Filling the project finance credit gap

14 February 2012

Export credit agencies have taken on an increasingly important role in financing large projects in the Middle East in recent years

Key fact

Jbic’s financial commitments to the Middle East totalled $19.5bn at the end of March 2011

Source: MEED

Export credit agencies (ECAs) have come to be seen as the most crucial source of capital in the region since the 2008 financial crisis dramatically curbed credit availability. They help to ensure that major projects achieve financial close when they would otherwise have struggled.

From the Sadara integrated petrochemicals project in Saudi Arabia to the Emirates Aluminum (Emal) smelter project in the UAE, and the Barzan gas project in Qatar, ECA cover and funding now forms an important part of any sizeable project finance transaction. 

Financing vacuum for projects

Demand for export credit in the region has grown steadily since the mid-2000s. Two key developments have transformed the climate in favour of ECAs. The collapse of global demand has caused corporations to scale back capital expenditure (capex) commitments, meanwhile balance sheet impairments have forced banks to rein in lending. ECAs have essentially filled the resulting vacuum.

Any large-scale engineering contract in the region is likely to be won by a Far Eastern developer

Martin Amison, Trowers & Hamlin

“Appetite for ECA supported financing has grown substantially in the Middle East as well as elsewhere over the past five years and we see that continuing,” says Simon Lee, director of the Middle East project and export finance team at the UK’s HSBC, which arranged more ECA-backed loans than any other bank in the region in 2010-11.

One Middle Eastern ECA chief said its lending commitments over the past three years have grown in direct relation to the deteriorating credit climate. “Our commitments were three times higher in 2009 than in 2007. Now, we’re seeing the Western banks that were active in the region starting to retreat, we are certainly seeing demand pick up a bit more,” he says.

For those charged with arranging project financings, ECAs have become a first port of call, particularly because the range of international banks willing to participate in regional deals has declined more than three-fold to less than a dozen.

“In the old days, if had you had an OECD [Organisation of Economic Cooperation & Development] ECA providing a comprehensive guarantee or insurance, it was easy,” says Bimal Desai, the Dubai-based head of US law firm Allen & Overy’s banking practice. “It was just a question of how much you had in the way of exports that could be supported by the relevant country, then you’d always find the bank funding to fill it. Nowadays, you often can’t find the bank funding at a competitive price to fill an ECA-backed facility.”

The entry of ECAs is not just a by-product of the lack of appetite from commercial banks, it is also influenced by the sizeable funding needs of capital-intensive infrastructure projects. Large investments in infrastructure, petrochemicals and other key sectors typically require long-term credit solutions of 10-15 years duration.

There is growing recognition in the region that the previous standard practice of funding long-term capex investments through short-term funding has run its course. Project sponsors need to be looking at long-term financing and ECAs are much better positioned than commercial lenders to provide that kind of support.

Diversity is another factor enhancing the role of ECAs. The trend towards mega-deals such as Qatar’s $10bn Barzan gas project, has pushed sponsors to diversify the mix of funding sources beyond traditional commercial lenders. Now it is common to include state pension agencies, Islamic banks, project bond issuers and ECAs in such transactions.

“You first started seeing ECAs in the mid-to-late 1990s, when you couldn’t do a deal in the Gulf without them, as you needed the political cover,” says Desai. “In the mid-2000s, that died away and you could do a very large project without any ECA cover at all. Now, they’re essential again for any project of significant size.”

Funding catalyst for projects

ECAs are typically approached at the inception of a major financing to play a catalytic role in raising funding. Their role does not stop there. ECAs are being asked to underwrite ever-higher amounts and take on a bigger share of the overall risk.

This demand provides a neat fit for ECAs, particularly from Asia, which are developing a growing strategic focus on the region, seeking to extend support for commercial interests tied to their home countries. 

Japan Bank for International Cooperation’s (Jbic’s) strategy for Middle East financing is centred on backing three broad project types: natural resource development, industrial diversification and the provision of sustainable electricity and water supply. These are areas in which Japanese developers and contractors have an established presence in the region’s project market.

Recent Jbic deals in the Middle East
CountrySigningProjectAmount ($m)
EgyptSep 2010Cairo metro line 37,900
OmanNov 2011Sur IPP697
QatarDec 2011Barzan gas project600
Saudi ArabiaJun 2010Jubail refining project200
UAEMay 2010Shuweihat 3 IPP400
UAENov 2010Securing long-term crude supply2,100
IPP=Independent power project. Source: Jbic

Jbic’s financial commitments to the Middle East have increased from $11.9bn in 2006, representing 16 per cent of its total commitments, to $19.5bn at the end of March 2011, about 19 per cent of the total.

In 2006, it extended a loan of $2.5bn to Saudi Aramco’s PetroRabigh refining and petrochemicals complex – in which Japan’s Sumitomo Chemical was the joint venture partner – as part of financing facilities totalling $5.84bn. 

In December 2011, Jbic provided a $600m buyers’ credit to the Barzan gas project, Qatar’s largest-ever project financing backed by Qatar Petroleum and the US’ ExxonMobil, as part of a total Japanese financing tranche of $1.2bn.

Jbic is just one of a clutch of Asian ECAs that have increased their presence in the Middle East. Export-Import Bank of Korea (Kexim) is the fastest-growing ECA in the Middle East project finance market, reflecting South Korean firms’ huge successes in the region in recent years. 

“These days, any large-scale engineering contract in the region is likely to be won by a Far Eastern developer rather than a Western one, as they generally don’t have the appetite or the finance,” says Martin Amison, a partner at UK law firm Trowers & Hamlin who has advised on several major regional project financings.

Far East presence in Middle East

The Middle East is the largest market for South Korean companies, accounting for 66 per cent of total plant contracts in 2011. That booming presence has risen in tandem with ECA financing. Kexim’s financial support for projects in Saudi Arabia grew from $2.5bn in 2009 to $6.9bn by October 2011.  

ECA support has been crucial to South Korean success in the region. At Barzan, Kexim’s decision to provide financing in proportion to the scale of South Korean equipment and materials used in plant projects contributed to increasing South Korean exports and the number of contracts won by South Korean firms. It is, therefore, a proactive supporter of South Korean bidders, cajoling them into increased commitments.

Japan-headquartered JGC Corporation, overseeing plant construction at Barzan, initially planned to conclude a $100m contract for supplies from three South Korean small and medium enterprises (SMEs) Kexim then requested JGC to raise the volume of the country’s content to increase exports by South Korean SMEs and create jobs. The result: a $190m contract ended up being concluded with five South Korean SMEs.

“I can understand why Kexim is very active at the moment as Korean contactors have been very successful. Jbic is also active because Japanese contractors are getting a very reasonable share of the projects,” says the Middle East ECA representative. 

Kexim financing for Saudi projects 
Source: Kexim

The trend for direct lending is not just reflective of the Middle East’s general tilt towards the Asia-Pacific. ECAs, such as Jbic and Kexim, are also those that are most prepared to commit direct lending, rather than offering traditional insurance cover.  

“The ones with just insurance cover just aren’t competitive anymore,” says one project finance lawyer. “Taking [Italy’s] Sace credit risk is like taking Italian government risk – it’s not exactly attractive right now.”

Not all ECAs are willing to provide direct lending, although Export-Import Bank of the US (Ex-Im) can, as can Sweden’s SEK and Sace’s through its Cassa Depositi e Prestiti (CDP) programme. Old-fashioned loan insurance still has a role to play, say project financiers.

“ECA direct lending is only one part of the picture and there is still an important requirement for banks to fund against the guarantee or insurance policy of ECAs,” says HSBC’s Lee. “If you look at what’s happened in some of most recent ECA financings, you will still see substantial demand for banks to fund against ECA guarantees. The current environment is one where banks have seen liquidity premiums increase substantially, with pricing having been impacted accordingly.”

While ECAs such as Jbic and Kexim are setting the pace, European ECAs are not completely out of the frame. Sace guaranteed a $355m loan to the Barzan project to support the Italian contracts awarded. This followed $435m of support provided to HSBC for a loan underwriting the expansion of Saudi Basic Industries Corporation’s (Sabic’s) Hadeed petrochemical project in Jubail in February 2011.

Some Europeans are still bidding on deals. In the UAE, Emal has approached lenders to finance the $5bn second phase expansion of its Taweelah aluminium plant, while Ex-Im, France’s Coface and Germany’s Euler-Hermes have agreed part of the project development cost. Eurler-Hermes is also guaranteeing part of the loan for Bahrain-based United Steel Company Sulb project financing, worth more than $1bn. 

This does not mean ECAs have unlimited coffers. Like commercial lenders, they also have capacity issues to consider, which may limit the amount of direct lending made available to the Middle East project finance market.

“The ECAs are having to manage the increase in demand for their support and prioritise issues around staffing as well as deal flow,” says Lee.

Ex-Im has recently faced criticism over the amount of credit exposure the bank wants to hold, with a request to increase the exposure cap from the current $100bn dismissed by Congressmen. However, the ECA representative says the situation has not yet reached crunch point. “I am not aware of any real constraints on ECA funding,” he says. “The Middle East is a real hotspot of activity that could last for decades, as industry develops and the demographics of the region play out.”

Financing drawbacks to export credit agencies

ECA participation in structured financings has its drawbacks. Banks regularly complain about the time it takes to complete deals when ECAs have to go back to their national funding committees, with all the bureaucracy that entails.

“Generally, it takes a lot effort and you tend to end up with tighter terms than with commercial banks,” says a lawyer. “But, they are civil servants and while they do take time, that’s what you get for your money.”

More important is that ECA support continues. With that sustained presence, the ECAs could look to expand their involvement beyond traditional areas sectoral power and water, petrochemicals, and oil and gas, to a more diverse range of economic activities. Markets outside the main Gulf project finance centres could also benefit from ECA interest. Iraq saw its first major ECA-supported financing in November 2011, with HSBC providing $24m in medium-term funding – insured by Euler-Hermes for equipment and systems supplied by Nokia Siemens Networks for Iraqi mobile operator Asiacell.  

Aviation and other transport sectors could also provide for increased ECA involvement, adding to an expanding array of activities needing funding from non-commercial lenders.

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