Nubian Suns turn to gold
When the government of Egypt announced the details of its monumental Egypt FiT programme in September 2014, International Finance Corporation (IFC) was both pleased to see the launch of such a bold initiative and aware of the challenges ahead. Through this landmark programme, Egypt declared its determination not just to harness its rich solar and wind endowment to enter the global renewable energy market in a grand manner, but equally important to create a wide and accessible asset class in which both local and foreign private companies, large and small, could actively participate. By Christopher M Cantelmi, principal, Nuru Lama, principal, and Erik Becker, manager, at the IFC.
On October 29 2017, in front of 350 government dignitaries, sponsors, lenders, advisers and reporters in Cairo, the International Finance Corporation (IFC), the private sector arm of the World Bank Group, publicly announced to the government of Egypt the simultaneous financial close for its first 13 solar photovoltaic projects under the banner of IFC’s Nubian Suns Renewable Energy Financing Programme.
This IFC-led initiative that is financing an aggregate solar capacity of 752MWp/590MWac in the second round of the Egypt’s Renewable Energy Feed in Tariff programme (Egypt FiT) brought together 18 diverse developers of various capabilities from three continents into six cohesive sponsor groups.
Raising financing packages – backed by 11 international financial institutions – collectively worth US$653m, it is the largest renewables financing to-date for both Egypt and IFC. IFC’s sister organisation, the Multilateral Investment Guarantee Agency (MIGA), is providing political risk guarantees for up to US$200m to the wider range of Egypt FiT projects.
The government of Egypt announced the details of its monumental Egypt FiT programme in September 2014. Through this landmark programme, Egypt declared its determination not just to harness its rich solar and wind endowment to enter the global renewable energy market in a grand manner, but equally important to create a wide and accessible asset class in which both local and foreign private companies, large and small, could actively participate.
With the express goal to stimulate private investment, the government purposely designed Egypt FiT to maximise the number of investment opportunities. Instead of awarding a few mega-projects to construct the entire planned 2,500MWac solar PV and 2,000MW wind facilities, it split the designated sites into a hundred or so medium-sized projects; each one dimensioned to be accessible to a wide range of private investors and financed individually through its own special purpose company.
The sheer scale and complexity of financing so many potential projects presented a formidable challenge. It is no secret that non-recourse project finance transactions are highly structured, heavily negotiated and expensive. Usually only larger-scale infrastructure deals sponsored by sophisticated, multinational corporations can afford the associated high transaction costs. One of the greatest challenges in Egypt FiT, therefore, was to avail the benefits of non-recourse, low-cost capital to the host of small projects and sponsors. Fortunately, IFC had a solution ready.
In essence, the Nubian Suns Programme – tailored to finance Egypt’s renewable energy – is the sequel to IFC’s 2014 Seven Sisters Programme in Jordan – which, although having been on a much smaller scale, had pioneered and proven the concept that a disciplined, standardised approach to no-frills documentation and collective parallel processing of multiple, differently sponsored projects under tight time pressures was indeed possible (see PFI Yearbook 2015, pp 120-123). At seven times the installed capacity, four times the financial volume and twice the number of financiers and projects than Seven Sisters – the Nubian Suns took things to a whole new level.
Assisted by common external counsel, Norton Rose Fulbright and Sharkawy & Sarhan, lenders’ technical adviser, Mott MacDonald, and lenders’ insurance adviser, INDECS, IFC’s Nubian Suns is a comprehensive, programme providing small and medium-sized renewable projects with access to efficient and affordable project financing. Nubian Suns also serves as forum for sponsors to come together to address common issues confronted along the way as well as to provide support in their negotiations with the government.
These first 13 projects financed through Nubian Suns form an integral part of the 35 Egypt FiT solar projects awarded to-date, collectively totalling circa 1,900MWp/1,450MWac, all co-located at the Benban Solar Park, near Aswan in Upper Egypt. When fully built-out, this colossal 37.15 km2 solar complex, split into 42 plots each ranging from 20 to 50MWac, is expected to reach circa 2,300MWp/1,800MWac and will become the single largest solar power complex anywhere in the world.
This article explores the background to the Egypt FiT programme, its evolution and how the Nubian Suns approach has now become a model for renewable programmes in Jordan and Egypt.
Round I – An important lesson
Offering the largest renewable energy programme ever launched in the Middle East and North Africa, Egypt FiT initially enticed 187 companies to submit prequalification documents in November 2014, signalling early on the potential to create a vibrant renewable energy power market in Egypt.
Given such strong investor interest, by June 2015 the government had signed memoranda for 55 solar PV projects equivalent to 2,500MWac– up from the initial target of 2,000MWac. Even though the draft contracts had bankability gaps, all believed those gaps could be bridged through subsequent negotiations and proceeded to secure land plots at one of three different government-selected solar parks – Benban (Aswan), Zaafarana (Gulf of Suez) and Minya.
In 2015, IFC signed around a dozen mandate letters to act as sole mandated lead arranger and carried out substantial project due diligence. IFC approached other financial institutions to secure scarce liquidity.
Meanwhile, the solar PV market continued to experience steep declines in project costs, mainly because of continually falling equipment costs. Overall tariffs had fallen in the space of a year from a level of c. 15–17 US¢/kWh witnessed in 2014 to a new benchmark between US$0.06 and US$0.08/kWh in 20151. Egypt’s Round I tariff by contrast had been set in early 2014 at US$0.143/kWh.
The magnitude of global solar PV price reductions that followed was a major surprise everywhere. While the difference in neighbouring tariffs could be partially explained by the preferential tax, import duty and shared infrastructure cost regimes applied elsewhere, by early 2016 the delta had grown making Egypt’s tariff look high.
Given the continuing impasse on certain red-line bankability issues (such as the venue for seat of arbitration) still lingering by June 2016 with no hope of resolution by the October 2016 Round I financial close cut-off date, work ceased for the vast majority of projects. Ultimately, only three projects were confirmed under Round I, with just one so far being constructed.
The Bennu reborn as Round II
Rather than give up, the government immediately rebooted its programme as Round II. IFC, together with EBRD and Proparco, engaged to ensure that this time the project documents were finally brought in line with lender requirements. The changes resulted in improved project documents from the outset, including the long-sought offshore arbitration provisions.
In September 2016, the cabinet decree authorising Round II, while halving the tariff, allowed all qualified solar PV participants under Round I to roll over into the new round. Out of the original 55 qualified projects, 32 eventually stayed in. All projects were moved to the Benban Solar Park, with efforts now focused on just one colossal mega-site.
The new deadline to reach financial close was set for October 29 2017, 12 months from the launch of Round II. Throughout the several high-profile sponsor-exits while many projects changed hands, IFC assisted clients to engage with new entrants and helped new faces join forces with existing consortia to gain economies of scale through consolidation.
Crucially, Egypt’s macroeconomic situation improved significantly. By the time Round II got fully under way in early 2017, a series of structural reforms and critical support packages to turn the economy around and restore investor confidence had been implemented.
The adoption of a US$12bn IMF package in November 2016 followed closely by a US$3bn budget support package from the World Bank and further sums from the African Development Bank (AfDB) helped to restore investor confidence.
These bold political actions included, inter alia, the establishment of a free float for the Egyptian pound – allowing a correction from E£8.8/US$ to between E£17.8 and E£18.1/US$ – and the increase by 30% of fuel prices. The success of Egypt’s return to the Eurobond market in January and May 2017, when two heavily oversubscribed placements raised US$7bn, completed the resetting of Egypt’s foreign exchange reserves to one of its highest recorded levels.
Round II - The Nubian Suns
IFC’s Nubian Suns is composed of 13 projects sponsored by 18 developers – organised into six sponsor groups. Sponsors are deploying capital from as far afield as China, India, Germany, Italy, Spain, Egypt, Lebanon, Iraq, Bahrain, Saudi Arabia, and the United Arab Emirates. Eleven financial institutions from four continents lent to the programme.
As in Jordan, IFC’s programmatic concept focuses on the synergies of aggregating the many sponsor-developers into a common, fast-track financing platform. By pooling IFC resources, lenders’ counsel and specialist advisers, account banks and administrative and security agents, and by agreeing to a programmatic syndication process and non-negotiable firm-but-fair standardised documentation, all projects benefited not just from speed and certainty of execution but also greatly reduced transaction costs. What’s more, the programme is scalable to any number of additional projects and replicable for those that will come later.
An unexpected area where Nubian Suns also yielded dividends was in bringing the sponsors together to solve common problems. For example, all project financial models were based on the same architecture developed by IFC, differing only in their sponsor-provided inputs – this allowed projects to be scrutinised and benchmarked side by side with outlying anomalies spotted early on.
Other valuable collaboration resulted – most noteworthy, the development of a common solar irradiation study used in the financial model. Early in the process, Mott MacDonald, the lenders technical adviser, identified inconsistencies between solar results when evaluating each of the projects in isolation, noting that, while each sponsor generally had access to long-term, high-quality data, each set was proprietary to the individual sponsor having been collected from weather stations on its site.
Taken individually, single source data have low statistical value and result in large uncertainty factors impacting the predicted energy yield and hurting sponsors’ ability to raise debt. Aggregating these various sources of data, however, greatly reduces the uncertainty and yields much more reliable results.
In this light, IFC stepped in to broker a deal among its six Nubian sponsor groups whereby they agreed to collaborate and appointed a common independent engineer, DNV-GL, to combine, correlate and analyse their data for the common good. By pooling their proprietary data – normally too sensitive to share with competitors – the Nubian sponsors materially reduced uncertainty in the energy yields and strengthened lender confidence in their financial models.
Perhaps the most defining feature of the Nubian Suns is the efficiency gains it made through the standardisation and mass production of the financing package. To make this process work required having the buy-in and trust of all its sponsors and co-lenders.
From the outset, IFC committed to take a fair position in which everyone would be treated equitably with no one sponsor or lender getting something the others didn’t – no cherry picking for those who asked versus those that didn’t … if a change was made for one, it would be given to all … while no one would get everything that they wanted either. In return, the sponsors and other lenders consented to much reduced influence on the documentation. This sacred pact was key in instilling the required discipline that “one sizes fits all”.
The process started, and ended, with one single, master long-form programmatic term sheet designed on the principle that from the outset terms should be balanced between lender and borrower, without creating the need for heavy, time-consuming and costly negotiations.
Specific details relating to individual projects, ie project names and specific lender groups, were minimal and inserted through a one page annex at the back – the only differentiating aspect unique to each project’s term sheet. The first term sheet was circulated to sponsors early in the process – May 2017 – with each given a brief opportunity to comment once.
Once received back, the IFC team considered all points and took on board those considered fair and reasonable in the spirit of the programme. The final form was then circulated on June 25 2017 to potential lenders as the basis to obtain credit and board approvals in July.
In parallel, documentation commenced. To assist the process, documentation was based on a new IFC form of the LMA, which proved to be more familiar and easier to explain to the wide range of participating sponsors and lenders. Also key to documentation efficiency, a common account bank, intercreditor and security agent was selected and appointed prior to the start of documentation so that their requirements, to the extent acceptable, could be built into the documentation from the start.
The process on and principles to documentation were similar, if more intense than, the term sheet. Only a single suite of programmatic finance documents was prepared, processed and approved by the various sponsors and lenders’ credit committees. Only at the last possible moment a few weeks before signing for each project were the individual finance documents split out and the execution versions produced, making minor adaptions where necessary.
First-draft documents were prepared based on previous negotiated precedents, then sent to sponsors getting first sight on June 29. After one week, sponsors sent comprehensive comments back, some just in time for a marathon sponsor week in London that commenced on July 10.
That week, a highlight of the process, was split with the first day spent internally by IFC with counsel who had prepared a comprehensive matrix of sponsor comments. The next three days were for the clients’ back-to-back meetings: two sponsor groups and their respective counsel arrived each day early in the morning and were greeted in meeting rooms on opposite sides of Norton Rose Fulbright’s client floor. Each sponsor group had one full day to go through the documents and present their comments. Other sessions during the day were also arranged to go through the due diligence and CP process.
Sponsors were also encouraged while in London to visit the account bank to start the process of setting up and opening their accounts. On the fifth and six days, once the sponsors had departed, the larger IFC and NRF teams reconvened and sequestered in an isolated conference room overlooking the Thames picking through and debating the comments received and weighing each of them on its own merits – again in the spirit of reasonableness, balance and fairness.
The product of this exercise, which genuinely strengthened the package for all parties, together with other missing pieces that arrived over the coming weeks from local counsel, produced the near definitive documentation that was circulated to the other lenders for the first time on August 3. Within the month, after a turn or two of the documents with the lenders and again with sponsors, a final set of sponsor and lender agreed programme-wide finance documents were ready to be split into project specific finance documents and signed near the end of September.
The Benban Solar Park, the first fruit of the US$2bn Egypt FiT, is attracting not only dozens of private investors, it is also opening the Egyptian project finance market to financial institutions long absent from its shores. At least 16 international financial institutions from Africa, Asia, Europe, and the Middle East including commercial lenders from China and Jordan, are financing Egypt FiT – 11 of them through IFC’s Nubian Suns.
These participants – many new to or long absent from the Egyptian market – are broadening the capital base for future power sector investments. A burgeoning market place is filling the gaps public capital alone cannot address.
On July 20 2017, the IFC board approved the Nubian Suns programme with an envelope of up to US$240m for IFC’s own account. Asia Infrastructure Investment Bank (AIIB) followed suit shortly with a matching amount. By end-July, 13 potential lenders had received approvals for Nubian Suns with commitments aggregating to US$920m – 70% oversubscribed for the original 11-project programme – allowing IFC to add two further Alcazar projects (Horus and Aten) at the very last moment just a few weeks before signing. Even after adding this further US$105m to the debt requirement, the programme remained oversubscribed by 41%.
IFC’s approach to syndication differed materially from that of other arrangers. Rather than selectively working with just a few lenders on a project-by-project basis, IFC chose to cast nets wide and syndicate Nubian Suns on a programmatic basis to attract as broad a lenders’ group as possible. Lender appetite in Round I was, quite frankly, weak at best, complicated by Egypt’s worsening foreign exchange position throughout early 2016. However, by the time syndication for Round II rolled around in spring 2017 that situation had completely reversed and IFC worked hard to spread the word.
As in Seven Sisters in Jordan a few years prior, this decision was taken deliberately to achieve three primary objectives: (i) redundancy to remove execution risk; (ii) diversification to spread lender exposures across a basket of individual projects and sponsor groups; and (iii) attract the largest number of lenders back to the Egyptian market.
To facilitate lenders processing time and decision making, the information memorandum was broken down into seven detailed volumes, a common book featuring the programme as a whole plus one book for each of the six sponsors detailing project specific features laid out in identical formats so that they could be quickly understood and compared. Due diligence materials and adviser reports were likewise standardised across projects for easy comparison.
Lenders that bought into the programmatic nature of the Nubian Suns and wrote tickets across the board got priority. As not every lender had such capacity, second priority was also given to those who could lend as broadly and flexibly as possible.
In this regard, AIIB was an early partner committed to underwrite the senior tranches of each of the original 11 projects on an equal dollar-for-dollar basis with IFC. Two other banking groups were also instrumental in adopting the programmatic approach and ultimately lent to nine projects each: CDC Group of the UK and the Arab Bank Group through its two constituent banks, Arab Bank, lending out of a branch in Bahrain, and Europe Arab Bank from the UK.
Together with IFC, these four banks provided the substantial degree of flexibility that proved essential to shift spare capacity from one project to another even at the very last moment. Other lenders with more modest tickets were slotted in where needed, some more flexibly than others. Typically, lenders were asked to seek approval for at least one or more sponsor than they intended to finance; although more work for them, it gave the programme valuable built-in redundancy necessary to cope with any last-minute surprises.
Last minute surprises there were. Two weeks prior to signing, an unnamed lender was no longer able to fund the two new Alcazar projects it was intended to finance, leaving a US$36m hole. Fortunately, the redundancy built into the programme and quick reactions by IFC, CDC and Arab Bank, which were already jointly committed, saved these two transactions from collapsing – Arab Bank shifted its allocations from the two other Alcazar projects to more than doubling its tickets for the two new ones while IFC and CDC jointly underwrote the remaining difference to buy time for Finnfund and Oesterreichische Entwicklungsbank (OeEB) to modify their approvals and come into these projects.
Key terms and structuring considerations…
Turning to financial details: The 13 non-recourse debt financings are composed of a combination of senior secured loans covering 75% of the capital structure as well as an optional subordinated secured debt tranche for an additional 5% , taken at the discretion of the individual project.
Both senior and subordinated loan tranches have door-to-door tenors of 18 years. Given construction periods are generally 12 months or less, the repayment period works out roughly to 16.5 to 17 years. The senior debt was sized based on the following constraints: a senior debt service cover ratio (DSCR) not less than 1.3x on the P-50 forecast nor 1x on the P99 forecast; a senior debt:equity ratio not exceeding 75:25. The repayment profile is sculpted to a constant DSCR.
The C Loan was sized based on a total debt/equity ratio not exceeding 80:20 and a total DSCR not less than 1x. It is designed to provide borrowers with an additional, flexible tranche of liquidity offering deferrals in circumstances where no cash flows down the waterfall. While subordinated to senior, it shares in the secured status of the senior loan.
The senior loans were syndicated either as parallel to the IFC A Loan or, in the case of eligible commercial lenders, as IFC B Loan participations. Participants under the IFC B Loan programme have the advantage of also sharing in IFC’s Preferred Creditor Status. None of the lenders in Nubian Suns required any form of additional cover. The subordinated tranche, or IFC C Loan as it is formally referred to, is provided exclusively by IFC. IFC as sole hedging counterparty is also providing the interest rate swaps for the entire programme.
Structuring considerations unique to Egypt were focused on the convertibility risks and the security structure. To address concerns that FX convertibility problems might return to impact a project companies’ ability to service debt, an additional convertibility debt service reserve account (DSRA) was required to be opened offshore and funded with an additional three months’ debt service, in addition to the standard offshore six months’ debt service reserve account. Subject to certain tests, this second reserve account could be released or reinstated if required again.
To correct for shortcomings in the perfection and enforcement of onshore security in Egypt, an offshore share pledge over an intermediate special purpose holding company was also required in addition to the standard suite of on and off-shore security.
1 – Throughout 2015 and into 2016, tenders in Dubai and Jordan delivered record setting tariffs: In January, Dubai’s DEWA 200MW bid set a record at 5.84 US¢/kWh followed by the announcement in May 2015s of its Round II reverse auction that resulted in 6.1-7.7 US¢/kWh for its four 50MWac projects, down 62% from its Round I FiT the year prior.