Suez's Arabian nights

PFI 500
16 min read

The financing and syndication success of the gigantic Marafiq IWPP project broke new grounds despite its sheer magnitude. By Rajit Nanda, CFO, Raphael Barreau, vice president and Elio Wolff, financial advisor, Suez Energy Middle East, Asia and Africa.

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What it demonstrates is that project development, including financing, can be successfully achieved if there is a combination of pronounced sponsor and other stakeholder/advisors support and clear, consistent objectives demonstrated through clear decision making structure and a willingness to sometimes replicate tested and well accepted structures. Marafiq and the Kingdom of Saudi Arabia have now set a standard for themselves in this respect and will no doubt continue to build on this success for its future projects.

Upon financial close in June 2007, the Marafiq IWPP represented the following financing achievements:

* Largest project finance debt in the power sector;

* Largest Islamic financing in the power sector;

* Longest tenor Islamic financing in the world of Islamic financing;

* Largest Saudi debt participation in the power sector;

* Longest tenor of Equity Bridge Loan;

* Longest tenor of debt for Saudi Arabia

IWPP Scheme & Resolution in the Kingdom

The Supreme Economic Council in the Kingdom of Saudi Arabia passed in June 2002 Resolution 5/23 to establish a framework for participation of the private sector in water desalination and electric power generation projects. The Resolution sets out the detailed terms applicable to joint electricity generation and desalinated water production projects. Pursuant to the Resolution 5/23, a generic contractual structure was developed by the Water & Electricity Company (WEC), and is intended to be applied in the context of the projects developed under the IWPP initiative.

A comparison of the main aspects of the Project’s contractual structure, in comparison to the generic framework, is as follows:


Whilst the project is very similar to the template contractual structure, it differs principally in the project company’s shareholding structure (The Public Investment Fund of Saudi Arabia (PIF) and Saudi Electricity Company (SEC) stakes reduced to accommodate Marafiq’s 30% holding), and the off-taker identity, with Marafiq’s wholly owned subsidiary, TAWREED, replacing WEC. The project is also developed on a Build, Own, Operate and Transfer (BOOT) basis.

The project

The project is located at Jubail Industrial City approximately 95km north of Dammam on the Arabian Gulf in the Eastern Province of Saudi Arabia. The site is located at the shore line on the eastern side of Jubail Industrial City.

Once complete, the Marafiq IWPP will have nominal capacities of 2,750MW power and 176MIGD (800,000 m3/day) desalination, making it one of the largest IWPPs ever. The technology to be used is considered as proven in nature, and the EPC Contractor, consortium of GE-Hyundai-Sidem, have an excellent track record in delivering similar projects. A parent company guarantee will be provided by General Electric Company in relation to the obligations of the EPC contractor under the EPC contract.

The project will generate revenues based on its availability, and therefore regardless of how it is dispatched, with all payment obligations of TAWREED under the PWPA to be backed by MOF credit support. Saudi Arabia has an excellent credit rating (Aa3 by Moodys and A+ by S&P).

The project will be developed to comply with all relevant local and international environmental regulations and procedures. The Project will comply with Saudi, World Bank, and international environmental standards, including the Equator Principles.

The project structure is based largely on the precedent IWPP transactions that have recently been structured and closed in Saudi Arabia.

Shareholding structure

The project’s shareholding structure is as follows - Marafiq, 30%, APP, 20%, GIC, 20%, SEI, 20%, SEC, 5% and PIF, 5%.

In essence, the project was backed on the bidder company by a consortium of well known players with a track record of power project development’s in Saudi Arabia and/or the Middle East region.

Suez Energy International (SEI) was the lead developer. SEI’s strong commitment to the I(W)PP sector in particular and the GCC privatization initiatives in general is well established amongst the banks and the regional governments.

Acwa Power Projects (APP) was formally established in 2004 in order to participate in value adding initiatives and opportunities for the private sector in owning and operating infrastructure assets, such as water and power and also to support the rapidly growing need for these services in the KSA. APP has participated in the major IWPP’s in the Kingdom including Shuaibah IWPP, Rabigh Independent Water, Steam and Power Project and Shuqaiq IWPP.

Gulf Investment Corporation (GIC) is a regional financial institution that is jointly and equally owned by the six Gulf Council Co-operation (GCC) Governments. The primary investment focus is the GCC and the utilities, telecom, metals, petrochemicals and financial service sectors. GIC is an active investor in the utilities sector with investments in the Ras Laffan IWPP (Qatar), United Power IPP (Oman) and Al Ezzel IPP (Bahrain) each being the first private power project in its respective country. In addition to Marafiq, GIC had also participated to the Shuqaiq IWPP in Saudi Arabia.


Financing structure - The project funding plan of US$3,443,000,000 is based on a combination of senior debt facilities made up of the International Term Facility, the Islamic Facility and the Korea Export Insurance Corporation (KEIC) Covered Facility (collectively being referred to as the senior credit facilities), early generation revenues (EGR) and shareholder funding.

With the exception of approximately US$1.3mM contributed as share capital in order to comply with the requirements of the Saudi Arabian Companies law, the shareholder funding will be contributed through an equity bridge loan facility (EBL).

In accordance with the phased commissioning of the four operational blocks that constitute the plant, the project is expected to start generating EGR prior to Scheduled Commercial Operation Date. The net available cash flow after meeting all operating expenses and applicable taxes during this period will be allocated towards payment of Project costs and represents the EGR.

While all the players involved in the structuring of the financing, including the Initial MLAs comprising BNP Paribas, GIB & Samba Financial Group played a vital role, the role and the constructive approach of KEIC and the Islamic Banks comprising Al Rajhi, National Commercial Bank and Riyadh Bank towards the financing was particularly noteworthy.

KEIC covered facility - This tranche represented the export credit covered portion of finance facilities which was provided to the Project Company by the KEIC covered lenders and insured by KEIC. The KEIC insurance provided in the context of the Project is a 100% comprehensive cover for political and commercial risks. The terms and conditions of the Facility are governed by the OECD rules. The loan is provided to pay, amongst others, (i) eligible commission during construction and (ii) certain portions of the EPC contract.

Islamic finance - Governed by the law of the Kingdom of Saudi Arabia and the provision of the Islamic Shari’a law, the Islamic Facility is based on a Wakala-Ijarah Mawsufah Fi Al Dhimmah structure.


Under this structure, the Islamic finance institutions employ the project company as their agent or Wakil under an agency agreement, entitled the Wakala Agreement, to procure the construction and delivery of certain assets required by the project and identified in the Wakala Agreement (the assets).

The provision of the Assets is facilitated by the project company’s entry into the EPC contract with the EPC contractors. The project company agrees separately in the Service Agency Agreement to insure and maintain the Assets on behalf of the Islamic Facility Agent.

Under the Agency Agreement, the Islamic Finance Institutions appoint the Islamic Facility Agent to be their agent in respect of the financing and, under the Asset Participation Agreement, agree to participate in financing the construction and ownership of the Assets procured from the EPC Contractor by the project company. Title to the Assets passes directly from the EPC contractors to the Islamic Facility Agent and the Islamic Facility Agent undertakes (on behalf of the Islamic Finance Institutions) to lease the Assets (to be constructed). The lease will be effective from a specified date as set out in the Specified Lease Agreement.

During the construction period, upon receipt of funds from the Islamic Finance Institutions, the Islamic Facility Agent will make phase payments to the project company in accordance with an agreed payment schedule for on-payment to the EPC contractors under the EPC contract. All responsibilities relating to the procurement of the project’s execution, completion and supervision rest with the project company. During this period, the project company is required to pay to the Islamic Facility Agent advance lease rentals set out in a pre-determined advance lease rental schedule.

From the commencement date specified in the Specified Lease Agreement, the Islamic Facility Agent (on behalf of the Islamic Finance Institutions) will lease the Assets to the project company. During the specified lease period, the project company will pay specified lease rentals, semi-annually. The specified lease rental will comprise of two elements:

* A fixed element for each payment date which represents the principal repayment; and

* A variable amount representing the Islamic finance institutions’ profit.


Apart from the financing structure explained above, the Marafiq IWPP also had some noteworthy firsts insofar as power project financing in Saudi Arabia was concerned. Some of them were as follows:

Structured subordinated DSRA facility, enjoying senior rights post-foreclosure - DSRA Credit Support for the Project will be provided by letters of credit, which will fund any drawings under the DSRA. The facility will be issued with recourse to the Project Company, with no recourse to any of the Sponsors. Interest and principal payments under the DSRA Facility will be subordinated in right of payment to all Senior Credit Facility. Nevertheless, DSRA facility Lenders will benefit pari passu with the other Secured Parties if security is enforced but will only have a right to vote in relation to decisions following enforcement and in certain specific default scenarios.

Flexibility for additional indebtedness - The project company is permitted to raise up to US$250m from additional credit providers to finance the cost of an expansion in name-plate capacity of the Plant. The additional credit facilities can only be obtained by the project company with the consent of the majority lenders and a number of conditions shall apply in relation to any such proposed expansion (including satisfactory contractual arrangements, a satisfactory technical report by the Independent Engineer, satisfactory insurance arrangements, evidence of committed equity funds, obtaining material consents). The project company will have the option to prepay in full any lender which dissented in the vote to allow the incurrence of the Additional Indebtedness. The additional credit providers will share in the Project security / cash flow on a pari passu basis with the remaining finance parties.

Syndication success

After providing the underwriting at the bidding stage, the Initial Mandated Lead Arrangers (Initial MLAs) comprising BNP Paribas, GIB and Samba Financial Group, together with the sponsors invited twenty nine Saudi (conventional and islamic), regional and International banks to participate in the sub underwriting stage at the end of the documentation phase. Marafiq IWPP represents the largest project financing in the Saudi IWPP/IPP sector, to date, and came at a time when the banks had started to get comfortable with the power sector framework and risk allocation in Saudi Arabia.

All the banks accepted the invitation and together with the Initial MLAs, Al Rajhi Bank, Arab Bank, Arab National Bank, APICORP, Bayern LB, Bank of Tokyo Mitsubishi-UFJ, Bank Al Saudi Al Fransi, Calyon, Dexia, DZ Bank, Fortis, HSBC, ING, KBC, KfW-Ipex, Mashreqbank, Mizuho Corporate Bank, National Commercial Bank, Royal Bank of Scotland, Riyad Bank, Shinhan Bank, Sumitomo Mitsui Banking Corp, NATIXIS, Saudi British Bank, Societe General, Standard Chartered Bank, Saudi Hollandi, Woori Bank and WestLB acted as Mandated Lead Arrangers. The transaction was almost twice oversubscribed at the sub-underwriting stage.

Marafiq IWPP financing agreements were signed in May 2007 and it reached financial close in mid June 2007. The success in the syndication represents the hard work that both the sponsors and the Initial MLAs and their advisors undertook to maximise the benefits of the structure for all parties. The transaction also demonstrates that the bank lending market has a good appetite for well structured financing’s with strong sponsors for big ticket project financings in complex jurisdictions. It also demonstrates that a deal can be tailored to market needs and see successful syndication as long as the attractiveness of the risk allocation is maintained. Other factors include:

* Strong, active sponsor group, with extensive experience and a proven track record in the Middle East and Saudi Arabia;

* Experienced plant operator in the form of a joint venture between an SEI affiliate and NOMAC;

* Project based largely on the already proven Saudi IWPP model that had been successfully adopted for the recent precedent IWPP transactions;

* Stable, robust off-take structure, with all of TAWREED’s PWPA payment obligations supported by a MOF guarantee on a continued basis;

* Strong technical, market and economical underlying rationale for this Project;

* One of the most efficient and cheapest power/water asset in the Kingdom of Saudi Arabia

* Proven technology, simple design, but large scale with limited interface risk;

* Flagship project for Saudi Arabia, and extensive involvement of Saudi authorities;

* First class EPC Contractor consortium;

* Robust economics and the ability of the project to withstand numerous downsides.

Table 1
Generic structureMarafiq’s structure
OwnershipBidder company 60%; PIF 32%; SEC 8%Bidder company 60%; Marafiq 30%; PIF 5%; SEC 5%
Fuel supply agreementEnergy Conversion Agreement, with fuel being provided by the off-taker and the projects essentially operating on a tolling basis
OfftakerWEC, a limited liability company, in which SWCC and SEC each hold a 50% stake, is the sole offtakerTAWREED, a 100% owned subsidiary of Marafiq, shall be the sole offtaker
Credit Support for off-takerVia Ministry of Finance (“MOF”) Guarantee
Water and electricity pricesActual allocation of the unit prices of water and electricity must be made without any cross subsidisation