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Not immune but robust

Even Qatar’s robust project finance market has been affected by the global liquidity crunch but the market remains strong, write Kevin Godier and Jon Marks.
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The extraordinary growth of the gas industry, and with it Doha’s transformation into a vibrant, mushrooming city whose rapid development entails a dizzying number of industrial and infrastructural mega-projects, has led Qatar to emerge in the past decade as a project finance market of global significance. That market leadership is now being put to the test by the emergence of increasing demand elsewhere – not least in other Gulf Co-operation Council (GCC) markets led by neighbouring Saudi Arabia – and also by constraints in the global market following the subprime crisis.

Even Qatar’s robust project finance market has been affected by the global liquidity crunch, sources close to the country’s next major deal tell The Banker. But the situation is hardly ­dramatic: the 2600-megawatt Ras ­Laffan C power scheme has already secured commitments worth more than its $3bn debt financing requirement; the downside is that the project sponsors will have to pay a wider spread than would have been the case 12 months ago.

“We already have more money than we need because the bank commitments have been over-subscribed,” says a project financier. “Pricing is higher than it would have stood for this project one year ago but, taking into account today’s market conditions, the sponsors are pleased.”

Margins rise

It is not a surprise that margins have risen: not only is this a global trend, but also the demand to participate in Qatari syndications has been such that margins have been squeezed to the bone and could only go upwards.

The independent power and water project in Ras Laffan Industrial City is the largest of Qatar’s power stations to date, and will provide about one-third of national power needs when ­complete. The preferred bidder, Suez Mitsui, is taking a 40% equity share alongside Qatar Petroleum (10%) and Qatar Water & Electricity Company (50%). An information memo went out to banks at the end of March, and a final list of underwriting banks was due to be selected as The Banker went to press. The transaction will consist of a $1.5bn loan from The Japan Bank for International Co-operation and a $300m untied Italian SACE (state-owned export credit insurance company) facility, both of which are already in place, with the remainder comprising uncovered commercial debt.

Banks everywhere “are now more selective in the deals that they will do”, says the project financier. “Banks have been waiting for this deal to tell them a little more about the current market in the Middle East.”

Crisis victims

The impact of the deteriorating global financing environment became apparent in late 2007, when deals that hit problems in the volatile market conditions included Qatar Steel’s stalled $1.3bn refinancing and Qatar Fertiliser Company’s $1.2bn bond issue. The unusually difficult passage of these operations showed that not even Qatar’s exemplary project finance track record could exempt it from the liquidity squeeze.

“Banks in the current market are picking and choosing, and they particularly like the ‘final hold’ approach that prevails for Qatari projects, which cuts out all the syndication worries,” a UK-based financier emphasises.

The next key Qatari project finance transaction, which is expected later this year, is for Qatar Gas Transporting Company (Nakilat), which plans to tap the foreign debt market to purchase extra liquefied natural gas (LNG) ­vessels. Nakilat issued a benchmark-shattering 27-year, Rule 144A bond about 18 months ago.

Banks are continuing to position themselves in the market. In March, HSBC opened a project finance unit in Doha with investment banker Amir Jawaid as director, when it claimed to be the “first international bank to establish a fully dedicated project finance presence” in Qatar. Darren Davis, HSBC’s regional head of project finance, referred at the time to “a challenging environment in the regional project finance business, due to a combination of huge demand for finance from developers and the ongoing tightness in the credit markets”.

Scope for growth

Sumitomo Mitsui Banking Corporation has since opened a Doha branch, which its chairman Teisuke Kitayama said would provide “ample scope for growth in various sectors from hydrocarbons, new energy and basic infrastructure”.

According to a banker involved in Ras Laffan, while global market conditions are making financiers “more choosy” about which project structures they support, “GCC deals have been less badly hit than elsewhere – the GCC has been the most robust part of the market. The projects are very important to the national economies, and the sponsors are seen to be very strong. The track records are superb, which puts a tick in all the credit boxes.”

Long-term view

Long-term dollar liquidity is not a problem for Qatari projects. “Any potential problems have been exacerbated by talk of depegging the local currencies from the dollar,” the banker says. “In this business, people have to take a long-term view – and liquidity problems are found at the short-term end of financial markets.”

That is just as well because there are more major deals anticipated for 2008, including financing for Smart Industrial City, a complex focused on developing technology-based industries, and the delayed Qatar Steel refinancing, involving about $600m-worth of debt raised in 2005 and the allocation of additional funds to expand the plant.

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