The Middle East project finance market enjoyed a bumper year in 2013, with several large and long-delayed transactions finally reaching financial close. Among the schemes to secure funding was the $12.5bn Sadara Chemical project, the largest project financing raised to date in the region.

A total of $48.7bn-worth of project finance deals were closed in the Middle East and North Africa last year, according to UK financial services firm Dealogic. This compares with $18.8bn-worth of deals signed in 2012. A total of 49 transactions closed in 2013, compared with 31 in 2012.

The growth in regional deal volume mirrored a global increase in project finance, which rose by 3 per cent to reach $418bn. Four of the 15 biggest project financings signed across the world last year were in the Middle East.

Steady flow

However, market participants are expecting 2014 to be a steady rather than a record year in terms of the value and number of project finance deals anticipated to close in the Middle East.

“Across the region in Oman, Kuwait, the UAE, Bahrain and Qatar, there are deals in the planning,” says Craig Nethercott, a Dubai-based partner at UK law firm Latham & Watkins. “But the pipeline is not as significant as before the financial crisis and the deals are certainly slower to come to market.”

The closure of several delayed projects such as the Sadara scheme in Saudi Arabia, which is a joint venture of state-owned Saudi Aramco and the US’ Dow Chemical, and the Al-Zour North independent water and power project (IWPP) in Kuwait are likely to cause bottlenecks in the deal pipeline, reducing the number of projects taken to the market this year.

The Saudi market in particular is expected to slow, despite the kingdom continuing to pump billions of dollars of investment into infrastructure. It was the most active market in the region last year in terms of deal volume, dominated by the closing of the Sadara deal in mid-2013. In addition to being the largest project financing ever raised in the Middle East at $12.7bn, it was one of the most time-consuming deals to date, taking six years to close. Delays to the scheme included changes to the project location and subsequent redesigns.

Although the project set a new precedent in terms of the size of the financing, it is unlikely to herald a flurry of similar-sized deals. The financing was very competitively priced, but many banks chose to participate in it for relationship reasons rather than for huge returns, motivated by the hope of winning further business from the parent company, Aramco.

Another significant deal to close in the kingdom in 2013 was the $1.6bn financing for the Rabigh 2 independent power project (IPP), the fourth project in Saudi Electricity Company’s (SEC’s) IPP programme. Banks are expecting the fifth deal to come to market later this year. In December, SEC issued a request for expressions of interest from firms to develop the Duba 1 IPP. The UK’s HSBC is adviser for the project.

The other major financing expected in Saudi Arabia this year is the $5bn deal to support Saudi Arabian Mining Company’s (Maaden’s) $7bn phosphate mining scheme at Waad al-Shamal. Commitments from banks were submitted at the end of 2013 and the deal is expected to be officially signed in the coming months. Lenders on the deal include Japanese banks Sumimoto Mitsui Banking Corporation and Bank of Tokyo-Mitsubishi UFJ, France’s BNP Paribas, HSBC, Canada’s Export Development Canada, Germany’s KfW and the Export-Import Bank of Korea. HSBC is once again the financial adviser.

Domestic liquidity

The Maaden deal includes a hefty Saudi riyal commercial bank tranche, suggesting the kingdom’s project finance market still relies on the high level of liquidity in the domestic banking sector. “Liquidity in Saudi Arabia is still high,” a Saudi-based project finance banker tells MEED. “There is no difficulty in getting riyals, but there is still some difficulty getting dollars.”

Aside from these schemes, it is looking like a relatively quiet 2014 for Saudi Arabia. A source from a major international bank tells MEED the lender has not received any requests for proposals for a Saudi project financing since mid-2013. He says the slowdown is probably a “transitory period” while the market digests the large-scale projects already closed or being finalised.

Beyond Saudi Arabia, prospects for project finance deals are picking up. “Despite the slowdown in project finance in the kingdom, we see increased activity in the region in Oman, Qatar, Kuwait, Abu Dhabi and potentially Dubai,” says Mario Salameh, the new head of project finance for the Middle East at HSBC, based in Dubai.

In Oman, banks are reviewing plans to finance a new refinery in Sohar. On the power and water front, bankers will be watching developments regarding Salalah 2, an IPP that remains in the early planning stages.

Infrastructure investment in Qatar is forecast to soar in the coming years, as the country prepares to meet its Vision 2030 objectives and host the Fifa 2022 World Cup. Qatar General Electricity & Water Corporation (Kahramaa) is developing an IWPP, known as Facility D.

The $3bn project is expected to reach financial close in 2014. Given the size of the deal, the scheme will need to attract large-scale funding commitments from local and international banks,as well as export credit agency (ECA) guarantees and direct financing.

Kuwait projects

The appeal of the Kuwait market could also grow in 2014, following the financial close of the Al-Zour North IWPP at the end of last year. The deal was the country’s first private power and water project. Work on the scheme began in 2010, but it met with severe delays, largely due to changes in Kuwait’s parliament. Now the scheme has closed, Al-Zour North is set to open the way for further public-private partnerships (PPPs).

Plans for the second phase of the Al-Zour North project are under way and project advisers will be formally appointed in February. Other PPP schemes expected to progress include the Al-Abdaliya integrated solar project, the first solar thermal power plant in Kuwait. Several transport-related schemes are also in the planning, although they are expected to take slightly longer to develop. “Kuwait has a projected need to increase its power capacity so I think the government will focus on power projects as a priority,” says Nethercott, who advised on the Al-Zour North scheme. 

Elsewhere, Abu Dhabi has been an active user of project finance in the past and in 2014 the market will be watching developments with the emirate’s next private power project, the Mirfa IPP. Dubai has typically not used project finance to support its infrastructure developments. However, that could change this year, following Dubai Electricity & Water Authority’s (Dewa’s) announcement in August 2013 of plans to build a clean coal-fired IPP.

As yet, no advisers have been appointed and there is a relatively high degree of scepticism in the market about the viability of the scheme, with many questioning why Dubai opted for coal as the main feedstock for the plant. The scrapping of earlier plans to develop a gas-fired IPP in April 2012 has also damaged confidence among potential lenders.

Outside the GCC, opportunities for project finance transactions are less abundant due to continued political instability in the Levant and North Africa region, coupled with a lack of public funds to spend on infrastructure. Egypt was traditionally one of the biggest markets in the region for project finance, but given the current uncertainty regarding the future leadership of the country, most infrastructure projects have been put on hold.

Some interesting prospects could emerge in Jordan’s renewable energy sector after the closing of a $240m wind farm scheme towards the end of 2013. The deal was highly dependent on the involvement of development banks such as the Washington-based International Finance Corporation and the European Investment Bank to persuade commercial lenders of the creditworthiness of the project.

Despite market observers expecting a leaner year for project finance deals to close in the Middle East in 2014, this is not indicative of a regional slowdown in state spending. Dubai’s successful bid for the Expo 2020, Qatar’s race to host the World Cup and Saudi Arabia’s ongoing investment in transport, social housing, petrochemicals and renewable energy will ensure the pipeline for schemes remains strong.

Given the level of infrastructure investment, some are even doubtful there is enough capacity in the conventional project finance market to fund the region’s long-term aspirations. Currently, the market is dominated by a small pool of international banks, mainly South Korean and Japanese lenders and a handful of European banks. Regional banks, often funding in local currency as is the case in Saudi Arabia, also provide large tranches of funding, as do ECAs.

Alternative financing

But some market participants argue that other means of funding projects will also be required. Salameh says the use of project bonds will need to increase. He points to European and US project finance markets, where bank debt is refinanced by the bond market once the project is operational.

“Once the project stabilises, the bank debt is taken up by the bond market and then we can use the liquidity to get another scheme off the ground,” says Salameh. “But in this region, the project bond market has not picked up.”

He says there is some resistance to project bonds because the market has yet to feel an acute need to tap that funding source. But he adds that there are signs the market is becoming more open to the concept of project bonds. Abu Dhabi National Energy Company (Taqa) issued $825m in project bonds last year to develop the Shuweihat 2 IWPP. The issuance was used to refinance bank loans taken out to fund the initial project costs. The market will be watching closely to see if Abu Dhabi repeats the success of the bond structure this year. 

“The project bond is the next big thing,” says Salameh, adding it will be a gradual process, initially limited to top names and stable sectors, and will be used for refinancings rather than funding new schemes.

While 2014 will not break any records in terms of deal volume, the coming 12-18 months could reshape the concept and use of project finance in the region.