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Wed 16 Nov 2011 09:55 AM

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Arab project finance goes local on Europe debt woes

Big-spending Gulf states look closer to home for capital as global banks rein in lending

Arab project finance goes local on Europe debt woes
Europe is battling a debt crisis that so far has cost five leaders their jobs, including Italys Berlusconi

Arab
governments and companies are relying more on domestic banks, export credit
agencies and bond investors to finance projects as Europe’s debt crisis prompts
European banks to curtail lending in the region.

Syndicated
loans in the Middle East have plunged 72 percent so far this year to $17.5bn from
$62bn in 2010, data compiled by Bloomberg show.

The
number of Middle Eastern banks among the top 10 lenders has risen to 5 so far
in 2011 from 3 last year, with National Bank of Egypt rising to the top of the
table, according to the data.

“European
banks, which historically played the biggest role in project finance as they
began lending to the oil and gas sector four decades ago, have significantly
reduced loans since 2008,” the chief executive officer of ACWA Power
International, the Saudi developer of electricity and water projects, Paddy
Padmanathan, said by email on Nov 15.

“Very
large transactions, previously funded by commercial banks, are now more reliant
on export-credit agencies. Going forward we will see project bonds becoming
more significant.”

Europe
is battling a debt crisis that so far has cost five leaders their jobs,
including Italian Prime Minister Silvio Berlusconi. German Chancellor Angela
Merkel called for an overhaul of the European Union, advocating closer
political ties and tighter budget rules, as the crisis that began in Greece in
October 2009 sent Italian and Spanish borrowing costs to euro- era records.

ACWA attracted
60 percent of the $2.25bn it had to raise for a plant on the east coast of
Saudi Arabia from local banks and 30 percent from export credit agencies,
according to Padmanathan. Only 10 percent came from European banks. ACWA
expects to close financing for the $2.95bn, 3,900 megawatt Qurayyah plant in
about a week.

“European
banks were some of the first in the region” to provide funding for projects,
Mohammed Ali Yasin, chief investment officer at Abu Dhabi-based CapM Investment,
said by phone on Nov 15. “With the debt crisis, we will see them participating
less, or not at all. If it’s a big project, they’ll be even stricter as to how
much they will leverage.”

Gulf oil
producers Saudi Arabia, Kuwait, Qatar and the United Arab Emirates, which
account for more than half of the oil supplied by the Organization of Petroleum
Exporting Countries, will need a variety of financing options for large
projects such as multi-billion dollar power plants to meet soaring demand for
electricity.

“Multi-billion
dollar deals will need multiple sources of finance, and multiple tranches,”
Richard Palmer, a structured finance adviser at Abu Dhabi government-owned investor
Mubadala Development Co, said on Nov 14. “Projects will have to include bonds, and
direct lending from export-credit agencies such as the Japanese and the
Koreans.”

Qatar
Petroleum’s Barzan natural-gas project, a venture with Exxon Mobil Corp., may
tap project finance bonds, Jonathan Robinson, the bank’s head of project
finance in the Middle East, said in September.

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Project
bonds fund a specific project, with buyers of such a security able to claim
assets only related to that project in the case the debt isn’t repaid.

The
$10.3bn Barzan project is Qatar’s most expensive energy project since Royal
Dutch Shell Plc announced the Pearl gas-to-liquids plant, now budgeted at $19bn,
in 2006.

State-controlled
Qatar Petroleum plans to raise about $3bn in project finance this quarter to
develop Barzan, two bankers familiar with the transaction said Sept 29.

It will
provide 1.4 billion cubic feet of gas a day to Qatar’s domestic market after
its two production plants are completed in 2015, enabling Qatar to expand
industries.

Kuwait
is in the process of tendering the Al-Zour North power plant, one of the country’s
biggest projects to boost electricity supplies. Five groups including ACWA are
bidding to build the 1,500 megawatt plant, according to National Bank of Kuwait
SAK, which is seeking to finance the project. Kuwait’s government plans to hold
a maximum of 10 percent of the company responsible for building the plant,
while a strategic investor will hold 40 percent. The remaining 50 percent will
be sold in an initial public offering.

ACWA
expects to hear whether it has won the Al-Zour contract in mid-December, and
would then seek financing for the estimated project cost of $3bn, Padmanathan
said.

Abu
Dhabi, the UAE’s oil-rich capital, will soon raise funds for its $20bn nuclear
power project. Emirates Nuclear Energy Corp, the government-owned company
developing the country’s first nuclear plants in a joint venture with Korea
Electric Power Corp, will complete the financing structure at the end of the
first quarter of 2012, ENEC spokesman Fahad al-Qahtani said earlier this month.

South
Korea may lend about $10bn to the project, the Export-Import Bank of Korea’s
chief representative in Dubai, Heung-Sik Min, said last year.

Gulf
nations should start to replace cross-border lending and credit lines they have
with Europe and the US and boost relations with more-liquid Asian banks, Nasser
Saidi, chief economist of the Dubai International Financial Centre, said.
Emirates NBD, the UAE’s biggest bank, and National Bank of Abu Dhabi are among
local lenders that have started inviting clients to open accounts in the yuan,
he said in an interview on Nov 13.

“It’s
true there is less liquidity in international markets,” ACWA’s Padmanathan
said. “But it’s not just a liquidity crisis. It’s also to do with people waking
up.”

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