To the dismay of those who tried, for as long as possible, to cling on to the idea that project finance was a bastion of calm in increasingly volatile markets, the market has been spared none of the pain of the global financial turmoil. Pricing has rocketed, and lenders are reluctant to put underwriting on the table for anything, let alone for deals with tenors stretching into the 20 year mark.
For the Middle East, this state of affairs will be particular hard to accept. In 2006 bankers were predicting that about half the project finance deals in the world would be in the Middle East in the coming years. And the ambitions of the Gulf Cooperation Council states and of sponsors to plough ahead with infrastructure projects has by no means diminished, judging by the growing pipeline of power plant construction deals set to hit the market in early 2009.
But getting the financing to get these multi-billion dollar projects off the ground will be increasingly difficult.
"Deploying bank capital for long term lending is a costly exercise for investors," says Peter Bulbrook, head of European and Middle Eastern loan origination at Barclays Capital in London. "People are going to be very selective about putting balance sheet out for that. It will be a massive challenge for project financing, and when we get into the new year, financing structures will be changing."
Swapping term loans for bridgesThe problems are not limited to the long tenors needed in infrastructure financing, but also the sheer size of the projects and the billions of dollars required to launch them.
"There are a great many power projects planned in the Gulf at least about six, with some in Bahrain, Oman, Saudi Arabia and the United Arab Emirates," says one banker. "But size is a big problem. They are too large to raise term financing now. Sponsors are instead recurring to bridge loans, for the amount to be spent in 2009."
Transactions which were originally planned to come to market this year have already been affected by lenders reticence to commit to long term financing, and deal arrangers have already performed a volte face on some facilities and restructured them.
The Shuweihat 2 independent water and power plant in Abu Dhabi, for example, was backed by financing totalling $2.6bn, for which three banks had already been mandated to arrange in October. But by triggering a material adverse change clause a provision in the loan agreement which allows lenders to renegotiate the deal if market conditions deteriorate drastically arrangers BayernLB, Calyon and Natixis were able to back out of the transaction as it was. The initial facility had a 23 year tenor.
Instead, a bigger group of banks was, in mid-December, in the process of putting together a $900m, 10 month bridge loan which would at least allow some of the funding needs of sponsors Suez and Adwea to be met.
Revamping the marketThis is a model which many project financing bankers think will become the norm in the Middle East, in 2009 at least. While the financing of many transactions has had to be pushed back, there is still an urgency to get some of them done especially the power plant constructions and that means sponsors will need to get their hands on whatever form of funding they can find.
But if stop-gap solutions such as bridge loans may be needed for the immediate future, the changes to the working of the project financing market are likely to be more permanent.
"The project market will have to be revamped," says Raouf Jundi, head of origination for the Middle East and Africa at Bank of Tokyo-Mitsubishi UFJ in London. "There will be life in that market, but deals will have to have more equity, tighter structures and shorter tenors. With EPC costs and steel prices going down, overall project costs will reduce, and debt size will shrink."
While the financing arrangers are also keen to tap into local liquidity as much as possible in 2009, by mirroring some of the multi-currency structures used in the loan market, finding funding in the local markets is also not an option for such huge projects, which remain reliant on international lenders.
"Banks in Saudi, for example, are still pretty solid and have money to lend, but the capital needed for these projects is way beyond what they are able to provide," says a banker at one Western financial institution.