Thursday, 17 January 2019

Ultra-supercritical project financing

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The project documents and financing agreements for the Moroccan Safi 1,350MW coal-fired power project were executed on September 17 and 18. For Nareva, Mitsui and GDF Suez (the sponsors of the project), ONEE (the tendering authority and off-taker), the banks and all advisers involved this marked the culmination of several years of hard work and perseverance. By Francois-Xavier Boul, senior vice president AIFA SAMEA and Stefano Terranova, Head of AIFA SAMEA, GDF Suez.

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The first bid for the Safi project was submitted in March 2010, to be followed in October 2010 by the second and final bid, in which a consortium of Nareva and International Power (which became GDF Suez after the merger between IP and GDF Suez) submitted the most competitive proposal. The original sponsors had initiated discussions pre-bid with Mitsui and soon after the bid Mitsui joined the consortium of sponsors – GDF Suez as lead consortium member at 35%; Nareva at 35% and Mitsui at 30%.

Set on a greenfield coastal location outside the port of Safi (200km south of Casablanca), the project will be constructed by Daewoo of South Korea. It will be a 1,380MW (gross) ultra-supercritical plant, with major equipment of boilers from IHI of Japan and steam turbines from Hitachi (also from Japan). The total project cost will be approximately US$2.6bn, financed through a US$2.05bn multi-tranche project financing and the remainder through equity.

Brief history – Focus on challenges

Developing a project such as Safi is not for the faint-hearted. The project was first launched (as Cap Ghir) in 2006 (pre-qualification). ONEE issued the official request for proposals and the bid date was set in March 2010. Although at the time quite a few large developers were interested, the tight timetable to bid and the many complexities associated with a greenfield, large-scale thermal plant meant that only two consortia made it to the finish line: a consortium led by EDF and our consortium comprised of Nareva and International Power.

Due to environmental issues with the originally proposed site, ONEE changed the site after the March bid – and the two competing consortia were invited for a final submission in October 2010.

Between the March and October bids, ONEE also decided to change the tendering rules, moving to a public tariff read-out and tariff-driven type of selection process. Naturally, a thorough examination of the technical and commercial content of the bids followed. However, due to the change in bidding rules, besides confiding in our technical and commercial strengths, we had to produce an unassailable tariff, in order to avoid any risk of re-bidding by competitors. With that in mind, we worked on all fronts to optimise our offer to ONEE.

One aspect that required courageous decisions was the financing of the project. Given the impossibility to source enough funding from commercial banks only, we had to look at export credit and multilateral agencies. It soon become apparent to us that the most compelling financing plan had to include a strong Japanese component. We therefore initiated discussions with Mitsui – which would eventually join our consortium. Informal approaches were also made to (mainly through Mitsui) JBIC, Nexi and also Japanese commercial banks.

Finally, we had discussions with the Islamic Development Bank (IsDB). The euro-centric financing plan that had underpinned our March 2010 bid was therefore discarded in favour of a definitively Morocco and Japan-centric plan, with the addition of IsDB later on.

Fundamental to our planning, our original Moroccan MLAs (Attijariwafa and Banque Centrale Populaire) renewed their solid support for our second bid. It should also be noted that at the time we took the decision, neither JBIC nor Nexi, nor any of the Japanese commercial banks, had done a project financing in the Kingdom of Morocco.

The choice of the new financing plan played a key role in our tariff emerging as the most competitive on the day of the bid (the gap with the competitor’s tariff would only increase at the end of the clarification period). Our consortium would soon be named preferred bidder for the Safi IPP project.

That was only chapter one of the long story. One year later, as financing conditions worsened (endangering the viability of the project), our original EPC contractor communicated its inability to maintain (never mind decrease!) the EPC price. That could have meant the end of the story.

A courageous decision was then taken to revive the project: the EPC would be re-tendered. The timetable allowed us to do so, since the construction of the port to be used to import coal for Safi IPP had not commenced. Therefore, under the clear condition of not increasing the tariff (not even for base rate movements), we embarked on a complex exercise of preparing a detailed request for proposals and launched and managed a full tendering exercise.

By late summer 2012, we had selected a new EPC contractor, securing the economic viability of the project. Not only that; in the process we shifted from supercritical to ultra-supercritical technology, with an improved environmental impact and significantly better fuel efficiency (the benefit of which we were able to pass on to ONEE).

Many more long months of development activity went by, and during summer 2013 the PPA and EPC contracts were signed – with suspended effectiveness pending financial close. The financing process took a further full year to fully develop, as detailed in Section IV below.

Contractual structure

SAFIEC (the special purpose vehicle we set up for the Safi project) will benefit from a solid, orthodox contractual framework. First and foremost, SAFIEC has entered into a power purchase agreement (PPA) with ONEE. The PPA is for 30 years from plant completion, with availability-based capacity payments and variable energy charges that allow (inter alia) pass-through of coal costs, at guaranteed efficiency of the plant.

The PPA is structured to achieve a BOOT scheme: accordingly, at the end of the PPA, SAFIEC will hand over the plant to ONEE. Mainly for bankability purposes, a support letter from the Ministry of Finance supplements the PPA, by guaranteeing the termination payment obligations as set out in the PPA.

Given that the equity of SAFIEC is held by three competent industrial players and that adequate staff will be recruited and trained at the company level, there was no requirement for a separate operating company, and SAFIEC is structured as an owner-operator company. However, to ensure SAFIEC’s access to the sponsors’ expert support, a technical support agreement is in place.

Other important agreements are normally not seen in more standard gas-fired or renewable IPPs, such as the coal terminal concession agreement (CTCA) and two further agreements to govern initial arrangements for both ash sales and ash disposal. The CTCA was negotiated and executed with ANP. It grants access to the dedicated coal wharf and other relevant facilities within the new port being built by ANP next to our site.

Ash arrangements are also of fundamental importance, as lenders’ required SAFIEC to secure upfront an appropriate site to dispose of fly ash under conservative assumptions if sales and other commercial applications are not put into place. In addition, an ash sales agreement to provide for a significant quantity of fly ash re-use has been secured.

One final project agreement worth mentioning is the investment convention and other agreements. Under these agreements, the Ministry of Finance grants SAFIEC exemption, under certain conditions, from VAT for most of the construction period as well as setting out other ancillary (but important) principles, such as recognising the repatriation of distributions to foreign shareholders.

Financing structure

The approximately US2.1bn financing package for SAFIEC comprises six tranches, in three currencies, provided by 12 lenders plus Nexi (the latter providing a comprehensive PRI plus commercial cover for the Nexi-covered tranche). This is summarised in the following table:

All tranches are co-terminus with a tenor of 18 years from signing and overall repayment profile sculpted to achieve a flat debt service cover ratio.

The financial process started well before the bid in 2010 and was a salient aspect of our offer. The bankability aspects were thoroughly looked at during all stages and were satisfactorily addressed by the off-taker, enabling us to raise the funding during the 12 months between September 2013 and September 2014.

Before starting raising the funding with the other groups of banks, we had already secured a large portion of the financing (about 30%) from both Banque Centrale Populaire and Attijariwafa Bank (in Moroccan dirhams) at the time of the bid. This was not on its own sufficient, of course (we still had US$1.5bn to raise on a long-term, project-finance/non-recourse basis) but was a solid foundation on which to build the remainder.

The process was obviously complex, having to deal with the various lenders according to their own processes and in a certain order. While we had pre-agreed a full term sheet with the Moroccan IMLAs, we had still to achieve the same with the other lenders before we could launch the full documentation phase.

We therefore agreed the main high level commercial terms with JBIC and Nexi during the first half of 2013, enabling us to start a discussion on more detailed terms and conditions with the commercial banks during the second quarter of 2013. After the PPA signing, we aimed for credit-approved commitments (including a full financing term sheet) from the international commercial banks. That led us to negotiate the term sheet and commitment letter initially with CA-CIB (as co-documentation bank) during the months between August and October 2013.

These were further tailored after sharing with the seven other international banks (BNP Paribas, BTMU, Mizuho, SMBC, SMTB, Société Générale, and Standard Chartered) during the following month. By December 2013, we received the expected commitments from the international banks, enabling us to shift the focus on the discussions with both ECAs (JBIC and Nexi) and IsDB. In addition, some fine-tuning was required for the terms originally agreed with the Moroccan IMLAs.

Months of due diligence followed in parallel with the discussions. Modelling banks were BCP and BTMU and technical bank was SMBC (Mott Macdonald acted as lenders’ technical consultant), all of which co-ordinated their efforts on behalf of the lending group. Furthermore, JLT acted as lenders’ insurance adviser (while Marsh acted for the sponsors) and BDO as model auditor.

The next phase lasted for about five or six months, during which the work-streams with the various lenders (international banks, local banks, ECAs and IsDB) were merged into only one set of negotiations and discussions. To facilitate the detailed negotiation process, the international and Moroccan banks were represented respectively by Attijariwafa and CA-CIB, as co-documentation banks, whereas BNP Paribas as ECA co-ordinator and Société Generale as hedging co-ordinator also took part in the relevant detailed discussions.

The size of the transaction and the number of parties around the table meant that these discussions would in any event take longer than usual. The commercial deal was quickly cooked in an effort from sponsors and banks to reach a reasonable compromise in full transparency, enabling the parties to shift their focus on the drafting and documentation front (from March 2014). Throughout the process, sponsors and lenders benefited from the professionalism and hard work of their respective legal counsels: Clifford Chance and Figes for the sponsors and Linklaters and Kettani for the lenders.

The following months (of what one could call finishing) are never to be underestimated. They can usually lead to surprises that few would expect given the upbeat sentiment that tends to prevail at such time (timing could then slip substantially).

The never-ending timetable was another specific challenge that we had to defeat. It is a difficult exercise to keep such a wide and diverse group of stakeholders motivated and focused on a certain deadline, when most deadlines had been movable for the past few years. This was managed successfully during summer 2014, when all lenders were kindly requested to be ready to sign by Q3 2014. The deadline to signing the financing agreement had become truly pressing. All parties were ready to sign by mid-September 2014.

It is worth highlighting some of the specific features/challenges that characterised the financing of SAFIEC:

* Hedging strategy– In addition to standard issues with interest rate hedging, we had to deal with a particularly complex currency hedging strategy, mainly as a legacy of the tariff being set at the time when the EPC and the financing had been “euro-centric”. Although at first the task appeared daunting simply given the large number of FX trades required, thanks to a detailed analysis and the support of experts within the sponsors group, a simplified pragmatic approach was identified, explained to the lenders (subscribed by them) and implemented;

* Intercreditor issues– Particularly complex in a six-tranche financing, and even more in the presence of JBIC and Nexi “trigger events” (ie, specific covenants/events of default applicable to either of the JBIC tranches and the Nexi insurance policy) as well as the Islamic tranche;

* JBIC dual tranche - - For the first time in one of our deals, we implemented at JBIC’s request a dual tranche for their portion. One of the two tranches is capable of being (and expected to be) syndicated to other Japanese commercial lenders at a future stage;

*IsDB’s Islamic tranche– Due to the concession nature of the project it was not possible to use structures typically seen in Islamic project financings. Thus an innovative structure, which combined an istisna arrangement with a wakala arrangement, was developed and implemented. In addition to the structural novelty, the IsDB Islamic tranche for Safi also represents the first multi-tranche cross-border Islamic financing in Morocco – which itself required additional work;

* Equity bridge loans provided by local banks– Nareva EBL lenders are Attijariwafa and BCP (50% each) whereas Mitsui & GDF Suez lenders are Attijariwafa, Crédit du Maroc (CdM), Société Générale Maroc (SGMA) and Banque Marocaine pour le Commerce et l’Industrie (BMCI) (25% each). This was another first of a kind, as the local banking market was not accustomed to EBLs. Finally, the notice to proceed was served to Daewoo by September 30 2014 and first drawdowns under the EBLs were made during the second week of October.

As ever with a large, complicated project and an extended development timeline, individuals too numerous to mention and entities too varied to list extensively were essential to the success of the Safi project. The sponsors’ development teams overcame nine-hour time differences on any given day and different interpretations of “weekend” and “working day” to meld team members centred on Casablanca, Dubai and Tokyo. National cultural differences, language barriers and company culture clashes were all overcome. In one memorable meeting, eight languages were heard in less than 60 minutes.

The complex financing package required flexibility and compromise from all participants. External advisers, in areas such as legal, financial and technical, but also insurance and tax, were essential to success. Their ability to provide precedent and knowledge from other deals as well as their capacity to mobilise large external teams to overcome peaks in workload supplemented the sponsors’ teams in important ways at key times.

Ultimately though, it is the off-taker and ultimate client that sets the rules of the game and either creates, or does not, the environment in which a deal such as Safi can be done. ONEE has throughout shown itself to be a sophisticated and modern procurer of the best possible solution for the Moroccan consumer. It is a model that should be studied and replicated.

More generally, at GDF Suez we found that all of the Moroccan authorities involved with the project and the local community showed a proactive approach and a welcoming attitude towards private investments in infrastructure. Morocco is not new to IPPs, however – thanks to the government’s renewed impetus in the sector, it is now one of the most attractive countries for private power developers.

It has been impossible to compile a comprehensive list of the key individuals who were critical to the Safi project since this publication lacks the requisite number of pages. The authors must therefore limit themselves to the cliché of “Thank you to all of you, you know who you are, and so do we”.


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