Gulf project finance to see return of the 'mini-perm' model

Sponsors of European and Gulf-based projects are expecting a return of "mini-perm" model financings as banks' strained capital positions limit liquidity for long-term lending to projects, banking sources said on Tuesday.

Under a mini-perm model, a shorter-term financing is put in place to cover the construction phase of a project ahead of a longer-term permanent financing.

Traditionally, European and Middle Eastern projects have been financed through permanent debt financing with maturities ranging from 10 to 30 years.

However, a recent rise in loan pricing has impacted syndication risk on project loans as banks are increasingly wary of committing funds over the long-term as pre-agreed pricing levels have rapidly disconnected from current market levels.

By bringing in loan maturities to investor friendly terms sponsors and lenders are also hoping to attract non-traditional investors into project debt such as long-term loan funds and life funds, relieving the liquidity pressures at banks.

Mini-perm financings, prevalent in the United States, have been seen in Europe before but may become a more common occurrence as the credit crisis continues.

"What you may see emerging are maturities of five to seven years, facilities maturing two or three years after project completion," one of the bankers said.

This will mean that the project sponsor will need to refinance the debt earlier than previously required, but this pressure is not immediate and allows the sponsor to put permanent financing in place which better reflects the operational risk profile of the project.

"There are signs that sponsors are being more pragmatic, they have to weigh up the risk of having to refinance in a few years time, with the risk of not getting financing at all," the banker added. (Reuters)