European Report 2002
The UK's PFI market has grown considerably over the past decade. What role does the UK government see PFI playing in the future, and what are the principles behind recent developments in the market? By Geoffrey Spence, Head of Private Finance Unit, HM Treasury.
The ‘not for' concept is currently in vogue in some government procurement circles. The fad, as its prefix suggests, is a negative response to the early workings of the Private Finance Initiative (PFI). Whilst the buildings delivered were fine or if not fine fixed at the private sector sector's expense, the whole refinancing issue put a spotlight on the profits made by the concessionaires. Hence the ‘not for' response, a negative response but one which could lead to some positive procurement examples if simplicity is maintained. By Rod Morrison.
At the end of June 2002, the British Ministry of Defence signed and closed the ROROs project, which provides for the services of six vessels for military transport during a period of over twenty years at a through life cost of around £950m. This is a highly innovative PFI project, involving assets which may be required to go anywhere in the world, and was achieved in spite of a background of uncertainties in the insurance and shipping markets of the world. By Edwin Godfrey, senior commercial partner at Simmons & Simmons and legal adviser to the Ministry of Defence on the ROROs project.
How effectively is the Private Finance Initiative being harnessed to deliver the massive investment programme required to develop the country's waste management infrastructure? This paper reviews progress to date and the future of waste management PPPs in the UK. By Robert Winchester, Head of Ernst & Young's Waste Management PFI/PPP Practice.
The necessity of fostering investments in infrastructure in Italy has already been discussed in this magazine in the past1. The Government has taken on board this onerous task as one of the fundamental goals of its legislative mandate2. By Velia Leone, head of the legal department at the Unita Tecnica Finanza di Progetto, the Italian government's public-private partnership task force.
It was neither the biggest, nor the longest, but the SCUT Grande Porto concession, which was won by the Mota-led Lusoscut consortium and signed on September 16th 2002, will be significant as it is the last of the seven Portuguese SCUTs (shadow toll roads) and, hence, it provides the opportunity to reflect on the programme as a whole and put it into its local and international perspective. By Nigel Purse, head of Espirito Investment, the investment banking division of Banco Espirito Santo, in London.
The E915m, A28-E402 toll-road project between Rouen and Alen篮 in Normandy, France, reached financial close earlier this year. It is the first limited-recourse project financed motorway in France. It is also the first time that a non-sovereign entity has issued inflation index-linked bonds in the Eurozone. The A28-E402 opens new perspectives for the financing of public-private partnerships in the region. By Benjamin Sirgue and Maria Mounina from CDC IXIS Financial Engineering.
One year on since Project Finance International took stock of heavy rail projects pending in Europe, real steps have been taken on some of those highlighted prospects. Slow progress due to the expensive, highly political and strategic nature of heavy rail means real deals are still some way off, but the wheels are beginning to turn. By Daniel O'Sullivan.
In Portugal, the new recently elected centre right government has embraced an ambitious PPP program envisaging a profound renewal and modernisation of the decadent, demoralised and highly inefficient Health National Service. By Jorge Abreu Sim president, Partnerships Health Taskforce.
Light rail looks set for boom times in Europe, with several projects across Spain, Italy and Ireland progressing through tender and the prospect of more to yet to come in the same locations and also further afield. Revenue support for funders of these perennially problematic projects, via subsidy either upfront or through operation, remains however a key issue in determining bank appetite for the deals. By Daniel O'Sullivan.
A quick look at any company's share price these days makes salutary reading but those in the general insurance sector, a sector not actually going bust, makes startling reading - Royal & Sun Alliance down from a yearly high of 428p to 92.5p and Zurich down from a yearly high of £194.66 to £55.50. Claims are up (due to turbines?) and investment income is down. Guess what? Insurance premiums have rocketed as a result of the sector's problems and the government and the private sector are as a result caught in a nasty vice which will test the idea of public private partnership. By Rod Morrison.
There can be a variety of reasons why a construction project may fail especially one carried out under Public Private Partnership (PPP). A recent article in InfoRM (the journal of the Institute of Risk Management) examined underlying factors or motives causing risk in the construction and allied industries. These factors were termed risk drivers and at least fifteen were identified as being a "fundamental generic underlying cause influencing the kind, numbers, and levels of risks faced by construction projects". By Michael Walker, Executive Director and Head of the Risk Management Group at Currie & Brown Consulting.
Americas Power Report 2002
By all accounts, the world has changed in the past year for Independent Power Producers (IPP's) in the US. After several years of giddy growth, with new merchant power plants being built all over the country and regulated utilities spinning off competitive power producers, is the party finally over? Ben Carliner reports on the state of the US power industry.
2001 saw both the highest levels of volatility US energy markets have ever recorded, as well as the spectacular implosion of Enron, the single biggest player in the wholesale gas and electricity markets. And while by many measures the wholesale markets stood up well to the crisis - power deliveries continued uninterrupted and defaults were avoided - the prospects for continued deregulation seem at risk. Ben Carliner reports on the state of the US energy markets and the state of the deregulation process.
The complex accounting standard known as FAS 133 was adopted in 1998 by the Financial Accounting Standards Board (FASB) to resolve inconsistent reporting standards and practices for derivatives. It was met with much confusion and negativity, but went into effect at most US corporations at the beginning of 2001. PFI looks at how a few major project sponsors have dealt with the implementation of the new procedures and the concerns that remain a year later. By Alison Healey.
What a difference four months make. Before Enron Corp and a number of its subsidiaries tumbled into bankruptcy court on December 2, 2001, off-balance sheet financing was seen as a positive and important corporate finance tool. More than 20 years ago, the technique was used to securitise residential mortgages and added much needed liquidity to the American housing market. Since then, the technique has been applied to a long and still growing list of assets and has opened the capital markets to a wider spectrum of companies. Today, it is difficult to identify an income-generating asset that has not been securitised. By Ken Coleman, partner, and Hugh McDonald, senior counsel, Allen & Overy, New York.
Many countries have either moved to establish a wholesale electricity market or are considering such a move, with the wholesale electricity market facilitating competition among non-regulated generators or other participants (eg, traders) to supply power. At the same time, but often on a slower schedule, there are moves to establish competition at the retail end of the market, allowing electric utility customers to select their provider and encouraging competition among non-regulated retailers (sometimes known as supply companies) to serve these retail customers. By Edward Kee, PA Consulting Group.
With the slowdown in US power deal flow, some US project finance shops have begun to look to the north for opportunities. And as the major Canadian provinces finally move forward on deregulation, there is certainly a need for financing in everything from transmission to ppa buyouts. By Alison Healey.
Brazilian energy company Petrobras unveiled its accelerated programme for investment in thermoelectric power plant construction last May. The aggressive plan for new construction was announced as record-low hydroelectric reservoir levels were about to force Brazil into mandatory power rationing; the plans fit in with state-owned electricity holding company Eletrobras' stated goal to double thermoelectric generation capacity in Brazil by 2005. As rainfall levels increased and emergency rationing ended early this year, Petrobras renewed its commitment to the programme. But the company may have trouble signing up equity partners in the evolving Brazilian power market. By Nicole Gelinas.
Things looked dim for AES as the stock fell to US$3.42/share from a 52-week high of US$55.85, and AES looked as if it were stranded somewhere between Enron and Argentina. Investors concerned about Enron were scrutinising AES' 2001 financial reports for evidence of potential downward-spiral triggers or corporate-level guarantees on operating-level debt. Investors concerned about this year's currency devaluations in Argentina and in Venezuela seemed to take note for the first time of AES' intense focus on the Latin American region. Standard & Poor's also weighed in mid-month with its placement of AES on CreditWatch Negative. By Nicole Gelinas.
On 15 May 2001, the Tietê Certificates Grantor Trust issued US$300m of Certificates to be used by subsidiaries of The AES Corporation to repay debt incurred in the acquisition of hydroelectric generator AES Tiete SA. The transaction was significant for three reasons. First, it is the longest tenor financing yet achieved by a Brazilian corporate issuer. Second, it marked the first capital markets transaction to provide investors with protection against devaluation. Third, and perhaps most significant, it is the first electric power financing in a below-investment grade country to achieve an investment-grade rating. The success of AES Tiete raises the question of whether it provides a model for financing the expansion of Brazil's electric sector. By Robert Sheppard, who was responsible for Project Finance Capital Markets at Banc of America Securities when the Tietê transaction was completed.
In response to one of the largest emerging markets crises in recent years, the Argentine government has chosen to pesify its economy, declare a debt moratorium, and abandon the Argentine peso's once sacrosanct one-to-one parity with the US dollar. In the past several months, US and other foreign investors in Argentina have been subjected to a dizzying series of federal and provincial enactments that have substantially transformed the investment landscape. Such enactments have altered tariffs, imposed foreign exchange controls, forced conversion of US dollars into Argentine pesos, voided provisions of public contracts, and effected pro-debtor changes to Argentina's bankruptcy law. US-based investors who must work within the new environment may look to the bilateral investment treaty held between the US and Argentina for some support. By Mark R Spivak, partner in the Washington office; James L Loftis, partner in the Houston office; and Douglas J Lanzo, associate in ...
The classic project finance approach is not well suited to the poorest countries of the world, where governments and people are too poor to pay for the critical water, power, transportation, health and other infrastructure facilities they need. A new form of public-private partnership is needed for the world's poorest countries under which (1) private sector companies would take the lead in developing, financing, implementing, and operating projects deemed to be of the highest priority by the governments of the recipient countries and by Western donor countries and (2) Western donor countries would pay - in whole or in part - for the services provided by these projects as part of a program of official development assistance (directly or through multilateral institutions such as the World Bank). By Jacob J Worenklein, Managing Director and Global Head of Project and Sectorial Finance, Societe Generale.
With the global economic recession that has now taken root, the clobbering of the stock prices of the major international power developers in the aftermath of the Enron collapse, and the largest emerging markets default in history coming out of Argentina, the financing of infrastructure projects in emerging markets would be difficult even if the emerging markets were doing everything right. But there are some fundamental problems at play that further undermine the credibility of investments in emerging markets - and these are within the ability of the countries involved to address and resolve. By Barbara Gibian, associate, Latham & Watkins in Washington.
Global Energy Report 2002
To get deals done in today's market, tolling arrangements or power purchase agreements are almost essential. But things have changed dramatically in the world of tollers and the credit committees who analyse them, and the number of participants in the tolling business has shrunk dramatically this year, leaving the market working on ways to keep itself in contracts. By Alison Healey.
There's a buzz about power transmission. Yes, of course, power lines literally buzz when heavily loaded, but what's new is the figurative buzz: the excitement and interest in a sector long ignored by the finance and investment communities. Many on Wall Street are wondering if power transmission will be the next big thing within the United States and perhaps elsewhere. Bankers and institutional lenders are interested, as are private equity groups. And yet very little in the way of actual financing has occurred. How much of the buzz is justifiable and how much is simply hype or wishful thinking? By James C Liles, regulatory advisor, Milbank, Tweed, Hadley & McCloy LLP.
It's been difficult this year to separate problems with LatAm markets from problems with US-based sponsors. Notwithstanding regulatory glitches in Brazil, Latin governments did much to encourage foreign investment in their power sectors during the late 1990s. US sponsors were attracted by the power-hungry middle classes and stable regimes of Brazil, Chile and Mexico, as well as of several Central American nations. But IPP returns in Latin America have not yet materialised, and the cash at home has dried up. Patience with evolving foreign regulations is now a luxury, as shareowners and lenders demand cash instead of business plans. While several companies, including El Paso, Alliant and even AES—still have plans to continue investing in LatAm, they will work a smaller scale and on a more geographically focused basis than in the past. By Nicole Gelinas.
The independent power plants in Thailand have somewhat landed into a battle between coal and gas. And gas is winning. Seven plants were awarded the IPP licenses in 1994 and of these, four are gas-fired while the other three are coal-fired. Of the coal-fired plants, the status of two projects is now in limbo following the government's May decision to postpone them indefinitely. The surviving third coal-fired plant may now find it difficult to seek financing. By Minerva Lau.
With the completion of a US$152m non-recourse refinancing, Theun-Hinboun has become the second large-scale commercial financing closed for a Lao borrower, after the original financing of the same project in 1996. By David Michaels, Managing Director of GMS Power, and Christopher Thieme, Director of Project Finance - Utilities Asia, BNP Paribas.
The new wave of European power project financings coming to market share an aversion to pure merchant risk and an emphasis on tolling-type structures to mitigate the effects of volatile energy prices on their spark spread. The trend is set to continue, for good reasons. By Daniel O'Sullivan.
Europe has emerged as one of the world's main buyers of LNG in the last few years. The days when the Europe LNG scheme in Qatar was quietly dropped while the Middle Eastern based sellers focused on buyers in Far East are long gone. The trend, and the resultant growing number of project financings, will continue. And as the activity continues, so new ways of doing business will develop. The link between LNG prices and power prices, established on a couple of schemes, could develop further. By Rod Morrison.
North America Report 2002
In the nine months following the Enron bankruptcy, the US energy industry has been rocked by a virtual perfect storm. The combination of falling energy prices and allegations of widespread accounting irregularities and marketing improprieties both within and outside the energy industry have triggered an unprecedented market sell-off. According to SNL Financial, a market research company based in Charlottesville, Virginia, the market capitalization of 88 large energy companies dropped US$240bn, or 50%, between January 2001 and July 2002. Investor confidence remains at an all time low; capital markets have virtually dried up; and the credit ratings of many industry stalwarts have been downgraded to junk status. By Mark S Laufman and Robert R Rabalais, partners, project finance & development, Vinson & Elkins LLP.
Many project finance shops have already written off 2002 with only a few deals done, and much of the year has been spent revisiting old deals to restructure huge amounts of debt to keep sponsors out of bankruptcy. The intense talks with companies whose survival depends in large part on favorable workouts with project finance lenders have yielded some ideas about the future of US project finance. By Alison Healey.
The collapse of Enron has produced widespread ramifications throughout the US energy industry, as surviving firms have moved to strengthen their balance sheets, preserve their credit ratings, and defend their trading practices in the midst of accusations and investigations. A variety of explanations have been offered for Enron's failure, with the most sophisticated focusing on Enron's strategic shift from being an asset-intensive, old economy utility to a knowledge-intensive, new economy trading firm. By Robert Sheppard, attorney and North Carolina-based consultant, previous co-head of the global project finance group at BofA.
"In the midst of turmoil, a buzz in the market, a glimmer of hope unfulfilled." Transmission is towering over us begging for investment and someone to finance it. Meanwhile, in the financing community, energy and deregulation are dirty words that have become synonymous with that even dirtier word - Enron, the root of all evil and the cause of many of our problems. Nonetheless, bankers are in search of the phoenix so we can all emerge from the ashes of the fire, move on and recover. By Eric McCartney, Head of Project Finance - the Americas, KBC Global Structured Finance.
The Ontario government's initial public offering of a majority equity stake in provincial power supplier Hydro One, announced at the end of 2001, was to be Canada's largest IPO ever. In January 2002, the government went so far as to choose underwriters BMO Nesbitt Burns, Goldman Sachs and RBC Dominion Securities to lead the C$5.5bn issue for fees of C$112m. But the privatisation effort went terribly wrong, and Hydro One has erased any hint of the debacle from its corporate website. By Nicole Gelinas.
Fuelled by a significantly increasing demand for electricity in the US, political and regulatory pressures that favor the development of natural gas-fired power generation capacity, and a growing domestic natural gas supply-demand imbalance, the LNG industry is poised to play an increasingly important role in the US power generation market. By Daniel R Rogers*, Chadbourne & Parke LLP, Houston, Texas.
10th Anniversary Issue
Over the past 10 years, the US power sector grew from being a tiny part to the largest component of the global project finance market. It has also been the proving ground for new structures such as mini-perms and the primary developer of the project bond market. The sector is now challenged by industry-wide issues that need to be resolved for the power trip to continue. By Chris Beale, Global Head of Project & Structured Trade Finance, Citigroup.
At the turn of the 1980's and very early 1990's the Asian project finance market was characterised by a concentration on infrastructure and oil, gas & petrochemical projects. The trustee borrowing structure was well established in Indonesia leading to many successful gas export and oil product led deals from that market. Hong Kong and Thailand led the way with respect to infrastructure deals with such benchmark transactions as the Eastern Harbour Crossing in Hong Kong and the Bangkok Expressway which on closing in 1989 was the largest BOT ever completed at that time in Asia. Other major infrastructure deals were also closing around the region at this time such as Hopewell's visionary Superhighway between Hong Kong and Guangdong , China, the North-South Highway in Malaysia and the Don Muang Tollway in Thailand. By Ashley Wilkins, head of SG's project finance and advisory team in Asia.
Looking back, I find it hard to believe that, ten years ago, I was still a partner at Linklaters, burning the midnight oil in Bombay and crafting that most litigated of all documents, the Power Purchase Agreement for Enron's then trail-blazing, now notorious, yet sad Dabhol Power project. Much has changed since then for me personally. My focus has switched from energy to infrastructure, and I've had the good fortune to enjoy a succession of immensely satisfying roles in banking and government. By Adrian Montague, senior international adviser, SG, and deputy chairman, Network Rail.
Project Finance has never been a job for the faint hearted. Appreciated by senior management only briefly when transaction fees are finally paid, this group of hardy characters are used to being shunned by senior colleagues, abused by risk management teams, hounded by portfolio managers, and often resented by their own client relationship managers. By Jason Peers, chief executive officer, Jasper Capital*.
Project Finance International has been handing out awards for deals over the last 10 years in our annual yearbook - with some awards every so often for the poor performers. It is interesting how the perceptions of what is good and bad changes over time. Teesside, for instance, would presumbaly have been an early top award but now it has crept into the poor performer slot. At one stage, toll roads littered the bad performing tables but now a few are sneeking into the top slots. Awards - fashion of fact?
Most people have heard George Santayana's (1863-1952) famous admonition, "Those who cannot remember the past are condemned to repeat it." Fewer people have heard Mark Twain's (1835-1910) witty rejoinder, "History does not repeat itself, but sometimes it rhymes." Our preference for rhyming over repetition is based on the fact that the world changes - we will never experience an exact repetition of the past five years complete with an internet boom and emerging markets crises. We will, however, experience similar political events, personalities, and economic conditions. For this reason, it makes sense to study the past as a way to prepare for the future. By Benjamin C Esty, associate professor, and Irina L Christov, research associate, Harvard Business School.
Asia Pacific Report 2002
The Asian project finance landscape was deeply scarred by the 1997 Asian economic crisis. As projects under construction were stalled, planned projects were shelved and existing projects were renegotiated, the number of greenfield projects coming to market in search of project financing dropped dramatically. Similarly many project companies and financiers lost their appetite to invest into the region, with many scaling back operations and strategically reallocating resources to core markets. However, economic growth and growth in demand for energy are inextricably linked and, although there may be some lead-time, increases in regional economic growth will see a resurgence in energy infrastructure development and financing across Asia. By Peter Roberts, Partner with Jones Day Reavis & Pogue, Hong Kong Emad Khalil, Partner with Jones Day Reavis & Pogue, Singapore.
As the market eagerly awaits the long delayed Singapore genco privatisation, Vijay Sethu, Director and Head of Power Asia, ANZ Investment Bank, discusses the potential impact of the continuing exodus of IPP developers from Asia and the relevance of experience from merchant power privatisations elsewhere.
Much has been written over the years on the opening up of the Chinese power industry to foreign participators. Despite this, the electricity industry remains, in reality, a domestically controlled industry. The percentage of generation capacity owned by truly foreign investors (as opposed to Chinese companies that happen to have shares listed in New York or Hong Kong) is very small. And as this article intends to show, the electricity reforms currently being promoted in China are, whether intentionally or not, likely to lead to a relative reduction in the importance of foreign participation in the industry. By David Platt, partner at Shearman & Sterling.
Since the crisis, there has been hardly any greenfield power project in Asia. And then, PF players - developers, bankers, lawyers - started flocking to the country which has embarked on an energy development programme. Vietnam, one of the few remaining communist countries in the world, has suddenly become the flavour of the month. At least, it is offering two greenfield power projects to the private sector, a first in the country. And it is looking like financial close could be achieved this year. Minerva Lau reports.
The Australian utilities market is undergoing another round of secondary sales, primarily as a result of American sponsors selling out. The lively market is proving to be a boon for many PF banks and advisers, a welcomed contrast to the general lack of activity in the rest of the region writes Sharon Klyne.
The structuring and syndication of a new A$900m financing facility for Duke Energy International in Australia has been completed. The deal was an innovative blend of corporate and project finance risks, which allowed DEI to avail of the benefits of consolidating their existing pipeline assets, whilst providing an objective platform upon which future project drawdowns could be achieved. Despite being syndicated in the immediate aftermath of the Enron meltdown, the structure was well received by the bank market. By Justin McNab, Vice President and Director, Energy at TD Securities.
The Western Australian (Labour) Government has recently been embroiled in high profile disputes regarding two of the State’s key infrastructure assets: the Dampier to Bunbury Natural Gas Pipeline and Westralia Airport (the long term leaseholder of Perth Airport). These disputes have resulted in litigation by the private sector owner’s assets against the State and/or its instrumentalities - and the stakes are high. Should the private sector lose (in particular the DBNGP case), the private sector owners will suffer material losses in equity value. By Nicholas Grambas, Partner, Freehills’ Major Projects Group.
This article will explore the current political context and legal framework which surrounds the Indonesian oil and gas sector and in particular, will consider the implications of recent oil and gas legislation introduced in November 2001 for foreign investment in the future. By Susan O’Rouke, partner at Ashurst Morris Crisp.
On July 4, 2002, the joint venture framework agreement was signed for the West-East Pipeline Project, the largest and most complex energy project in China to date. This represents the latest stage in the rapid growth in FDI in China’s hydrocarbons sector, as reported by John Pexton, head of project finance and Mike Cheng, vice president, for Deutsche Bank in Hong Kong.
The global project finance market has witnessed recently increased activities in portfolio or hybrid financing. These are pooled financings of energy/infrastructure projects through bond issues by or bank facilities to a common parent holding company. These structures have the characteristics of both traditional single-asset project financings and corporate financings. This structure appeared in the Asian market in the 1980s and 1990s, when a number of energy/infrastructure portfolios were financed by way of bond issues. Market conditions, and therefore structures, have, however, changed. There now seems to be a preference for portfolios to be financed by bank debt rather than bonds. This article examines the application of this product in the Asia-Pacific region and explores its key structural challenges. By Mitchell Silk, partner, Joseph Tse, partner and Roger Lui, associate, Allen & Overy Asia Projects Group, Hong Kong.
Indonesia’s experiment with the privatisation of its fixed line telecommunications services has come full circle. Two of the five BOT networks that were launched in 1996 are now back in the hands of incumbent telecom utility PT Telkom, with a third in the process of completing conditions precedent. This will return the dominance of basic line services to its fold, but ironically, this dominance will not last beyond 2003 as the government will throw open the domestic long distance call services to other providers. By Boey Kit Yin.
In geographical terms, Australia lies on the edge of the Asia Pacific region. In terms of privatisation experience, however, it is the leader and trendsetter. Between 1995 and 2001, Australian governments (State and Federal) privatised more than 30 businesses (excluding airports and the telecommunications sector). As the table below shows, the bulk of these have been in the energy and power sector and it is the governments of Victoria and South Australia which have been the most active. By Saadia Khairi, md, and Peter Clark, director, Citigroup project and structured trade finance.
The financing of the acquisition of the Dalrymple Bay Coal Terminal in Queensland from the government of Queensland by a private consortium involved a number of interesting features. Diccon Loxton, partner at Allens Arthur Robinson discusses the acquisition financing.
The closing in March 2002 of the finance package for the Tradeport logistics centre in Hong Kong would not normally have registered too prominently on the radar screen, given that the HK$300m in debt raised was relatively small. However, in spite of its size, the financing arranged by WestLB attracted attention as it represented the first example of a logistics project raising finance on a limited recourse basis. By Richard Michael of WestLB Specialised Finance, the sole arranger, and Simon Black of Allen & Overy, counsel to the lenders.
In the Asia Pacific region, the airports market is experiencing both the highs and lows of activity. Deals ranging from a recent record sale price achieved for Sydney’s airport to thwarted investor appetite in Malaysia set the extremities for a very wide spectrum of opportunity. This article examines some of the recent developments and trends in the Asia Pacific airports market and provides a case study on some interesting developments currently taking place in India. By James Harris, partner, Lovells Lee & Lee, Singapore and Karan Singh, partner, Trilegal, Mumbai.
Middle East & Africa Report 2002
The Middle East project finance market had a good year last year, doubling in size in terms of debt raised to US$8.6bn from the figure in 2000. Much of this business was actually transacted after the events of September 11th, showing the market was able to withstand this shock and the initial nervousness of the international banks. A key factor in achieving this were the local and regional banks who are profiled at length in this article. By Rod Morrison.
There are now more than 250 Islamic finance institutions throughout the world with estimated total assets of US$100bn. However until now, developers have been reluctant to utilise this ready source of finance because of a lack of familiarity with Islamic financing products and a presumption of incompatibility between Islamic finance and conventional finance. However, the reality is that many Islamic banks are now willing and able to participate on a pari passu basis with the international banks; offering competitive rates, tenors and terms and conditions combined with speed of execution and certainty to match. With the continued growth in demand for infrastructure finance in the Middle East, the liquidity provided by the Islamic Banks is becoming an increasingly key element to the successful financing of projects there. By Nicholas Buckworth, Adam Cooper and Annabel Gurney of Sherman & Sterling.
The Mid East has a range of now familiar development names. Links to the government are central to these companies but they have strong commercial instincts. By Rod Morrison.
The syndication for the US$280m commercial bank facilities for the Saudi Polyolefins Company (SPC) closed in January 2002. This marked the end of almost 18 months work in developing the financing structure following the issue of invitations to bid to potential arranging banks in August 2000. The long gestation period can largely be attributed to the the structure of the project that broke new ground for a project of this size and therefore acts as a useful illustration of how more and more future projects might expect to be financed in Saudi Arabia and perhaps in the Middle East in coming years. By Darren Davis, manager, GCC Business Group, Arab Petroleum Investments Corporation. Apicorp.
BNP Paribas recently arranged a US$100m four-year revolving credit to fund the Nigerian operations of Addax Petroleum. The deal used an innovative new structure that could set a precedent for other upstream ventures in Africa. The loan is a hybrid, mixing elements of both the US and European versions of borrowing-base facilities with the kind of covenants and security seen on project and export-backed financings. By Daniel O'Sullivan.
South Africa is currently cast as the target market for several ventures exploiting gas fields either offshore or across its borders. Some doubt however that the country's as-yet largely unrealised gas sector will ever justify all of them, and key in the race to market is pinning down the local offtake commitments. Failure on the part of one major to do so has led to an eye-catching alternative. By Daniel O'Sullivan.
Project Bonds Report 2002
At a time when things look bleak for many of the assets for which the project finance banking world once held high hopes, one of the first big US power deals stands as an example of an asset that is actually making money—creating a US$60m profit in its first years of operation. Edison Mission Energy took advantage of its strong cash flows and refinanced in a sale-leaseback structure for one of the largest and lowest-cost sources of electricity in the Mid Atlantic states. By Alison Healey.
The number of Latin American developers with regular access to the international capital markets can be counted on one hand and is steadily shrinking. But Pemex, Mexico's state-owned oil and gas company, is just beginning to raise funds for US$14.7bn in infrastructure projects planned for this year. Pemex raised US$3.88bn for a portfolio of projects in 2001 and 2002 through the Pemex Project Funding Master Trust, and is not yet halfway done. By Nicole Gelinas.
Korea's first Samurai bond funded project under the Private Participation in Infrastructure initiative, the Daejeon Riverside Expressway Section 4, has successfully closed setting a blue print for delivering future Korean infrastructure projects. The project was particularly significant as it was the first Korean Private Participation in Infrastructure project with foreign equity. By John E Bastian, director project development Egis Projects Asia Pacific and representative director Daejeon Riverside Expressway Co Ltd and Andrew Hart, partner of Freshfields Bruckhaus Deringer (Hong Kong)
The infrastructure bond market in Australia has slowly developed for infrastructure projects over the last three to five years. Though the capital market is still a fledging, it has now become a viable alternative to finance some types of infrastructure projects, say banks. By Sharon Klyne.
The use of the bond finance in the UK private finance initiative (PFI) market could really start to take off this year with 2003 being an equally bright year. 2001 was a poor year, with just one bond Dudley Hospital transacted, but this was mainly due to a lack of projects, not a lack of investor demand. This year, and next, investor demand will actually be tested by the PFI market and similar sectors such as water. But given the tight economics of the deals, will the government come to rue the financing strategies now being adopted? By Rod Morrison.
Last year saw the first long-dated infrastructure bond in Europe, a 27-year €126.5m monoline-wrapped issue refinancing the Algarve shadow toll road in Portugal. The deal established that there was indeed a market for the asset class and this year should see it grow, with a couple of confirmed issues expected and a growing pipeline of potential deals. By Daniel O'Sullivan.