Project sponsors will begin testing the capacity of the debt market in the final quarter of the year as they seek funds for deals totalling $20bn, despite signs that difficult market conditions are likely to continue over the short term.

Among the deals coming to the market will be the $2.5bn Aldur independent water and power project (IWPP) in Bahrain, the $3.5bn Dolphin pipeline refinancing, the $3.2bn Shuweihat S2 IWPP in Abu Dhabi, the $5.5bn IWPP at Ras al-Zour, and a proposed $3bn deal at Rabigh, both in Saudi Arabia.

The majority of the upcoming deals are in the power sector. The size of the deals will test the confidence and capacity of the banking market, which is still suffering from the impact of the global credit crunch, say bankers.

“There are signs that a lot of project deals are being lined up to approach the banking market,” one project finance banker tells MEED. “The question is whether there is the capacity to handle them.”

Bankers say the market may not have recovered sufficiently to absorb the deals.

“It is very disappointing that the market has not recovered, despite lots of predictions that it would be back to normal by now,” says one project financier. “Every deal that is done will restore confidence, but there remains little appetite for underwriting in the market.”

The head of syndications at one regional bank says the sector still has concerns over borrowing costs and how the market will behave in the short term. “Most syndications departments are still nervous of trying to syndicate a lot of debt because no one knows if the market will start to recover now, or if liquidity will continue to come at a cost,” he says.

Bankers say the terms and conditions attached to deals continue to reflect a lack of confidence in the market. For example, some banks are insisting on attaching ‘market flex’ conditions to deals in a bid to reduce risk. Market flex conditions allow them to reprice deals when selling them on to the wider banking market.

Other bankers say that while the deals will come to the market towards the end of 2008, project sponsors are unlikely to receive a response from the market until early 2009, as many banks will have already hit their annual targets for this year.

“If we were to bring out any transactions in the next few months, we would not ask for any response from banks until January 2009 because otherwise you risk not getting much interest,” says one Dubai-based banker.

So far this year, about $28bn worth of project finance deals have closed in the GCC. The figure has been helped by a couple of huge developments, such as the $10bn Saudi Kayan project.

Although the Kayan deal only closed in July, most of the banks involved had committed funding to the project in 2007. Getting commitments for new deals in 2008 has proved more difficult.

The key for success in financing upcoming projects will be to tap as many funding options as possible. Multi-currency tranches, Islamic banks and export credit agencies are expected to play an increasing role in enabling the project finance market to recover by allowing deals to rely less on the difficult conventional banking market.

FUNDING REQUIREMENTS
Value of deals coming to the market in final quarter of 2008 $20bn
Funding for Aldur IWPP $2.5bn
Funding required for the Dolphin pipeline refinancing $3.5bn
Funding required for the Shuweihat S2 IWPP $3.2bn
IWPP= independent water and power project.

Source: MEED