The $426 million debt financing for the expansion of the Ras Abu Fontas A2 desalination project in Qatar has wider implications than many of the larger deals that closed in 2013. Ras Abu Fontas A2 (RAF A2) is the first Qatari financing to solely use local lenders. Qatari financings typically attract enthusiastic international bank support, but RAF A2's sponsor decided to work with local banks.

Ras Abu Fontas A2

STATUS

Signed 26 September 2013

DESCRIPTION

The addition of a new unit at an existing Qatari desalination plant, with a capacity of 36 million gallons per day

SPONSOR

Qatar Electricity and Water Company

DEBT

$426 million, comprised of a $154 million conventional term loan, a $255 million Islamic tranche and a $17 million standby facility.

LENDERS

Qatar National Bank, Masraf Al Rayan Bank (Islamic tranche), Qatar Islamic Bank (Islamic tranche) and Barwa Bank (Islamic tranche)

FACILITY AGENT, TRUSTEE AND COORDINATING BANK

QNB

SPONSOR FINANCIAL ADVISER

HSBC

SPONSOR LEGAL ADVISER

Norton Rose Fulbright

LENDERS’ LEGAL ADVISER

Simmons and Simmons

LENDERS’ TECHNICAL ADVISER

Shaw

LENDERS’ INSURANCE ADVISER

Jardine Lloyd Thompson

LENDERS’ MODEL AUDITOR

Operis

Even before the beginning of the financing process, project sponsor Qatar Electricity and Water Company (QEWC) had already decided to test the capacity of the local banks. The Qatari government owns 43% of QEWC, but the sponsor wanted to prove itself in the local market. The deal was a chance for Qatar National Bank (QNB) and Qatar Islamic Bank (QIB) – both proven and reliable regional project finance lenders – to take centre stage.

Earlier QEWC deals leaned heavily on international banks. The arrangers of the $450 million in debt for the Ras Abu Fontas A1 desalination plant, which closed in March 2008, were Bank of Tokyo-Mitsubishi UFJ, Royal Bank of Scotland and Standard Chartered, in addition to QIB, Doha Bank and Gulf International Bank.

For RAF A2, QEWC split the financing into two tranches – a conventional term loan and an Islamic piece, plus a $17 million standby facility. QNB alone funded the $154 million 25-year conventional tranche. QIB and two other banks – Barwa Bank and Masraf Al Rayan – participated in the $255 million Islamic tranche, with QIB, Barwa and Masraf each contributing $85 million. HSBC was financial adviser to QEWC.

The Ras Abu Fontas A2 financing featured a commodity-based profit rate swap for the hedging of the Islamic facility, one of the first times this product has been a feature of a Qatari project financing. The conventional tranche used standard hedging. All lenders provided US dollar-denominated funding. The debt is priced at 175bp over Libor, with upfront fees of 185bp and commitment fees of 59bp.

Final lender takes dropped as the deal neared financial close. QEWC had been expected to need $450 million of debt, but was able to cut the total after revising the plant’s engineering, procurement and construction contract. The size of QNB’s tranche fell by $8 million, while QIB, Barwa and Masraf ended up contributing $5 million less each, and QEWC could cut $1 million from the standby facility.

QNB was global and conventional facility agent, global onshore and offshore security trustee, onshore and offshore account bank, and coordinating and documentation bank. QIB was the Islamic facility’s agent and security trustee.

The 2008 financing, for Ras Abu Fontas A1, also had a commercial term loan and an Islamic tranche. That deal comprised a $288.2 million 20-year commercial term loan and a $144.1 million 20-year Islamic tranche. QIB was the sole underwriter of the Islamic facility, which marked the debut of QEWC in the Islamic market.

The expanded Ras Abu Fontas A2 will benefit from a 25-year water purchase agreement with Qatari state-owned utility Kahramaa. The expansion entails the addition of a new unit at the desalination plant, with a capacity of 36 million gallons per day. QEWC plans to bring the new unit online in 2015. The existing plant, which entered operations in 2012, has a capacity of 45 million gallons per day. Mitsubishi Corporation and Toyo Thai will build the expansion, which will use Hitachi Zosen technology.

RAF A2 is small enough that its financing could be an all-local affair. Larger financings, particularly those with a large power element, will not be as choosy. But the deal demonstrates that domestic banks have the ability to close and assemble large deals, and will increasingly take top billing both locally and regionally.