Project finance: Developers have to tread carefully

11 July 2008
Without co-ordination, borrowers risk cannibalising each other's deals and pushing margins higher still.

After a quiet first half of the year, several project finance deals are finally set to come to the market in late 2008 and early 2009.

With several power projects planned in Saudi Arabia, managing the flow of these deals in the fragile debt markets will require delicate handling by banks. First up is the $5.5bn Ras al-Zour independent water and power project (IWPP), for which Riyadh will hope to have secured funding by the end of the year.

The Water & Electricity Company (WEC), sponsor of the project, denies that Sumitomo is the preferred bidder. However, the Japanese consortium has mobilised a large banking group, indicating that it favours its chances and is preparing to move quickly.

With other projects planned at Rabigh and Yanbu, the pressure will be on to reach financial close by the end of the year to leave a clear market for the next deals.

Bid deadlines on these projects were recently pushed back to November for Rabigh, and to December for Yanbu, meaning that another $6bn in project financing will be lined up closely behind Ras al-Zour.

In Bahrain, the Addur IWPP will be seeking about $2bn in financing at the same time.

All this raises the tantalising prospect that deals will return to the market by the fourth quarter. However, without careful co-ordination, borrowers risk cannibalising each other's deals and pushing margins higher still in an already difficult market.

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