GDF Suez, the sponsor of the moment in the Middle East power sector, last month wrapped up another financial close in the region - this time of the PP11 IPP in Riyadh, using a variety of financing instruments ranging from Islamic tranches to US Exim funding. Perhaps the most remarkable aspect of the project financing, however, was its speed and lack of fuss - proof, if proof were needed, of the return to form of the project finance bank market.

The project

PP11 is the second in a series of three IPPs being procured by the Saudi Electric Company (SEC). The first, Rabigh, was won by local developer Acwa Power, and reached financial close last year. The third, Qurrayah, is currently in procurement, with qualifying developers expecting RFP documentation shortly.

The project will add 1,730MW capacity to the Saudi grid, and will run off gas as main fuel, and Arab Super Light Crude Oil as backup fuel.

Procurement

The procurement process was notable for one bid in particular being far lower than the others - and in the event, not winning the project. That came from Marubeni, and though various theories have been put forward, both SEC and Marubeni have remained tight-lipped over exactly what it was that made it so cheap - and what made it non-compliant.

Suez, Sojitz and local partner Al Jomaih offered the next lowest price for power, and were always confident when the bids were read out that theirs would be the cheapest compliant bid. So it proved.

The project company, Dhuruma Electricity Company, is owned as follows:

• GDF Suez - 20 per cent
• Al Jomaih - 15 per cent
• Sojitz - 15 per cent
• SEC - 50 per cent

The financing

The Suez bid was also fully financed, which had not been an explicit requirement of the procurement process. Its financial advisor was long-time relationship bank Crédit Agricole, which headed up a six-strong club on the international, commercial bank tranche.

That tranche included Saudi bank Samba, which would also lend on one of two Islamic tranches. The biggest ticket was initially taken by Export Development Canada, but it went on to sell on US$50 million to each of CIC and Banco Intesa immediately after financial close.

The commercial and Islamic tranches were lent on a 20-year tenor, including the 3-year construction period, leaving a 3-year contracted tail after maturity thanks to the 20-year PPA from SEC.

The US$2.1 billion project was funded on a roughly 74:26 debt-to-equity ratio, although much of the equity portion has been funded through equity bridge loans. Total term lending on the project came to US$1,550 million.

The international commercial tranche was provided as follows:

• Credit Agricole - US$93m
• Standard Chartered - US$93m
• Société Générale - US$74m
• Export Development Canada - US$170m (US$70m after close)
• KfW - US$55m
• Samba - US$46m
• CIC - US$50m (after close)
• Intesa - US$50m (after close)

There were two Islamic, Riyal-denominated tranches, Istisna Ijara and Wakala Ijara. The Istisna tranche, including a US$30 million standby facility, was provided by:

• Bank Saudi Fransi (BSF) - US$264m
• Samba - US$117m

The Wakala tranche came from:

• Alinma: US$167m
• National Commercial Bank (NCB) - US$93m

The remainder of the term lending came from US Exim Bank, which providing US$384 million. Its tenor is shorter, at 14 years from Project Commercial Operation Date (PCOD), or 17 years in total.

The debt was also competitively priced, reflecting a general downward trend in the margins banks are asking for in 2010.

The term lending is priced at 250bp to start, rising through 340bp by the end of the loan. At year 13, an 85 per cent cash-sweep kicks in for the final seven years to pay off a 20 per cent balloon implied in the model.

White & Case was mandated as legal adviser to the lenders on the deal, with Mark Castillo the lead partner.

As well as the term loan, all of the sponsors except Al Jomaih arranged equity bridge loans, from the following banks:

• GDF Suez - KfW
• Sojitz - SMBC
• SEC - National Commercial Bank

Market context

Financial close of PP11 was the third in the last 12 months for GDF Suez' power team in the Middle East - but comparing it to the company's last two deals, and others last year in the Middle East, PP11 stands out as having been remarkably simple.

Last year, the company brought the Al Dur IWPP to financial close in Bahrain, and Shuweihat 2 in Abu Dhabi. Al Dur was a quite spectacular deal, done in the teeth of the worst times for the market and bringing in funds from a wide variety of sources on a mini-perm structure. Getting it to close was a huge achievement - but the process was far from ideal.

On Shuweihat 2, Suez was forced to bring in a Japanese equity partner, in the shape of Marubeni, in order to be able to access JBIC money - which was the key to funding that deal. Compare that with PP11, where Suez partnered with Japanese firm Sojitz - but even so closed the deal without JBIC support.

The lack of JBIC support on the deal is a remarkable aspect - but it is worth noting also that Suez is partnering with Sojitz on the up-coming Barka 3 and Sohar 2 IPP projects in Oman, which are currently in financing - and which, again, will proceed without JBIC finance.

The two other big closes in the Middle East last year, Salalah and Rabigh IPP, got done eventually with Chinese and Korean ECA money, and were again far from simple. In contrast, PP11 closed in three months, with a relatively small amount of support from one ECA - US Exim - which itself set a new record for funding approval turnaround.

Break-neck speed

Karel Breda, head of investments for GDF Suez in MENA, picks out the speed of closing as one of the deal's stand-out aspects. "Three months from winning the contract is definitely quick in the current climate", he says, adding - "particularly with US Exim".

Cathy Marsh, lead partner at the Milbank team advising the sponsors, emphasises the relative ease of the transaction. Although, she says, it was "a big financing and a relatively complicated financing, with a complicated mix of financing parties in there," she concludes that "perhaps the most remarkable thing about the deal is its unremarkableness."

She continues: "The terms are not as complicated as for instance the Al Dur financing; it's more conventional in that sense, which I think is a very good sign as it shows that you can get deals away against a more classic structure, even deals of this size with no government guarantee - contrasted with, for instance, Abu Dhabi."

The lack of a government guarantee is something which is in sharper focus given events at the end of last year in Dubai. Although SEC is a public sector company, the experience of Nakheel in Dubai shows that guarantees of quasi-governmental entities should not necessarily be relied upon in the Middle East.

Looking to the future

The PP11 financing is surely hugely encouraging for procurers and developers in the Middle East. Though banks clearly require a contracted tail on lending, and the debt here is not fully amortizing, 20-year money at reasonable prices, provided with a minimum of fuss, augurs well.

Suez is now looking to finance two projects in Oman, quite a different kettle of fish as a jurisdiction, and is bidding along with four other teams for Shuewihat 3 IPP in Abu Dhabi. After that will come the Qurrayah IPP in Saudi Arabia, which will provide a good comparison with PP11 in terms of where financing is at.

Breda predicts that "pricing might be a bit lower for Qurrayah [than for PP11]. PP11 was priced in September-October 2009; we're almost a year later now so it should be a bit lower but not dramatically. There'll be perhaps another 25bps reduction.

"A number of banks are back in business; a year ago we had to beg them into our transactions, but now they're more willing - but there's not a massive amount of liquidity."

Tellingly, Breda claims: "We haven't really reached a level of competition yet [in the bank market]; pricing is not yet driven by the cost of funds so much as the lack of competition in the market."

Nevertheless, it's hard to see banks showing much reluctance to participate on Suez' upcoming deals. PP11 is the latest in a serious run of form for the France-based developer, and the no-nonsense way in which it carried out the financing is a signal to procurers across the Middle East and further afield that GDF Suez is a company that knows how to get results in the current climate.