If there is a theme to project financing in 2009, it is the absence of a common structure for deals. It would be far too optimistic to say that the market will return to the boom times of the first half of 2008
After a bumpy 2009, next year looks like it could be better for the region’s project finance sector. As long as there are no more shocks to the Middle East’s financial system, banks will begin to return to the table, and sponsors should be able to push down the margins they pay for debt.
But it would be far too optimistic to say that the market will return to the boom times of the first half of 2008. Many regional banks still have bloated balance sheets that need to be reduced by shedding loans of dubious quality.
Access to dollar financing remains difficult. Even international banks will struggle to lend money at less than 200 basis points above the London interbank offered rate (Libor).
That will constrain the ability of sponsors to push pricing down too far, but a gradual lowering of debt costs should occur.
Negotiating longer borrowing periods could be a tougher battle. The financing of Abu Dhabi’s Shuweihat 2 independent water and power project (IWPP), with its 22-year debt term, shows that long-term loans can be done, and with Oman close to securing a 17-and-a-half-year loan for its Salalah IWPP, project sponsors do have precedents to point to.
However, these deals are unusual in some respects. For Shuweihat 2, most of the banks involved lent money over a short duration to get construction started after Abu Dhabi’s original long-term financing plans collapsed. For Salalah, its Omani sponsor is largely relying on Chinese funding.
If there is a theme to project financing in 2009, it is the absence of a common structure for deals. Each project sponsor has done whatever it can to attract liquidity. With financial markets stabilising, 2010 should give sponsors and project advisers a clearer idea of what terms lenders will tolerate.
That will be good news, though perhaps not as good as some sponsors, who want to return to pre-2008 deal tenors and pricing, were hoping for.
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