Project finance activity set to gather pace

Traditionally, the summer months are quiet in the UAE for bankers. This time around, however, they are busy tying up the loose ends of multi-billion dollar project financing deals, some of which will be signed in the last quarter of this year. More deals will be finalised in the coming year.

Indeed, local and foreign banks are gearing up for a busy period ahead as project finance activity gathers pace. Most of the financing is for small and medium-sized projects but the name of the game will be innovation.

Local and regional banks, including Islamic banks, are coming to play an increasingly vital role in project financing, moving to higher levels, such as tier-one arrangers rather than being sub-arrangers. While this is a new trend in the promising UAE's project finance market, local banks will be facing some challenges.

Project financing in the UAE as in some other Gulf countries is largely driven by infrastructure and industrial development that require huge financing.

The developers of the projects draw up their financing structure with foreign and local banks and the projects get underway. Foreign banks have up to now played a lead role in project financing although that has been slowly changing in the last two or three years.

Bankers and analysts are unanimous that project financing in the UAE will continue to be an attractive proposition for banks and financial institutions judging by the number of projects in the pipeline and the huge liquidity pool available as oil prices continue to remain high.

"Simply, high oil prices have infused a fresh buoyancy into the UAE economy that is moving along well. In such times, it not unusual to see a lot of projects being rolled out and all these need massive financing," said Nabeel Farahat, senior analyst, Emirates Securities and Commodities Authority.

"There is enough liquidity, so banks are waiting to lend for small and big projects," he said. Corroborating this, a banker from HSBC said project financing in the UAE looks good.

"There are ongoing projects that need financing in different phases, there could be more refinancing for some projects and we know for sure new projects are on the drawing board here and in neighbouring GCC countries."

Leading the big ticket projects are those in the infrastructure sector. The multi-billion dollar Dolphin Gas project has banks scrambling to make finance available.

Last month, Dolphin Energy Ltd (DEL) signed a $1.36 billion deal with a consortium of 16 local, regional and international banks to finance a portion of the construction and operating costs.

The five-year deal with initial pricing of 45 basis points over Libor is expected to be refinanced with the proceeds of permanent project financing well before the maturity of the bridge loan.

"There is a lot more financing required for the mega Dolphin project and we could see an interesting financing structure being created in the coming months," a banker said.

A number of banks are also readying the financing for Abu Dhabi's fifth independent water and power project, the Taweelah B/C, expected to cost about $1.5 billion.

The Dubai Rail Project estimated to cost $3 to 4 billion is another project many banks are eager to finance.

There are also many smaller projects in the real estate sector that require financing.

"Historically, in the UAE, we have seen mostly pure project financings in the power sector, such as the Taweelah, Shuweihat, Umm Al Nar and now the Taweelah B/C with basically government guarantees that are looked at by the lenders who may not necessarily look 100 per cent at the project itself," said a project financier at Abu Dhabi Commercial Bank (ADCB).

"In these projects, the structuring is comfortable because the entities are the government who also ensure energy/fuel supplies and hence the project viability is guaranteed," he said.

Even a project such as Thuraya in the satellite telecoms sector had corporate guarantees when it started. As it reached several milestones, reflecting the health of the project, these guarantees fell away.

"Bankers are waiting to see when and how the second GSM operator in the UAE will get started. There will be an element of financing there," he said.

Islamic financing is playing an important part in the UAE's project financing. In most projects financed by banks in the last few years, there has invariably been an Islamic tranche.

"Islamic institutions have lots of funds and they are keen to play their role in local or regional financing. They have been part of big deals in most projects and they continue to be part of upcoming financing deals," one Western banker said.

Confirming their active role in project financing, a senior official from the Abu Dhabi Islamic Bank (Adib) said: "The bank is an active player in the UAE's project finance market. We are also part of the Dolphin financing and it is working out well," thus indicating that the bank could also be part of the Taweelah B/C financing.

Adib also launched its maiden Sukuk issue of $200 million. "We are raising this to re-lend and finance some projects. We hope to close this by end-2004," he said.

Undoubtedly, project financing offers attractive potential for banks in the country. Local banks need to play a bigger role and become more innovative by devising clear and effective project financing strategies, experts said.

"Local banks react according to liquidity and now with oil prices ruling in the $40 range, there is very high liquidity," Farahat said.

"Overall, project financing activity will be reasonably busy this year. But the challenge is when the projects become larger, leading to longer tenors and moving into the next stage. This country has the capital but how to leverage the resources in the best way is the challenge."