CASE STUDY: Al Dur Power &

Water Company Secures

USD1.34bn Refinancing
Despites Headwinds
By: Bonds & Loans
Published: 26 February 2019 10:38

Following Al Dur Power & Water Company’s (Al Dur) debut project financing
transaction in 2009, the project company returned to the financial markets last year
to refinance its outstanding debt. Navigating difficult macroeconomic conditions,
alongside broader EM volatility, Al Dur secured a complex USD1.3bn refinancing
package from an assortment of national and international lenders.

Background

First awarded to a
consortium of ENGIE and the Gulf Investment Corporation in February 2008, Al Dur is
Bahrain’s flagship independent water and power project (IWPP). As the largest IWPP in
the country, Al Dur accounts for around one third of the country’s power and water
production, and features a contracted capacity of 1,234MW and 48 MIGD. The project
also enjoys a long-term Power and Water Purchase Agreement (PWPA) with the
Electricity and Water Authority of the Kingdom of Bahrain, due to mature in June 2036.

The project company’s original plans to secure financing by the end of 2008 were
scuppered by the financial crisis. But in June 2009, Al Dur reached financial close,
making it one of the first transactions to reach closing since the advent of the crisis. The
financing was structured on a hard mini-perm basis, with a total project cost of
USD2.2bn, and a debt-to-equity ratio of 73:27, resulting in total borrowing costs of
approximately USD1.6bn in debt. The significant balloon repayment of the international
facilities, the domestic facilities, US Exim and Korean ECA covered facility, and the
Islamic facility necessitated the transaction’s eventual refinancing and streamlining.

As the project commercial operation date had been slightly delayed, and following some
disputes regarding performance-related matters, the company faced some discussions
with the off-taker and EPC contractor that needed to be settled before refinancing could
begin. Once these disputes were resolved in 2016, refinancing plans began in earnest.

Swimming Against the Tide

 After launching the
Project’s original financing in the midst of the financial crisis, Al Dur understood how to
successfully execute deals during times of market turbulence. A cocktail of difficult
macroeconomic factors in Bahrain posed a particularly difficult challenge to the project’s
refinancing: a double-digit fiscal deficit, a high debt-to-GDP ratio (the highest in the
region), low oil prices, and a recent sovereign rating downgrade, all dampened investor
appetite in the country.
Compounded with the sheer amount required, USD1.3bn, accessing capital within
Bahrain was increasingly difficult.

However, , Al Dur enjoyed a strong 7-year long operational record, the backing of two
reputed sponsors, and was strategically vital to the Bahrain government, all of which
went some way towards offsetting negative sentiment at a time when the country’s
macroeconomic strain was weighing on other corporates in the country.

With the support of its financial advisor, Standard Chartered, Al Dur began sourcing a
wide spectrum of refinancing options, including bank and project bond products as part
of a liquidity analysis. Early plans for a dual-tranche project bond/bank debt tranche
refinancing plan were initially considered with the aim of attracting EM investors looking
for longer tenors as a complement to shorter-dated bank liquidity. However, as the Fed
continued to hike rates throughout Q2 and Q3 2018, EM liquidity began to dry up for
Bahrain.

Consequently, the plan was mothballed and the refinancing team instead chose to
substitute the project bond for a longer-dated bank debt tranche anchored around regional
pockets of liquidity – predominantly from within Saudi Arabia.

The end result was a USD1.3bn fully uncovered PF refinancing scheme, consisting of:

1) USD800mn 10-year tenor tranche provided by 20 banks

2) USD500mn 14-year tranche provided by 6 banks

The dual tranche structure ensured that the facilities with a c9.5-year tenor provided
annuity profiles, while facilities with a notional tenor of c14 years provided a largely
back-ended repayment profile, benefitting from a cash-sweep profile in order to ensure a
weighted average life of 9 years.

Perhaps most remarkable about the refinancing facility was its complexity. With swaps
having been initially entered in 2009 in a much higher interest rate environment, Al Dur
had material negative mark-to-market exposures complicating a smooth execution
process. A vast array of institutions took part in the deal, including participation from
over 20 regional and international lenders via both conventional and Islamic facilities.
Due to a strong bookbuilding process, all commercial lenders active in the Middle East
project financing space remained part of the financing facility.

Al Dur’s refinancing deal marked the project’s second successful transaction during a
time when Bahrain faced significant headwinds. Securing a sizeable refinancing facility
from an assortment of regional and international lenders, the deal assures the continued
functioning of a strategically vital operation for the years to come, and sets an important
benchmark for other borrowers in the country and the wider GCC region.