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
Circular economy reshapes business strategies in the UAE
Organisations in the UAE are beginning to see the value in adopting closed-loop resource systems Key takeaways: Governments and organisations are beginning to recognise the multi-trillion-dollar business value of circular economy ...
READ MORE
CONNECT SERIES: CONSTRUCTION MEGATRENDS
Insights from the MEED Mashreq Connect Series webinar on megatrends that will reshape construction in the coming decade Watch the complete webinar A hub between Europe, Asia and Africa, with vast hydrocarbons ...
READ MORE
The region’s project pendulum swings
Government-led projects will be the focus for construction across the region in 2019 while public-private partnership schemes remain in vogue The region’s construction market over the past five years has been ...
READ MORE
Future of region’s aviation sector still up in the air
Regional airline carriers can expect a slow and painful post-pandemic recovery The Covid-19 pandemic has had a significant impact on the dynamics of the GCC’s aviation industry since March 2020, but ...
READ MORE
Mixed forecast for airport projects
Airport projects are continuing in spite of Covid-19, but the outlook for schemes under tender is now clouded with uncertainty While Covid-19 has challenged the outlook for upcoming airport projects, the ...
READ MORE
UK to support export credit deals with dedicated GCC office
UKEF has capacity to fund £9bn of schemes in the UAE and £4.5bn in Saudi Arabia The growing interest from project clients for using export credit facilities to fund their projects ...
READ MORE
Reengineering Construction – MEED Mashreq Construction Partnership Newsletter: Research and White Papers – November 2020
The MEED Mashreq Construction Partnership is a knowledge-sharing initiative that was started in 2017. The aim is to provide a platform for senior industry executives to discuss and address the ...
READ MORE
The-Tower-at-Dubai-Creek-Harbour
The tenders for The Tower and the shopping mall at Dubai Creek Harbour evoke memories of 2004, when contractors competed for the deals to build what would become Burj Khalifa ...
READ MORE
Appetite for debt will encourage expansionary budgets
Recent bond issuances have shown that there is demand from international investors for regional debt GCC sovereigns continue to issue debt as they combat the economic effects of the Covid-19 pandemic. ...
READ MORE
Saudi Arabia seeks interest for urban rail PPP
National Centre for Privatisation is the client Saudi Arabia’s National Centre for Privatisation (NCP) has invited firms to express interest by 1 October for the contract to provide technical advisory services for the ...
READ MORE
Circular economy reshapes business strategies in the UAE
CONNECT SERIES: CONSTRUCTION MEGATRENDS
The region’s project pendulum swings
Future of region’s aviation sector still up in
Mixed forecast for airport projects
UK to support export credit deals with dedicated
Reengineering Construction – MEED Mashreq Construction Partnership Newsletter:
Tendering in 2017 reflects tightening margins for developers
Appetite for debt will encourage expansionary budgets
Saudi Arabia seeks interest for urban rail PPP
27 February, 2018 | .By JAMES GAVIN