A new approach to large financings

Construction site

With oil prices starting to firm, lenders from within the region and beyond are coming under pressure to close a looming funding gap facing major projects. In the GCC alone, ratings agency Standard & Poor’s estimates the difference between the value of projects to be awarded by the end of 2019 and the capital expenditure that governments have committed at $270bn.

This has left banks straining to commit the levels of project finance required by major infrastructure and other related schemes in order to get off the ground. Though the appetite of lenders for longer-tenor deals is showing signs of reviving to pre-low oil price levels, there are challenges in matching supply with demand.

One of these is the damage wrought to loan books by the slowdown in economic activity. Non-performing loan (NPL) levels have risen, with the ratio of NPLs to total loans in the GCC reaching a rate of 3.1 per cent at the end of September 2017, up from 2.9 per cent at year-end 2016, according to Moody’s Investors Service.

And Moody’s expects NPL ratios to continue to deteriorate over the next six months before progressively stabilising. That could deter some banks from participating in project financings, though the space afforded to certain banks to root out the problematic parts of their credit portfolios should ultimately leave them in a stronger position to lend to long-tenor project-related deals.

A selective approach

One effect of the tighter liquidity conditions seen in the region – which in part reflects governments’ policies of withdrawing deposits from the local banking sector during periods of lower oil revenues – is that lenders are being more selective in which projects they choose to support.

“In a deteriorating environment, there is less capacity to lend money to projects that can be seen as a bit risky,” says Arnaud Depierrefeu, a partner at law firm Simmons & Simmons’ Doha practice. “Banks are starting to understand that they will have to lower their expectations in terms of government support going forward.”

The result is that the project finance market has found itself squeezed. The increasing selectiveness of the banks has led to the market increasingly seeing risk-sharing agreements in which guarantees are provided by governments and sponsors. Another trend is to push more risk onto the international sponsors. Other deals that have lacked large sponsors have struggled in the marketplace.

This challenges the traditional project finance model, says Depierrefeu, which by its nature was intended to be non-recourse for sponsors, who are now asked to provide guarantees instead.

Bank appetites for Middle East and North Africa (Mena) region project financing can vary widely, says Bimal Desai, a partner at Allen & Overy’s Dubai practice, who has experience in structured financings in the Middle East. “The willingness to lend is often driven by relationships with sponsors, but some banks are simply out of project finance.”

Export credit agencies

There does appear to be more ability to write local tickets in the market among local lenders. What has helped this is the re-emergence of export credit agencies (ECAs) in Mena region project financings.

“The ECAs are front and centre again in project finance deals,” says Desai. “In the old days, you could not do anything without them, but from the mid-2000s, you could do a lot without them. Now we are back full circle: you cannot do bigger deals without the ECAs these days.”

As an example, take the financial close for a 250MW wind independent power project in Ras Ghareb in Egypt’s Gulf of Suez that was reached in December 2017 by a consortium led by France’s Engie.

Non-recourse project financing was provided by the Japan Bank for International Corporation in coordination with Sumitomo Mitsui Banking Corporation and Societe Generale under a Nippon Export and Investment Insurance cover. This sat alongside an Egyptian component, with the Commercial International Bank Egypt acting as working capital bank and Attijariwafa Bank providing an equity bridge loan.

This deal also highlights the growing Asian presence in the region’s project finance market. Desai adds: “The other thing is that the liquidity coming from the Chinese banks has growing potential. They are big players in the power and utilities sector, and will soon start expanding into petrochemicals and oil and gas as well.”

Another Mena-wide project finance trend is the increasing receptiveness towards capital market structures within the funding mix. This is especially evident in the refinancing market. In the UAE, Ruwais Power Company’s Shuweihat S2 independent water and power project (IWPP) was partially refinanced in August 2013 through an $825m bond that will mature after 16–18 years.

In November 2017, Emirates Sembcorp Water & Power Company raised $400m with a senior secured bond to fund the operation and maintenance of the Fujairah 1 IWPP in the UAE.

A couple more such deals are currently being talked about, but while the power refinancing market is active, greenfield capital market project financing is still some way off.

With stronger balance sheets beckoning, local lenders’ capacity to commit to the region’s funding gap should increase. But the trend is clear: the bigger deals, with larger sponsors and that also take in ECAs, are likely to be the ones that prosper.

 

Related Posts
Optimising value from oil assets with tertiary recovery
Enhanced oil recovery represents the leading front for oil extraction capacity expansion in the Gulf Enhanced oil recovery (EOR) in the Middle East took a leap forward in November with the ...
READ MORE
Adnoc
As oil production cuts boost confidence in the energy sector, Abu Dhabi National Oil Company (Adnoc) is pushing ahead with bullish plans to expand its refining capabilities, add value to ...
READ MORE
Adnoc exemplifies gains from asset divestment
The recent agreement to sell a minority stake in its gas pipelines business represents one of the largest global energy infrastructure transactions By raising $10.1bn from a 49 per cent divestment ...
READ MORE
ENERGY CLUB 4: The outlook for upstream gas strategies
The fourth Mashreq Energy Club discussed the challenges and investment outlook for natural gas in the Middle East and North Africa Few regions invest more consistently in the development of hydrocarbons ...
READ MORE
UAE set for post-Covid recovery in 2021
While short-term challenges must still be overcome, the UAE remains an attractive place to do business as its 50th anniversary nears As the world recovers from the ravages of the Covid-19 ...
READ MORE
EXCLUSIVE: Firms prepare Dubai flying taxi bids
Selected consultant will undertake study and assist in launching tests and full operation of the service Consultancy firms are preparing to bid for the contract to undertake a feasibility study for ...
READ MORE
Saudi sovereign wealth fund to build Jeddah free zones
Fund plans to build sports and medical cities north of Jeddah airport A contract to build an airport city adjacent to the airport was awarded in August 2016 Fund to buy Al-Jowharah ...
READ MORE
Construction
As project sponsors and construction clients seek ever greater levels of return on their investments, it is becoming increasingly important for anyone involved in project delivery to find ways to ...
READ MORE
Decarbonisation is the next phase for Mena construction
The region’s construction and wider projects market must start incorporating sustainable practices in the planning and delivery of projects As countries around the world commit to reducing their carbon emissions, the ...
READ MORE
CONNECT SERIES: Applicable UAE construction laws amid Covid-19
Alternate legal routes are available to companies that find themselves unable to meet contract commitments due to Covid-19 Findings from Mashreq Construction Club Connect Series episode I On 16 April, the Mashreq ...
READ MORE
Optimising value from oil assets with tertiary recovery
Adnoc eyes diversified growth
Adnoc exemplifies gains from asset divestment
ENERGY CLUB 4: The outlook for upstream gas
UAE set for post-Covid recovery in 2021
EXCLUSIVE: Firms prepare Dubai flying taxi bids
Saudi sovereign wealth fund to build Jeddah free
Improving productivity and efficiency in the region’s construction
Decarbonisation is the next phase for Mena construction
CONNECT SERIES: Applicable UAE construction laws amid Covid-19
27 February, 2018 | .By JAMES GAVIN