Despite a successful fundraising for phase 1 of the Etihad Railway, the rest of the project is expected to require significant government financial support

Not many investment banking deals in the Middle East start on micro-blogging site Twitter, but on 22 January 2012, UAE Prime Minister Sheikh Mohammed bin Rashid al-Maktoum attended a meeting of the UAE cabinet and shortly afterwards tweeted that at the meeting the cabinet had approved plans for “Etihad Rail to borrow AED4.7bn [$1.3bn] to finance their new line to Al-Ruwais”.

With that, Sheikh Mohammed kickstarted plans to get the financing in place for the first part of the scheme to link together the seven emirates of the UAE by rail for the first time.

At Etihad Rail, which is 70 per cent owned by the Abu Dhabi government, plans to borrow to fund the first phase of the project had been under way for about a year by this point.

Offtake agreement

Phase 1 of the project involves the construction of an industrial rail line to transport sulphur between Habshan and Ruwais for Abu Dhabi National Oil Company (Adnoc). This has enabled the funding to be structured around an offtake agreement with Adnoc, which will pay Etihad Rail for the delivery of sulphur – a by-product of oil refining – to Ruwais for export. This feature of the deal, and the obvious financial strength of Adnoc and its integral role in the Abu Dhabi economy, gave lenders the security they needed to get involved.

“This deal is essentially Adnoc’s risk, because the project revolves around Etihad Rail providing a service for Adnoc,” says one banker involved in the scheme. “It is this that helped get banks on board.”

The loan has a five-year tenor and has been financed on a club deal basis by:

• National Bank of Abu Dhabi (NBAD);
• Bank of Tokyo-Mitsubishi UFJ (Japan);
• Abu Dhabi Commercial Bank;
• HSBC (UK).

NBAD acted as the facility and security agent for the loan. No details of the loan’s pricing have been released, but the banker involved in the deal says: “Pricing is a reflection of the fact that it is Adnoc’s risk.”

To ensure the deal would be attractive to banks, Etihad Rail had several rounds of sounding out market appetite. The firm tested the sort of pricing lenders could offer for loans ranging from five to 20 years, before finally settling on the five-year tenor and structure of the deal. It would not be until February 2013, more than a year after Sheikh Mohammed’s tweet, that Etihad Rail announced it had the funding in place.

We managed to close the club deal financing for phase 1 of the Etihad Railway with a huge oversubscription

Paul Green, Etihad Rail

The more challenging aspect for the project will be how to fund the remaining phases of the railway. This will be mainly a passenger network, making it more difficult to structure a financing option around the scheme because lenders are expected to be fairly reluctant to take on the risk of whether enough passengers will actually get on board. “No bank will even contemplate taking on passenger risk on a greenfield project,” says one banker in the UAE.

Another lender involved in financing phase 1 of the railway says: “I know they are fairly bullish in Etihad Rail about being able to approach banks for more funding, but at the moment there is not much clarity on how a deal would be structured to make it attractive to us.”

Funding expected

Speaking at the NBAD Financial Markets Forum shortly after this deal closed, Etihad Rail’s chief financial officer, Paul Green, said the success of the financing for phase 1 demonstrated that banks would be supportive of the broader Etihad Railway scheme. “We managed to close the club deal financing for phase 1 with a huge oversubscription,” he said.

“We have the support of the country’s leadership, but the risk profile we present at the moment means this project cannot stand alone,” he added. “The size of the debt we would be looking at would require us to look at a range of solutions.” This could include bond funding and bank loans.

Opportunities for using export credit agency funding will be limited, as most of the contracts will be local civil engineering work, without any significant international component.

At present, there has been no official announcement of how the rest of the scheme will be financed. Lenders in the UAE expect there to be significant government support to either fund future phases directly or convince banks that the risks are being shouldered by the state.

In total, the project is expected to cost about AED40bn to develop, meaning Etihad Rail still has a long way to go before it has all the necessary funding in place.