the deal was well structured, with a lower equity tranche than Paris Sorbonne PPP - an education project only a third of the size - and featuring the first use of mezzanine financing for a social infrastructure project in the Gulf is a testament to Mubadala's perceived strength as a sponsor.

Furthermore the structuring of the deal as a mini-hard perm should be viewed in the context of the banking sectors' fears over liquidity rather than as an indictment on the project.

With the Abu Dhabi's government continuing a drive to develop its infrastructure on a large scale, the Zayed University campus will likely be used as benchmark for future PPP projects across the MENA region.

The project at a glance