Lehman bank collapse threatens project funding

19 September 2008
Local firms face difficulties in securing finance as failure of Lehman Brothers drives up cost of dollar debt.

The Gulf project finance market faces one of its most challenging periods of the past few years as the financial system struggles with the repercussions of the collapse of US investment bank Lehman Brothers.

On 16 September, three-month dollar interbank lending rates rose to their highest level since January in the wake of the fresh financial crisis, leaving industry experts claiming that companies will struggle to raise funding.

“The project finance market is now dead,” says the head of syndications at one large regional bank. “No one will be able to find long-term dollars at these prices now.”

Despite a slow year for project finance deals, bankers anticipated more than $20bn worth of projects would be seeking financing in the fourth quarter of 2008 and early 2009 (MEED 12:9:08).

Project financiers say it is unlikely that deals will be able to be launched into the market in the planned timeframe. “No one has any appetite for underwriting, and that will only have decreased since the news about Lehmans,” says one Dubai-based project finance adviser.

However, some bankers remain optimistic that well-structured deals with strong sponsors will be financed. But they warn that without careful management, this pipeline of deals could drive up the cost of financing even further.

There is also speculation that the margins on some deals could rise to as high as 300 basis points over the London interbank offered rate (Libor).

“Every deal will come out with market flex now,” says the head of syndications, in reference to the underwriting condition that allows syndicating banks to increase the margin on debt in order to encourage banks to buy into a deal. “This could see margins go up as high as 300 basis points.”

Until now, the typical rates on deals in the region this year have been closer to 125 basis points over Libor.

There are also fears that projects could end up competing with each other for funding. “There is the potential for these deals to wait for some signs of recovery in the market, but then that risks two or three projects all moving at once [for financing] on signs of a recovery,” says one Saudi-based banker.

“This could end up pushing up the prices for all of them because appetite is still limited from the banking market.”

TABLE: Upcoming project finance deals

ProjectCost ($bn)SponsorFinancial adviser
Ras al-Zour IWPP5.5Water & Electricity CompanyHSBC
Shuweihat 2 IWPP3.2Abu Dhabi Water & Electricity AuthorityHSBC
Yanbu IWPP3.0MarafiqHSBC
Rabigh IWPP3.0Saudi Electricity CompanyCitigroup
Dolphin Pipeline3.5Dolphin EnergyRBS
Addur IWPP2.5Electricity & Water AuthorityBNP Paribas
Salalah IWPP1.0Oman Power & Water Procurement CompanyBNP Paribas
Riyadh wastewaternaNational Water CompanyHSBC

IWPP=independent water and power project; na=not available

Source: MEED

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