Sunday, 17 February 2019

GDF – The serial user of project finance

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  • Cameron LNG, when complete

GDF Suez could well be the largest corporate user of the project finance market by number of deals closed over the last decade, with €55bn raised in those 10 years. Through its evolution from Suez to GDF Suez and then its acquisition of International Power, the company has sought to use project finance to build up its asset base. By Rod Morrison.

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In 2014 alone, the fundraising total stands at €11bn and the global deal list is impressive: in the US, Astoria 1 power refinancing, Cameron LNG, Oyster Creek power and Astoria 2 power refinancing; Mexico, Los Ramones gas pipeline; Portugal, Lusovento wind refinancing; UAE, Mirfa IWPP; Morocco, Safi IPP; and UK, Karugamo 2 wind refinancing.

But that is not just one active year. Take the list for 2013, when the deal flow reached €4.2bn: Canada, C2C wind and solar; Morocco, Tarfaya wind; South Africa, West Coast 1 wind and DoE power peakers; Singapore, Senoko refinancing; UAE, Shuweihat 2 IWPP bond; US, Astoria 1 mezzanine refinancing; French wind portfolio; Kuwait, Az Zour; and the Gasselys LNG vessel.

The upshot is that over the past decade the company has raised €6.3bn of project finance in Asia-Pacific, €22.6bn in the Middle East and Africa region, €11.8bn in Europe, €10.1bn in North America and €4bn in Latin America.

Now at a corporate level, of course, times have been tough for European utilities, particularly those with a portfolio of thermal generation assets at home. The price to books valuation of GDF Suez is around 1 and analysts at Credit Suisse recently suggested that the company had a conglomerate discount on its share price of anywhere between 5% and 40%.

Indeed, they suggested the company should list its French networks to improve the valuation. Change is afoot in the sector with news that E.ON is to demerge its upstream activities one of the big business stories in Europe this year.

For GDF Suez, its strategy has been clear – debt reduction combined with growth into fast-developing markets. Along the way, the company earlier this year took a €15bn hit on assets and goodwill to draw a line under the European problems to reflect its belief that “this situation is serious and long lasting”.

Gross annual capex, however, remains at the €9bn to €10bn level. The company is committed to be a leading player in the independent power project (IPP) market, the gas and LNG value chain and energy transition markets in Europe such as renewables.

The development culture within the organisation remains strong and indeed over the past couple of years has been strengthened. How GDF Suez responds going forward to the utility sector’s problems will be interesting, to say the leas,t but it is a fair bet to assume that the develop to grow attitude will remain in place.

The €9bn to €10bn of capex will mainly be financed through non-recourse or limited recourse funding. This function is headed from Paris by the acquisitions, investments and financial advisory (AIFA) team headed by Sven De Smet. He is backed up by Frederic Claux, deputy head in charge of Europe, oil and gas and infrastructure, and Philippe Lekane, head of energy international.

The AIFA team has more than 100 professionals worldwide with around 30 in the Paris and Brussels hub. But the network beyond Paris/Brussels is extensive, with offices in Melbourne, Jakarta, Bangkok, Delhi, Dubaï, Johannesburg, Rome, Berlin, London, Houston, Mexico, Panama, Santiago, Florianopolis (Brazil), Rio and Lima.

AIFA keeps such a network of offices as very rarely does it use financial advisers on its deals. Occasionally it might, when a bank insists on exclusivity arrangements, but normally it wants to keep its financial independence.

And having the office network reflects the way the market is moving. Since the global financial crisis (GFC), localised capital markets have become an important and competitive source of debt financing for projects. And GDF Suez has itself been carving out new niches, developing new markets from a standing start.

In South Africa, its West Coast 1 wind and DoE power peakers deals set the standard for the host of renewables projects seen in the country over the past few years. And now in Mongolia its work on CHP5 is bringing project finance to a new market. Having an office on the ground helps on both counts.

When looking at a new project, the project developer clearly takes the co-ordinating lead. AIFA, legal and technical provide vital back up. The developer and AIFA work on the risk allocation issues with a project and negotiate with the host government, obviously a central part of the decision of whether to go for a project or not. IFA will look at the balance sheet issues for the company associated with any project, the return rates, and procure the best finance.

GDF Suez does not have a reputation in the market as an overbearingly tough procurer but then again it is not a soft touch. Its reputation, if anything, is low key, perhaps not too aggressive say competitors – but then again it got the pricing on Mirfa IWPP in Abu Dhabi down to 110bp, the lowest in the market this year.

The only real criticism I have heard was from true Brit Dr Ranald Spiers, who felt the company was too French, or indeed just French! That was before and during the GDF/IP takeover. IP had the tight financial discipline of a company with a sub investment grade rating and thus was unable to bid for many new deals by the time it was taken over. Spiers and his fellow IP directors must have looked with envy at what could be done with a bigger balance sheet – before they were handsomely paid off.

GDF Suez uses project finance as its default financing technique. There are cases where project finance is not used. This is where local subsidies can get finance on a portfolio basis or where the economics of project finance do not stack up. This has been the case until recently in the US merchant power market, where what was on offer from the banking market was too expensive. But by and large project finance remains in vogue and indeed there are plans to continue expanding the AIFA team.

Renewables is one area of growth. In the US, activity has been limited by the fact that the market is tax driven and GDF Suez has little to offset. But elsewhere, the prospects look good in places such as Africa and Latin America. The company has perhaps been a little slow in this sector in, say, Europe but its reach across the world and into emerging markets should now put it in a good position.

In gas and LNG, the company has clearly been given a head-start by its GDF heritage. It is No 3 in the world in terms of gas and natural liquids (GNL) trading and moving upstream to project development is a natural.

The company has moved from being an off-taker of the Yemen LNG scheme, which was an emerging markets deal, to developing the Cameron LNG project in the US along with Sempra and its Japanese partners. Cameron LNG, one of the first US shale gas LNG exports projects, was financed on a classic tolling basis, that is the LNG plant is simply infrastructure kit and financed accordingly.

For GDF Suez and its partners, the output from Cameron goes into their LNG trading portfolio and they then decide where the gas ends up, depending on market conditions. Next up is the Cameroon scheme which is obviously a little more challenging than Cameron – indeed the project has been around for five years or more.

The independent power project (IPP) sector is clearly one where the Tractebel, then Suez and then International Power culture runs through the company like the lettering through a stick of Brighton rock, as the good doctor would say.

The company was involved, for example, in first Middle East IPP, the 90MW UPC scheme in Oman back in 1994. Going forward, the prospects are bright. The company made its first acquisitions in India, at a time when the rupee was down, the market depressed and the original developers needed buyers. As already said, it is working in new markets and moving into Mongolia. Last year, it was first in Kuwait with the huge Az Zour project. Despite all the promise of Kuwait, this still remains the only deal done in Kuwait under its PPP programme.

Of course, it has not all been new development. Under the corporate debt reduction programme some assets have gone. This year it has sold out of its assets in Panama and Costa Rica and its 440MW French onshore wind portfolio to Credit Agricole. Given the state of the European utility market, could we see more recycling of mature assets?

The list of deals this year is a strong one. Mirfa and Safi were classic Middle Eastern IPPs, which took along time to put together and ended up being signed within weeks of each other. Mirfa was notable, in a financing sense, for its ultra-cheap mini-perm while Safi, won by IP, was a traditional ECA/bank debt deal with local financing thrown in too. Los Ramones and Cameron LNG were stand-out deals in the Americas, with Los Ramones part of the push to get US gas into Mexico and Cameron to get it beyond into Asia.

























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