French bank Calyon is in talks, which could lead to it walking away from more than $1bn worth of financing commitments to strategically important utilities projects in the Middle East.
It is the clearest sign yet that major Gulf projects are being threatened by the global financial crisis.
The talks centre around the $3.2bn Shuweihat 2 (S2) independent water and power project (IWPP) and a $550m sewage project, both in Abu Dhabi.
Calyon is the sole underwriter for the sewage project and is responsible for at least one-third of the $2.2bn in debt required for the S2 plant.
Its underwriting commitment to the two deals totals at least $1.28bn, which it needs to syndicate to other banks.
However, syndication is increasingly difficult in the current financial environment.
As a result, the French bank has entered into talks with the projects’ sponsors and financial advisers about invoking a ‘material adverse change’ clause in its contracts.
Such clauses entitle an underwriter to walk away from a deal in exceptional circumstances.
Typically, this can include severe economic downturns, a large increase in the cost of funding, or a contraction of the syndicated loan market.
Sources close to both deals say the clause has not yet been invoked by Calyon and renegotiations of the terms of the underwritings are under way to ensure that the bank continues to finance the deals.
However, bankers in the region are concerned that it could be the start of more banks deciding to cancel underwriting of project debt.
One senior banker says discussions are being held by a large number of international banks about invoking similar clauses on other projects.
Calyon finalised the under-writing for the sewage project in July, when France’s Veolia and Belgium’s Besix signed a deal to develop the two waste-water plants in Abu Dhabi and Al-Ain under a 25-year concession (MEED 30:7:08).
As Abu Dhabi Water & Electricity Authority (Adwea) holds a 60 per cent stake in the project company, observers are confident the scheme will go ahead even if Calyon exits the deal, with the authority stepping in to provide finance if necessary.
“The contract is moving forward on the original agreement and we are moving towards closure of the contract,” says Alan Thomson, managing director of the client, Abu Dhabi Sewerage Services Company, which is wholly owned by Adwea.
“The financing may need to be reviewed, but we are not planning to cancel the contract.”
“Material adverse change has not been formally called and there will be meetings with Calyon, Adwea and the financial advisers about the terms of the underwriting,” says another source close to the project. “Adwea is a strong sponsor, so we expect to be able to resolve this issue.”
However, the source says difficulties could spread to other project deals. “This week has been total meltdown,” he says.
“No bank can get any treasury market to agree to any deal at the moment. If Calyon does call the clause, it could be the start of [similar clauses being invoked] for every single deal.”
“Everyone is trying to wriggle out of their commitments as the market becomes more negative,” says one Bahrain-based project financier.
Calyon is understood to have already exercised a separate market flex clause on S2, which enables it to increase the pricing on the debt to make it easier to syndicate. Pricing now stands at 150 basis points over the London interbank offered rate (Libor).
Another difficulty is the tenor of the debt, which is 22 years once construction is completed, two years after the end of Adwea’s offtake agreement.
This overhang means “debt with that risk will simply not sell”, says the London-based adviser.
Under the concession agreement for S2, Adwea insists that the developer, Belgium’s Suez Energy International, has financing in place before the end of 2008.
The chances of Suez being able to do this will be made far harder by the current talks with Calyon.
There could also be a knock-on effect for the $2bn Addur IWPP in Bahrain, which is due to be developed next by Suez and is also being underwritten by Calyon.
Suez was awarded the scheme in a consortium with Kuwait’s Gulf Investment Corporation in late August, but is thought to want to complete the financing of S2 first (MEED 31:8:08).
Calyon had also been supporting a consortium of Suez and Japan’s Marubeni Corporation for the Ras al-Zour IWPP in Saudi Arabia (MEED 30:6:08).
The bank is also backing Marubeni’s exclusive bid for the Shuweihat 3 IWPP in Abu Dhabi (MEED 25:7:08).
Calyon’s discussions on S2 and the Abu Dhabi sewage plants are believed to have started in late September.
“I can see the attraction in calling the clause because otherwise Calyon will have to wait until well into 2009 for the markets to recover enough to sell down these positions,” says one project finance banker.
“This could help it get some of that exposure off its books before the end-of-year reports.”
Calyon declined to comment.