Bankers have been pulling their hair out at the frustratingly tight pricing in the GCC power sector but the days of double digit pricing for deals involving huge investments may soon be a thing of the past

The bankers had reason to smile last week when the papers were signed for the US$2.2 billion debt that will be used to finance the world's largest IWPP - at prices set in 2005.

Saudi Arabia's Marafiq IWPP will cost US$3.5 billion when all is said and done. It will produce 2,750MW of electricity and desalinate 800,000 cubic metres of water per day.

Marafiq is under contract to the Jubail Water and Power Company, an SPV set up by a Suez Energy-led consortium with the following shareholders:

• Suez Energy - 20 per cent
• Gulf Investment Corporation - 20 per cent
• ACWA Power Projects - 20 per cent
• Marafiq - 30 per cent
• Public Investment Fund (PIF) - 5 per cent
• Saudi Electricity Company (SEC) - 5 per cent

The project will be developed on Saudi Arabia's Gulf coast on a BOOT basis with it being transfered to Marafiq 20 years after full commercial operations first start in March 2010. The first power block and desalination units are expected to come online in mid 2007.

Project details

The power plant component of Marafiq will be made up of four blocks using CCGT technology. Extraction steam from the turbines will supply the steam for the desalination plant.

Marafiq's desalination facility will be made up of 27 units using multiple effect distillation (MED) technology.

Water and power produced by the integrated facility will be supplied to Jubail Industrial City and the Eastern Province of Saudi Arabia.

Saudi Arabia is the world leader in desalination with more than a quarter of the world's desalinated water being produced in the country. Saudi leaders have pledged to continue with the IWPP programme with the next facility likely to be located in Yanbu.

Financing

On top of the US$2.2 billion in project debt, there is also a seven-year equity bridge loan (EBL) of US$468 million along with an EBL standby loan for US$27.6 million. The EBL loan is priced at 30bp over prime.

The 18 banks that arranged the EBL loan each underwrote US$26 million in base debt and US$1,531,389 for the standby loan. Those banks were:

• BayernLB
• Bank of Tokyo-Mitsubishi
• Calyon
• Dexia
• DZ Bank
• Fortis
• HSBC
• ING
• KBC Bank
• KfW
• Mizuho
• Natixis
• Royal Bank of Scotland
• SMBC
• Société Générale
• Standard Chartered
• WestLB

Korean Export Insurance Corporation (KEIC) agreed to guarantee an additional US$645 million facility, which was provided by the same 18 financial institutions that provided the EBL loan.

BNP took the lead and underwrote US$135 million of the guaranteed debt, which was priced at prime plus 40bp over a 17-year tenor. The other 17 banks each arranged US$30 million for the guaranteed facility.

Financing for the project also included a US$600 million Islamic tranche with Al Rajhi Banking & Investment Corporation, National Commercial Bank Saudi Arabia, and Riyad Bank each underwriting US$200 million.

The 22-year facility is priced at the equivalent of 110bp during the two-year construction period before dropping to 110bp. From there, the pricing will increase to 160bp over the life of the loan with step-ups.

Jubail Water and Power Company originally mandated BNP, Gulf International Bank and Samba to arrange the US$2.172 billion debt facility but such was the interest in Marafiq that by the end 32 banks had agreed to help finance the project.

The 22-year facility is priced the same as the Islamic tranche and was arranged by 29 financial institutions. All the banks involved in the facility also contributed to a US$45.8 million stand-by loan that is priced at plus 10bp.

The advisers were:

• Citigroup and SAMBA (financial advisers to sponsors)
• Shearman and Sterling (international legal adviser to sponsors)
• Alliance of Abbas F Ghazzawi & Co and Hammad G Al-Mehder (local legal advisers to sponsors)
• Berwin Leighton Paisner (international legal advisor to winning bidder and  project company)
• Milbank Tweed (lender's legal adviser)

The banks and their contributions to the financing are as follows:

Next up

Marafiq was created and is owned by Saudi Basic Industries Corporation (SABIC), Saudi Arabian Oil Company (Saudi Aramco), Public Investment Fund (PIF) and the Royal Commission for Jubail and Yanbu.

It was created to serve the two industrial cities Jubail and Yanbu and this first project will help provide power and water to Jubail. The next IWPP that Marafiq will put out to tender will serve Yanbu.

This project was the third Saudi Arabian IWPP to close but when Marafiq's legal advisers Shearman & Sterling put together the RFP for the project, it was the country's first.

That created the framework that will be used for the Yanbu IWPP that is next on the agenda for the Marafiq organisation.

However, before the Yanbu project will proceed, Saudi's Water and Electricity Company (WEC) will seek financing for the Ras-az-Zawr IWPP.

The project, which will generate 850MW-1,100MW of electricity and desalinate 1 million cubic metres of water per day, will likely cost at least as much as Marafiq.

Losing liquidity

Saudi Arabia's programme to build these cash-intensive massive projects in the power and water sectors is soaking up the market's liquidity as shown by the number of banks needed to complete this transaction.

The need for increased liquidity was also demonstrated by the major involvement of KEIC in providing a US$645 million guarantee against both political and commercial risk.

While the liquidity of the market is buoyed by new entrants looking to make a name for themselves in the world's most active power region, it is the tightening of the cash supply that is leading to more sustainable pricing for these huge IWPP projects.

The terms for financing Marafiq was agreed two years ago but its size and the amount of capital needed to close the deal meant that there was a great deal of pressure on the lending rate anyway.

It is possible that the heyday for developers of power project in the GCC region is over and that future deals will give bankers reasonable returns on their huge investments.

 

The project at a glance