Innovative solutions devised on the $2 billion (£1.24 billion) debt financing of the Qurayyah independent power project (IPP) have set the benchmark for how lenders will take security under a new Saudi trusts law.
“I think the work of the team of lenders’ and sponsors’ lawyers on this project in setting a template to implement the law will be a starting point for future deals,” said Chadbourne & Parke London partner Agnieszka Klich. “It was a new development that required some getting used to on the part of the lenders.”
Recent amendments to the Commercial Mortgage Law introduced the concept of a trustee for the purposes of holding and selling security in Saudi Arabia.
Implemented at the start of the year, the new law meant that the lenders had to identify an entity – either an individual or a company – that would be willing to hold the security.
“We considered various professional bodies,” said Klich. “Law firms, accountants and so on. Eventually one of the law firms not working on the project agreed.”
Working without precedent, the team had to draft special appointment language for the revised documentation.
The scope of responsibilities of the new trustee had to strike a balance between the borrower’s need to control its assets and the situations in which the trustee could act to sell those assets following a default.
The financing unravelled
The unique financing structure involved both conventional financing and a Murabaha facility – a Shariah compliant form of trade finance based on letters of credit. It closed on April 24.
It marks the first time the financing structure has been used on a project of this scale.
Qurayyah is the biggest IPP in the world. It will deliver 3,927 megawatts of electricity to Saudi Electricity Company (SEC) under a 20 year power purchase agreement, starting on June 30 2014.
Despite the introduction of a new legal framework half-way through the project, according to Klich, the biggest challenge was dealing with the multiple lenders. “Similar deals will also look to how we dealt with the intercreditor map among all the lenders and tranches, how we structured voting rights and so on,” she said.
The financing combines the Islamic tranche for both the senior long term debt and the equity debt because, to spread construction risk, the equity providers contributed funds. The murabaha structure funded their share.
The Islamic tranche on the long term debt was structured as an ijara component, used for leases.
The financing also included a tranche from the US export-import bank, governed by New York law. The rest of the financing was done under English law.
There was also a covered tranche from the export-import bank of Korea.
There is no completion guarantee, and the sponsors have achieved a high level of limited recourse because of the equity provided by the Islamic murabaha tranche. There are also no guarantees for the senior lenders.
“I would say, not only is there no completion risk on the equity sponsors, but the risk is very well defined and very limited,” added Klich.
Al Qurayyah is the third IPP to be built under SEC’s IPP program.
Once completed, the plant will be operated by The First National Operation & Maintenance Company (NOMAC), a subsidiary of ACWA Power, under a long-term operation and maintenance contract.
Chadbourne & Parke represented the winning consortium, comprising ACWA Power International, Samsung C + T and MENA infrastructure fund. Allen & Overy advised the lenders, with Baker Botts acting for the government.
Hatem Abbas Ghazzawi provided Chadbourne with local advice, with Hassan Mahassni advising the lenders.