A group of banks led by Gulf International Bank (GIB) has completed a $500 million, 10-year loan for a state-owned power company in Saudi Arabia, backed by revenues from two of the utility's major customers. The significance of this structure is that the borrower runs at a loss because of government caps on electricity prices.

'It's the first time this kind of structure has been used in Saudi Arabia,' says a GIB official. 'We believe it's a landmark deal and it will open the door to future financings.' The loan to the Saudi Consolidated Electric Company for the Eastern Province (Sceco-East), signed on 23 June, is priced at 90 basis points over the London interbank offered rate (Libor). The money will be used to part-finance a new 2,400-MW power station at Ghazlan in the east of the country. The loan was arranged by GIB, Chase Investment Bank and three Saudi banks: Al-Bank Al- Saudi Al-Fransi, National Commercial Bank (NCB) and Saudi British Bank. The group won the Ghazlan mandate last year (MEED 2:8:96).

The loan agreement stipulates that payments for electricity by two of Sceco-East's biggest customers - Saudi Aramco and Saudi Basic Industries Corporation (Sabic) - are paid into an account to cover repayments to the creditor banks. If revenues from these two sources fall below a preset level, the banks have rights over electricity payments from a number of Sabic's subsidiaries. As an inducement to lenders, the financing is subject to English law.

Domestic power demand is rising rapidly in Saudi Arabia, the government wants to keep down capital spending and the power industry is about to be reorganised with a bigger role for the private sector. 'It was a difficult transaction to negotiate because the industry is in a state of flux,' says the GIB official. The Saudi power industry needs to attract foreign capital, but the other three regional power companies could find it hard to follow Sceco-East's example because their cashflow is thinner and they do not have large, reputable clients like Aramco and Sabic, whose receivables can be used as collateral for a loan. This means that a more feasible way for the country to build up its power capacity may be through private projects like Shuaiba (see Saudi Arabia).