Saudi Arabia’s Acwa Power has dominated headlines in the region’s power and water sector in recent years, offering world-record low tariffs for solar schemes and securing a remarkable success rate in winning new projects through competitive bidding.

In 2016, the developer continued to win major deals across the region, from Oman to Morocco. In parallel, Acwa Power is leading the way in finding innovative financing solutions to help cement and build on its success. This has included the $1.85bn refinancing of its Rabigh independent power project (IPP) in Saudi Arabia and reaching financial close for the GCC’s first coal-fired power plant.

In an exclusive interview with MEED, the two men driving Acwa Power’s financial strategy outline how the developer is continuing to remain competitive in the changing economic landscape, and how it is preparing to play an even bigger role in the region’s rapidly reforming energy sector.

Project finance

Rajit Nanda, chief investment officer (CIO) of the group, admits the project financing market has become increasingly challenging as a result of several factors. “The international markets and liquidity for project financings have been affected by the prevailing business environment, and the region has been affected by the lower oil prices and subsequent knock-on effects,” he says.

“In my view, the inflection point was actually the sovereign downgrades of some GCC countries at the end of October [2015], which acted as a catalyst in reducing liquidity, with some banks reviewing their exposure to Middle Eastern companies and often re-pricing to match the country risk.”

The CIO says the fall in oil prices has made it harder to secure project financing from international banks. “Some international banks are withholding participation from certain Middle Eastern countries that are viewed as high risk,” says Nanda. “While liquidity is available on a case by case basis, the pricing parameters and risk appetite have evolved and bank credit terms are far more conservative than in 2014 to the middle part of 2015, when the environment was more benign.”

Innovative methods

As a result of the tightening liquidity among international and regional lenders, Acwa Power is pursuing new financing methods to assist with ongoing schemes and enable the group to further expand its portfolio.

In July, Acwa Power completed the $1.85bn refinancing of the 1,204MW Rabigh IPP in Saudi Arabia. Nanda says a creative approach was adopted to secure the refinancing of the plant, which is in its fifth year of operation under a 20-year power purchase agreement (PPA).

“There was an element of innovation in the refinancing,” he says. “For the first time, insurance companies from OECD countries came in as direct project finance lenders under a fixed-coupon basis, in many ways as an intermediary to the international banking market.”

The refinancing involved the three largest life insurance companies of South Korea – Samsung Life, KB Insurance and Dongbu Insurance – putting together $325m of long-term debt for the deal.

Nanda says the successful transaction has increased their appetite for involvement in future financing deals for projects in the region. “Since the transaction has closed, we have seen repeated interest from these insurance companies, saying that if there are future candidates in our portfolio for refinancing, they would be very keen to examine the potential to participate in them,” he says.

The Saudi developer also tapped new markets of liquidity to secure financing for the $3.4bn Hassyan clean coal project in Dubai, the first such project in the GCC. Acwa Power faced several challenges in financing this maiden coal scheme as a result of changing international perceptions towards using coal for power generation. The project was tendered in 2015, with Acwa Power selected as preferred bidder in October that year.

“The Hassyan project underwent a very interesting evolution,” says Nanda. “After the Cop 21 [climate conference] in December 2015, the international banks in the market that had been supporting clean coal projects decided to change their policy and no longer support coal projects in any form. And it was a very large transaction that needed to mobilise significant private capital in the form of project finance with very long-term tenors.”

To solve the problem, Acwa Power managed to mobilise financing from the largest Chinese banks and welcomed Chinese sovereign wealth fund Silk Road as a partner.

Big four

“For the first time, the big four [Chinese banks] came together – ICBC [Industrial & Commercial Bank of China], Bank of China, China Construction Bank and the Agricultural Bank of China – on the back of Chinese participation for the EPC [engineering, procurement and construction] contractor job, and we secured Chinese sovereign wealth fund involvement,” says Nanda.

Acwa Power also secured significant interest from the regional banking sector, and closed the financing with the Chinese lenders contributing 80 per cent, or $2.6bn, of the total, and regional banks agreeing the remaining 20 per cent. “This shows that new pockets of liquidity are out there in the market, and the way we structure the transaction remains key to attracting those pockets of liquidity” says Nanda.

The CIO says additional methods of financing will be required in the coming years to enable the region to succeed with its ambitious capacity-building programme in the electricity and water sectors.

“The next evolution I would like to see in the project finance market is for project finance sukuk [Islamic bonds] to come into the form of refinancing takeouts, as there are several refinancings set to take place in the next two years. I would like to see these refinancings take project finance sukuk, not just conventional bonds.”

Changing approach

Acwa Power expects to see a sharp increase in the use of mini-perm structures for financing long-term PPAs in the coming years, with utilities realising that more liquidity with increased value can be attained for IPPs and independent water and power projects (IWPPs).

Nanda says the sheer volume of schemes expected to be executed under public-private partnership (PPP) structures in the coming years will require increased use of the shorter-term loan structure.

“Mini-perm enables a lot of market participants, who would normally not be attracted to playing infrastructure space for long-term tenors, to participate in projects,” he says.

In his view, while mini-perms bring different risks, they can have a double advantage for sponsors. “Mini-perms do build in refinancing risk, and by extension equity risk for shareholders, but have the advantage of raising liquidity for large projects at a time when liquidity has contracted and banks have lower appetite to fund long term,” says Nanda. “In addition, a mini-perm solution often provides procurers with a more competitive tariff and gives shareholders a built-in incentive to refinance to improve and maintain the economics of a project.”

While Acwa Power has amassed an impressive portfolio of assets since it was established in 2004, the group is not planning to remain still. In addition to boosting its portfolio of greenfield schemes, the developer is looking to play a major role in the privatisation of existing state power plants in Saudi Arabia, which is due to start in 2017.

Kashif Rana, chief financial officer (CFO) of Acwa Power, says the firm is interested in the upcoming opportunities to buy assets in the kingdom’s utilities market. “It will be one of the largest opportunities in the [utilities] sector worldwide for the next few years,” says Rana. “It is our home base, we know the risks of the market well and can manage assets better than anyone else. So we are very interested in pursuing opportunities when they come along.”

Acwa Power is already working on raising capital to put it in a strong position to participate in Saudi Arabia’s unbundling of state electricity assets.

Rana says the developer is still committed to launching a much-publicised initial public offering (IPO), but only when the time is right.

“We did a run on this [IPO] in 2014, appointed advisers and almost went through with it, but for a few reasons we did not pursue it” he says.

“We are committed to an IPO, but the markets at the moment are not conducive towards exploring an opportunity. As and when the markets improve, I am sure the shareholders, board and management will consider it.”

With plans for an IPO on the backburner for now, Acwa Power is pursuing alternative ways of boosting capital. The developer has raised capital from selling stakes in the company in recent years. Two investment funds owned by the Saudi government, Sanabil Direct Investment Company and the Public Pension Agency, acquired shareholdings almost totalling 20 per cent in early 2013. This was followed by a $100m investment from the Washington-based International Finance Corporation in 2014.

Rana says there are plans for further investments in the company in 2017, without giving further details. “We are working on something to enhance the equity profile of the company,” he says.

Riyadh’s support

Since MEED conducted this interview, it has been reported in the media that the Saudi government, through its Public Investment Fund, is considering increasing its stake in Acwa Power.

While the group cannot comment on the speculation, Rana says Riyadh’s previous support for the firm has had a positive impact. “It has tangible and intangible benefits,” he says. “Credible partners like the Public Pension Agency and Sanabil add a nice enhancement to the company profile, and end up benefiting in many ways.”