GCC RT p1-20:GCC RT p1-20 - Latham & Watkins · 2009-09-29 · Simon Dickens (Latham & Watkins)...

Project Bonds in the GCC

RoundtableSeptember 2009

REUTERS PROJECT FINANCE INTERNATIONAL

Latham & Watkins has built an internationally recognized project finance practice that represents sponsors, lenders and other credit providers and governmental entities across a wide spectrum of industries.

The firm’s award winning project finance team includes more than 100 lawyers who regularly advise on some of the largest and most innovative projects globally. They have the knowledge and experience to deal with any number of issues that inevitably accompany complex projects, from commercial, energy and environmental law to tax, banking and real estate matters.

Latham & Watkins is an international law firm with more than 2,000 attorneys in 27 offices around the world. For more information, please visit www.lw.com.

Abu DhabiBarcelonaBrusselsChicagoDohaDubaiFrankfurtHamburgHong KongLondonLos AngelesMadridMilanMoscowMunichNew JerseyNew YorkOrange CountyParisRomeSan DiegoSan FranciscoShanghaiSilicon ValleySingaporeTokyoWashington, D.C.

www.lw.com

A Global Leader in Project Finance and Development

Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy and affiliated partnerships conducting the practice in Hong Kong and Japan. © Copyright 2009 Latham & Watkins. All Rights Reserved.

September 2009 | pfi special report | 1pfie.com

Editor Rod Morrison Tel: 44 (0) 20 7369 7570Fax: 44 (0) 20 7369 7482/3/4email: [email protected]

ParticipantsDerek Rozycki (Mubadala)Simon Dickens (Latham & Watkins)Paul Fairbairn (RBS)Hussain Hussain (RBS)Paul Chivers (BNP Paribas)Rajiv Shukla (HSBC)Mike Redican (Deutsche Bank)Andrew Davison (Moody’s)Rod Morrison (Thomson Reuters)

Editor-in-ChiefKeith Mullin

Managing DirectorElly Hardwick

Associate PublisherAnn Worsley

Advertising DirectorChris Keene

Head of ProductionClive George

Assistant Production Manager Nita Webb

Senior Production ExecutiveGavin White

Production ExecutiveAngela Allwright

PrintPrinted in England by Wyndeham Grange Limited

ISSN: 0967-5914 © 2009 Thomson Reuters Registered Office: Thomson Reuters Ltd, Aldgate House, 33 Aldgate High Street, London EC3N 1DL

FOREWORD


Welcome to the Reuters Project Finance International“Project Bonds in the GCC” roundtable – sponsored byMubadala, Latham & Watkins and Royal Bank of Scotland.

The event was held in Abu Dhabi and followed the two highlysuccessful bond issues during the summer from leading GCCissuers Dolphin and Rasgas.

In today’s challenging credit environment, opening up a newsource of capital for projects is an important endeavour – and thatit what Dolphin and Rasgas did, in spite of the views of the scepticspre-issue. Before the bonds were placed, there was a good deal ofmarket commentary as to whether the effort of structuring thebonds was worth it. But it was, in both cases.

Using bonds in project finance is, of course, not new, but neither arebond issues for projects in the GCC countries. But at the start of theyear the global capital markets were more or less shut down. Gettingtwo significant and competitive priced issues transacted by mid-yearwas an important milestone, and opened up a new source of capital.

It was not just an important milestone for the projectsthemselves and their funding plans and strategies, but it wasimportant too for the wider market. It is true that the bank marketis returning to life and bank credit is becoming available for strongprojects. But as the full and long-lasting impacts of the creditcrunch hit home in general and the specific effects of Basel II comemore into play, banks will no longer be able to do all the heavylifting when it comes to funding projects.

The only real alternative to cheap and ever-flowing bank capital,which is now no longer guaranteed, is the bond market. Dolphinand Rasgas represent what is hoped will be the start of a long lineof deals.

There are challenges. Both Dolphin and Rasgas were projects atthe top of the ratings curve and some other schemes will struggleto match their profile. Both projects are operational. Both haveextremely strong and government-linked sponsors. Yet on both,the tenor was more limited than in the past. But both set atemplate that GCC issuers and their advisers are now examining tosee how it can be developed.

A whole range of themes and market issues came up during thediscussion, which I hope you will enjoy. One theme was that thebank and bond markets should live together in funding GCCprojects. Paul Fairbairn from RBS pointed out: “I think the firstthing to remember is the banks haven’t gone away.” SimonDickens from Latham & Watkins added that the two sources offinancing were coming together more often

Mubadala’s Derek Rozycki said at the end of the Roundtablediscussion: “I think that the future of project finance, which issomething that we are clearly keenly focused on, is largely a bankbond solution.”

Derek Rozycki, MubadalaDerek Rozycki has responsibility forthe development and execution ofcomprehensive financing strategiesfor Mubadala. Before joiningMubadala, Derek worked for BarclaysCapital in the investment banking re-lationship management, structuredfinance and credit risk managementunits.

Paul Chivers, BNP ParibasPaul Chivers is Head of Debt CapitalMarkets, CEEMEA at BNP Paribas, hehas been with the bank for threeyears. CEEMEA DCM is responsible forthe origination of all debt productswithin its region, with seperate teamsspecifically focussed on the Russsian,Middle Eastern, Central European andAfrican markets.

Simon Dickens, Latham & WatkinsSimon Dickens is a partner in Latham& Watkins’ Project Finance andDevelopment group. Based in London,he represents developers, lenders, un-derwriters and governmental entitiesin oil and gas, LNG, petrochemical,fertiliser, power generation, solarpower and other commodity-basedprojects.

Paul Fairbairn, RBSPaul Fairbairn has 20 years’ advisoryexperience, as a banker and a lawyer.He joined RBS in 1997. Paul recentlyadvised Dolphin Energy Limited andits sponsors (Mubadala, Total andOccidental Petroleum) on its US$4.1bnfinancing, raised from commercialbanks (US$1.4bn), export creditfinance (US$218m), capital markets(US$1.25bn) and sponsor co-loans(US$1.22bn).

Rajiv Shukla, HSBCRajiv Shukla is a Managing Directorand heads HSBC’s Debt CapitalMarkets group for the MENA region.He has been with HSBC for over 5years. Rajiv has been closely associatedwith and led developments in theSaudi Arabian financing space, beforetaking on the regional role since lastyear.

Michael Redican, Deutsche BankMichael Redican is a ManagingDirector, Debt Capital Markets, in theGlobal Markets division at DeutscheBank and is primarily responsible forthe structuring, negotiation andexecution of structured bond transac-tions in the infrastructure sector. Hehas 28 years banking experiencehaving worked initially with Citibankbefore joining Deutsche Bank in 1986.

Hussain Hussain, RBSHussain is a Director in RBS’ CorporateDebt Origination team in Dubai,assisting GCC based corporate clientsin raising funding via the capitalmarkets. During the course of 2009,he has worked on the successfulexecution of a number of regionaldebut issues.

Andrew Davison, Moody’sAndrew Davison is Team Leader, EMEAProject Finance for Moody's GlobalInfrastructure Group. His currentanalytical responsibilities focus onlimited recourse financings of energyand infrastructure assets, and includeconventional project finance, PFI andPPP transactions. Andrew has a broadbackground in energy and infrastruc-ture finance.

Rod Morrison, Thomson ReutersRod Morrison is the editor of ProjectFinance International.

Participantspfi.com2 | pfi special report | September 2009

Project Bonds in the GCC roundtable

Rod Morrison: So welcome, everyone, tothis PFI Project Bonds in the GCCRoundtable. Our first question relates tothe issuance by Dolphin and RasGas ofproject bonds. Maybe we could start withDerek Rozycki of Mubadala to talk usthrough the Dolphin project.

Derek Rozycki: Sure. Very pleased to behere. First of all, thank you everybody forjoining us today. Dolphin was obviously afantastic success for Mubadala, Total andOccidental Petroleum, our partners. Itachieved everything we wanted to do andmore. It was a transaction that had beenlong in the making and had been antici-pated by the market for a long time. Ithink a project bond on Dolphin had beentalked about since the initial financingback in about 2001.

We were very pleased with the efforts ofall of the people involved, and I think itproved that the project bond market isback. It was the first 144a bond from adebut issuer – and I think that is an impor-tant distinction – since about 2007, and itwas extremely well received by the market.It was not just a US dollar or US investortrade, as many of the transactions had beenin the past, but in fact was very well distrib-uted through multiple geographical areas.In fact, only 29% went to the US, which Ithink is much lower than we have seen inthe past, and that suggests that there is asignificant amount of demand out therefrom the market as a whole.

I think one of the great successes of thistransaction was that we succeeded incompeting multiple pools of capitaltogether, so at a time when capital is con-strained at the banks, having an alterna-tive source, especially one that likeslonger tenors, is very, very valuable forproject sponsors.

So we had succeeded with our financialadvisers – and I will let Paul Fairbairnspeak about this a little bit more – tocompete different capital pools againsteach other, if you will, or alongside eachother, for the process of structuring. Wehad ECAs; we had Islamic finance in theequation; we had, of course, conventionalfinance; and we had the project bonds all

along. In the end, in fact, it proved ourefforts, despite all the nay-sayers that wewould get a project bond done, especiallygiven the challenges in the marketplace,the project bond came inside the bank,even on the pricing, which is a great suc-cess for us. This validates the project bondconcept in terms of being a very competi-tive source of financing against the banks.

From Mubadala’s perspective, this is animportant development for the long term,because obviously bank capital is severelyconstrained and our perception is that itwill continue to be severely constrainedfor the long run, so having this marketdevelop is crucial and important to thedevelopment of project finance globally, Ibelieve, going forward.

With that overview, I would like to passon to Paul to speak a little bit more aboutthe details of how the transaction wasprogressed.

Paul Fairbairn: Thanks, Derek. The bondon Dolphin wasn’t a last-minute event; alot of time and effort had gone into plan-ning it, we presented to the rating agen-cies in January of this year, and when wecame out with the information memoran-dum in February, it clearly envisaged animportant role for the bonds in thefinancing of Dolphin.

That was for a couple of reasons: one,as Derek said, there was a strategic ambi-

tion on the part of Mubadala and its part-ners to see the bond market in the regiondevelop, and Dolphin was identified asbeing a transaction to facilitate thatprocess. But also, when you looked at thedebt sources that were available, clearly arequirement of US$4.1bn, of whichUS$1.2bn would be met by sponsor co-loans, still left a very significant amountthat needed to be raised in the debt mar-kets, and I don’t think anybody could seri-ously envisage raising US$2.9bn from thecommercial bank market. And of courseeven export credit financing these days isfacing its own challenges if it is bank-funded, because that is also utilisation ofliquidity. The old days where export cred-its were a way out of dealing with limita-tions on bank capacity simply don’t applyany more.

So we were keen to minimise thedemands that we were making on thecommercial bank market, and with thatwe went out with a plan that envisagedround about US$1.5bn from the conven-tional banks, and we wanted to look atthe possibility of accessing the Islamicmarket as well, alongside the Sacetranche and a bond piece.

The key thing, I think, was that wedeveloped all those sources in tandem.Ultimately we didn’t proceed with theIslamic tranche because of additional con-siderations in the context of this particu-lar transaction; although we could havedone an Islamic piece, it didn’t really adda lot to the process, so we focused ourefforts on the other sources.

I think the interesting thing with theDolphin bond was the way that it reallygathered impetus from a market perspec-tive in the closing weeks because, asDerek said, there were nay-sayers throughthe process, saying “Why are you bother-ing, this isn’t going to be competitive”. Wemaintained the process all the waythrough the market – we were lucky withthe market, I don’t think we should under-estimate that – and at the end of the daythe bond was significantly upscaled.

I think to me, the key message comingout of it is developing multiple sources;maintaining that momentum across the


pfi.com September 2009 | pfi special report | 3

We were verypleased with the

efforts of all the peopleinvolved and I think itproved that the projectbond market is back. Itwas the first 144a bondfrom a debut issuer andit was extremely wellreceived in themarket.

“

”

alternatives; keeping a competitive envi-ronment, establishing and maintaining acompetitive environment; then makingthe ultimate decision on the fundingstructure based upon where the marketsare as you approach closing. Particularlyfor the large-scale projects coming out ofthe Middle East, and you see that in anumber of industrial sectors, that is goingto be very important. You can’t look toany one source.

Mike Redican: Do you think the fact thatwe actually had an operating track recordwith Dolphin was a huge issue in the mar-ketplace? We may well come on to it,about greenfield/brownfield, but if youlook at RasGas 2, that is something thatstarted off life 10 years ago, a bit likeDolphin, as a project financing, and ofcourse it managed to get its regional proj-ect finance bonds in a way that made it alandmark transaction at the time. But Ithink today’s issue is that RasGas, with itstrack record of delivery, has turned itselfinto a structured corporate, almost, and Ithink similar things could be also appliedto Dolphin as well: that you actually havea real business going that could be identi-fied as a real business, which helped the

marketability. Do you think that is a faircomment?

Paul Fairbairn: Absolutely. There are anumber of factors that were very impor-tant for the success of Dolphin, not just awider market liquidity issue. Given thevery nature of the project: it is strategical-ly important to the majority shareholder,who is government owned; it’s vital to theeconomy of the region; it was operating.Those are definitely big pluses, but I don’tthink they are necessary conditions to aproject bond succeeding. I don’t think theoperating track record is a necessary con-dition.

I think you will be seeing bond issuescoming out of the region, there are obvi-ously mandates out there at the momentwith greenfield developments. That obvi-ously brings its own issues from a struc-turing perspective, but I think the advan-tage that the bond issues coming out ofthis region have for strategically impor-tant projects is that people will pin thebond – to a greater or lesser extent – tothe post-government sponsor of the proj-ect, and that will be a very important con-sideration in the marketability of theissue.

Rod Morrison: The market did move inyour favour. I guess you had structuredthe deal so that you didn’t have to do thebond.

Paul Fairbairn: That’s right. We had anexternal debt requirement of US2.9bn andwe had US$3bn of commitments acrossthe commercial bank facility and the Sacefacility, so if the market wasn’t there,there was certainly no requirement to doa bond.

Paul Chivers: Personally speaking, I thinkit was a much more significant event thanjust another bond coming out. In fact, Ithink it is a huge step forward for the sec-tor, and as Derek has already pointed out,really has opened up a new asset classthat we haven’t seen for a couple of years.

I think that people in this room havewitnessed several false dawns for the proj-ect bond product really over the pastdecade with its most successful applica-tions probably coming out of the PPP sec-tor, but never with a sort of sustained runin hydrocarbons, telecoms and otherindustrial sectors.

I don’t think it was any mistake that itwas as huge a success as it was, in fact,


pfi.com4 | pfi special report | September 2009

The Roundtable panellists led by Derek Rozycki, centre

September 2009 | pfi special report | 5pfi.com


and I think that partly that’s due to thefact of the momentum that was gatheredin the region, of which the sponsors tookfull advantage at the right time. So I thinka key lesson that I think the sponsors real-ly grasped very early on, and their advis-ers in the Dolphin exercise, was that theywere ready to go to market at the righttime should the market be there.

The market in the Gulf region reallydidn’t do anything for the first quarter,and again, it’s no surprise that the coun-tries that have really sponsored the mar-ket opening with the highest quality cred-its – the sovereigns of Abu Dhabi and ofQatar – have both taken advantage andhave allowed their corporates and higherrated credits to access the market by pro-viding liquid curves out there that sud-denly produced the level of transparencynecessary to get the bonds priced appro-priately and give investors confidence thatthey were buying something of relativevalue.

The final point I would make on that isthat as a result of that, we have seen bothQatar and Abu Dhabi lead with the firsttwo project bonds in this region, and Ithink that these are very, very strongbenchmarks and we certainly expectmore to come as a result of that.

Derek Rozycki: Could I just add veryquickly to that. You mentioned momen-tum in the market. It was developing veryquickly and very favourably, and I thinkthe Dolphin issue certainly benefitedfrom the fantastic success of the RasGastransaction. We have some folks who canspeak in depth about that now, but thatwas certainly a key component of our suc-cess in the transaction. It was very impor-tant to get these two very high-grade, veryrock-solid credits out into the marketearly to really open up this space, andthen, as you have said, Paul, the fact thatthey were both completed, that they wereup and running, is very helpful but notnecessary. I think it really opens the doorsfor new credits, including greenfieldissuers.

Rod Morrison: Derek, you mentioneddiversity of sources. How did you come upwith US$1.25bn – because I guess youcould have gone further – as to the size ofthe bond?

Derek Rozycki: Sure. This is always thetricky question at the time of executionwhen we are actually pressing the button.Right-sizing the deal and getting the pric-

ing right is something that is absolutelycrucial. Truth be told, in retrospect, I wishwe had left another 12.5bp on the table orso in that trade. I think the reason being,we sort of conceptualise that 12.5bpupfront as an upfront fee, or similar to anupfront fee in the banking market. After-market performance, I think, is some-thing that issuers often underestimate theimportance of, and we would like to see abit stronger performance in the Dolphinbond. We are going to get it right on thenext one.

So it was a question as to whether ornot we would do a billion – as demanddeveloped and our order book firmed up –and then what the right pricing is. Wedecided that shifting incremental capitalaway from the banks and into the bondmarket is something that’s good globallyfor the development of the markets in theGulf, so a little bit more of a pan-Gulfview on that one, if you will. Validatingthe strong demand in the market wasvery important to us, so we chose to bringit a little bit bigger, and we thought wewould – it pleased investors also. I thinkinvestors were also looking for a bit of abigger issuance to ensure more liquidityin the trade.

Rod Morrison: Andrew in London, it hasalready been said that there were tworock-solid credits. Would you say theywere very conservatively structured froma ratings standpoint?

Andrew Davison: Yes, in terms of ouranticipating the credit quality of bothDolphin and the RasGas 2&3 issuance, thebuilding block we used to describe thatcredit quality refers to the underlyingcredit quality on a standalone basis,which we refer to as the baseline creditassessment, and then reflecting theimportance of the sovereign sponsorsunder government related issue method-ology, we see a substantial credit enhance-ment as a result of the sponsor interac-tion and the relationship of those spon-sors with the government.

So in Dolphin, the underlying creditquality was positioned at a baseline creditassessment of 8, but that’s equivalent to aBaa1 rating, with a number of enhance-ments to take it then to the definitive Aa3rating. So that is evidence therefore of thestrength of the underlying credit and thesubstantial credit enhancement of the sov-ereign component.

In relation to RasGas 2&3, our publishedratings don’t actually give a point output

based on credit assessment that sets theunderlying credit quality in a range that isequivalent to the Baa category. Thenagain, there is substantial credit enhance-ment we believe appropriate to reflect theimportance of the local liquefaction proj-ect within the RasGas 2&3 portfolio to thesovereign level of Aa2.

So to answer your question, yes, webelieve the projects are very, very robust.

Rod Morrison: Moving on to Mike. Do yousee these two deals as landmark transac-tions?

Mike Redican: I think they are very impor-tant. I think the fact as well that only 29%was sold into the US shows that there isnow at last a wider appetite for this typeof asset class. I think there has alwaysbeen a problem with education, and oneof the problems we have had generally ininfrastructure for the past eight or ninemonths has been that there has been a lotof plain vanilla corporate issuance outthere at very good pricing. Now that isactually shifting a little bit and people arestarting to look for yield, new asset class-es, and it was very, very important to getthis asset class out across a wider distribu-tion network.

That gives me a lot of heart for thefuture, actually, but taking on fromAndrew’s point, one of the things that isgoing to help deals to be done in thisregion is the quality of the sponsor sup-port, government involvement in share-holdings, and I know a number of dealsthat are out there at the moment willhave some either direct government or agovernment entity in the sponsorshipstructure, which will be massively impor-tant for the region.

So it’s going to be either government orextremely strong corporate sponsors driv-ing the deals out there. That will be a bigfactor. Because it’s both a managementand an essentiality issue, which I thinkwill be important to getting wide accept-ance from investors.

Paul Chivers: I think it is fair to say thesewere the right deals at the right time. Ithink the timing of bringing two very, veryhighly rated projects to the market, youknow, within a week of each other, should-n’t be underestimated. The marketdemanded top quality and it got top quality.

I think that it would be interesting tohear from Andrew how many other sortof Aa rated credits there are out there inthe project world, and then suddenly two

6 | pfi special report | September 2009 pfi.com


come along pretty much at the same timeand open the market up.

I think that’s been necessary. I think itgot investors more comfortable as a resultof that and, no question, gave a lot ofmomentum to each of the deals as aresult of exactly that credit quality.

Andrew Davison: I think the point thatPaul has spoken to in relation to the tim-ing for the Dolphin and the RasGas 2&3issues; I think that’s a very importantpoint. It comes on the back of sovereignissuance by Qatar and by Abu Dhabi earli-er in the year, and then subsequently inthe first quarter the issuance by a numberof quality corporates that prepared theground for subsequent project issuance,with reference to the quality corporateand positions by Mubadala, by DIC, Aldar,TDIC, and in Qatar, the issuance of QatarTelecom. For example, in Qatar Telecom’scase, I understand that the US$1.5bn debtissuance was itself nine times oversub-scribed.

So in that context, while there hasn’tbeen a great number of project deals inthis type of rating category, that is thevery strong part of the rating range, Ithink what was a very significant con-tributing success factor was clearly theground that had been prepared by thesovereign and the quality corporateissuance earlier on in the year.

Rod Morrison: Rajiv, you worked on RasGas.Were you surprised by the success of theorders you got? US$17.5bn, wasn’t it?

Rajiv Shukla: We were rather pleased bythe eventual subscription, but as has beensaid for both transactions by other people,the market was one angle. I think a lot oftrouble had been taken to structure theproject ahead of time and ticking all thenecessary boxes. Of course, the sponsorsupport, the fact that Qatar is gas, was animportant story. But simply getting thestructuring done in the best possible man-ner, and yet presenting it lucidly toinvestors was – to bond investors who typ-ically have a much, much shorter atten-tion span than project finance loanbankers do – very important.

In Qatar RasGas’s case, this presentedthe final bit of debt-raising of its US$10bnprogramme. What helped was the factthat the amount to be raised wasabsolutely definite and announced aheadof time. It goes back to your point, Derek:you were not looking for an infinite

amount of money; you would have beenvery disciplined about it. In that case, themarket knew what was to be taken andthey would not take more, so that kind ofsnowballed the demand a lot more.

In RasGas’s case, this represented thethird time they have actually approachedthe bond market, and it was very clearlytheir desire to try and shift the position-ing to a corporate – these were bullets,which is not typical of project financeamortising structures. But again, therewere three, five and 10-year bullets acrosswhich the placement was done, therebygiving the benefit at the one end of pric-ing, at least shorter date of transaction,providing that pricing benefit, and yet ifyou model it, it still gives kind of anamortising feel to the whole structurefrom the project perspective, at the sametime achieving the whole objective ofbecoming more corporate, so the nexttime they approach the market, it will beas a corporate and not in a project financetransaction.

The dynamics on pricing, of course,reflected the way the market receivedthese transactions. Dolphin was a success,but preceding that, RasGas, a success tocome well inside the secondaries ofRasGas where they were trading andbring the whole Qatar curve down. All thevarious Qatar people who were out thereactually came in as a result – through theperiod as the price whispers went out, theprice guidance went out, and eventuallyRasGas came in at one of the tightestspreads to the sovereign by the time itwas priced.

Mike Redican: Did you consider goinglonger than 10 years? Obviously, we haveseen longer amortised deals in the past. Ithink when I first saw it I expected atleast one piece to be longer than 10 years.

Rajiv Shukla: It was a possibility, but ulti-mately it was a question of what would beaccepted in the market. Actually, the 10-year tranche itself went a little beyond 10years, and that created a problem forsome of the investors who have 10-yearlimits. But when they were happy withthe rest of the transaction, going a fewmonths over didn’t matter.

Paul Chivers: I think that point on amorti-sation, though, is actually quite an inter-esting one when you look at the two proj-ects, because on Dolphin we had a fullyamortising profile for the bond and we

had the three tranches with bullet maturi-ties on RasGas. I think it is fair to say thatthe sponsors considered the bullet maturi-ties on RasGas. But the advantage thatRasGas had, I think, was a much longeroperating history and a more corporate-style profile, as Mike mentioned earlier,and I that’s to its advantage; and it reallygets away with almost a synthetic amorti-sation through the various maturities.

I think on Dolphin, though, thatinvestors looked at the maturity, under-stood it; I think the investor group global-ly now is pretty sophisticated. They arewell educated, the questions on the roadwere good, and they absorbed that amorti-sation profile, and it was certainly one ofthe key facts that were part of the discov-ery in terms of marketing the bond.

Rajiv Shukla: I think that is absolutelyright. We would be a little cautious in say-ing that these two transactions have creat-ed a new asset class. It’s probably the pre-cursor of a project bond asset class, but oftwo strong corporates – two strong proj-ects with corporate-like characteristics ina market that is really seeking those. Yes,as we move from that continuum to themore Greenfield-like projects, that will bethe real test. At the same time, themomentum in the market, in the invest-ment market, seems strong, but it will beoverlaid with: Is the market acceptabilitythere?

Hussain Hussain: I would agree with that. Ithink the advantage of RasGas, as well, thesheer size that they were looking to raise,gave them the ability to structure it aswell to kind of three different tranches. Ithink with Dolphin, while at the end theydid do US$1.25bn in terms of financing, soit would have been able to do it in varioustranches. Initially, they were looking atsomewhere from 750 to 1.25. So it wasn’tyet certain that it would attain the bench-mark sizes that one would need for vari-ous tranches in order to get investors toget inside and participate in these deals.

Again, echoing what has been said sofar, clearly these are two of the strongestcorporates and two of the strongest proj-ects to come up to the markets, and Ithink it is important for this asset class toreopen that it starts with the strongestprojects to emerge, to perform well, toprice well, to get the market excitedaround it, and that will subsequently leadmore of the Greenfield-type projects tosubsequently emerge.



It is essentially an orderly progressionof issuance as we have seen in the corpo-rate market, where it started with the sov-ereigns, moved on then to the quasi-sover-eigns and the corporates, and in timemore cyclical type of issuers shouldemerge, and maybe even an issuance outof Dubai from the GCC region as well, aspeople get more comfortable with theproject and the asset class.

Simon Dickens: With respect to RasGas, Ithink one of the keys to the success, ashas been noted, is that this is not the firsttime RasGas has gone to market. One ofthe benefits of having these capital mar-ket programmes in place is that you dohave the ability to time things muchmore quickly than you do if you are agreenfield issuer. When RasGas 2&3 wentto the market the second time, they did-n’t feel that the bond market was going tobe there, they were able to structure abank transaction, they were able to take alittle bit more time. In 2005, they went tothe bank and bond market; in 2006, justthe banks. This time I think they wereperfectly willing to go to the bank marketif the bond market wasn’t there, butthere was a feeling following on thestrength of the sovereign offerings in theregion that the bond market was going tobe a viable choice. I don’t think anybodyexpected it to have the response that itdid get, being eight times oversubscribed.

To me, one of the very interesting fea-tures is the tenor, both of the RasGasbond and the Dolphin bond. Five yearsago or more, when people were lookingat structuring project bonds, the last proj-ect bond in the state of Qatar was theNakilat bond in 2006, and that was signifi-cantly longer than 10 years. I believe itwas about 19 years. People were lookingat the bond market particularly to stretchthe tenors, and it’s very interesting to methat the two very successful project bondsthat have come out recently are bothcapped at 10 years. I am wondering if thisis just a temporary reaction to changes inthe market or whether this represents areal shift in what project investors aregoing to find acceptable in the medium tolong term.

Derek Rozycki: That’s an interesting pointand something I can address. We actuallyhave a project where – in 2007 and againin 2008 – we tested the markets; that’sEmirates Aluminium. We tested the mar-kets for longer tenor deals, 20s and 30s,

and actually we had a bid from the market,it was pretty thick pricing, and we decidednot to proceed with that. But the bid wasthere, and I think that’s important.

Now, I agree with you completely: thequestion right now is whether it contin-ues to be there. There are certain advan-tages and disadvantages to going out thatlong. Obviously I think for projects thatby their very nature require a little bitmore flexibility than straight corporatesin many senses, it’s nice to have banksthere who are a shorter tenor bond, Ithink issuers and sponsors get very nerv-ous about having a 20-year project bondout in the market, from the perspective ofhow much it ties the sponsors’ hands interms of expansion, other joint ventures,and just the normal challenges that comeup in the project bond market as a singleasset entity.

But we have tested that, and it has beenthere in the past, and I guess our view isthat it will come back again in the future,and this is important for the developmentof one area that we look and hope to pushforward in the future, which is the PPPspace in Abu Dhabi specifically. We have anumber of university projects that arehopefully going to be entities that will bestrong potential issuers in the 20ish yeartenor.

Hussain Hussain: I think it is a matter oftime essentially for the market toprogress from where it is right now. Evenin terms of the corporate market, it has

really been limited to 10 years, if you lookat all the issues that have come, evenfrom the sovereigns, but I think in timethat is going to progress.

Mike Redican: The US market has beenused to taking longer bonds for a goodmany years. You have seen obviously inthe UK and Europe the development oflong duration bonds. There are absolutenatural homes for that.

One of the problems I think is that inthis region, because the sovereignissuance has been relatively short, wehave not seen many people going longbeyond the sovereign, and therefore forinvestors there’s just a little bit of – Iwon’t say “resistance” – but a little bit ofinertia, shall we say, to progress a longway away from where the sovereign’slongest trade has been.

Having said that, I am glad you raisedthe PPP model. I think, as these things aregreenfield – I am sure Andrew will say –you know, the agency does get very con-cerned about refi risk on these sort ofconcession type deals. Clearly, being ableto get a longer piece of bond debt togeth-er with some shorter bank debt actuallyhelps manage that refi risk in a muchmore effective manner.

We are talking to people the wholetime. If you have, for example, a 12-yearbond, what do you do with your bankdebt? Because you don’t want it all com-ing to you at the same time or within ayear, so even if you could get a 10 or 11-

Derek Rozycki and Rod Morrison



year bank debt, you wouldn’t necessarilywant it if you only have a 12 or 13-yearbond, because it puts too much pressureon the refi risk.

So we are trying to encourage the mar-ket to go a little bit longer so we can man-age the maximum liquidity in the bankmarket with the liquidity in the bondmarket.

You can have an amortiser with a bul-let, because you know you are alwaysgoing to try and work off the economiclife of the asset. On the concession agree-ment, for example, if you have a 30-yearconcession, you would not want to have a15-year amortising bond. That would beinefficient. But you can definitely do apartial amortise.

Paul Chivers: Let’s just try and rememberfor a minute how far we have come. Weare still getting towards the end of thethird quarter in 2009. Let’s remind our-selves that in the first quarter there wereabsolutely no capital markets issues in theregion, whether it be sovereign, corpo-rate, financial or otherwise.

I think that the maturity issue is reallydriven by the investor base at this pointin time, and I think that the five and the10-year in US dollars is absolutely thesweet spot, and whether it is projects atthe moment, sovereigns or corporates,most people coming to the market, mostissuers coming to the market are target-ing those two maturities, and that’s verymuch driving the capacity of the marketat the moment.

Derek Rozycki: There is a very interestingquestion there, and I put it obviously tothe banks, to the investors as well, toAndrew. Is a hard semi-perm facility –that’s what we term it in the bank market– something that the rating agencieswould consider, and how would you con-sider it? In other words, having, say, 40%of the notional amount amortising and a60% bullet in year 10 in order to achieve

an effective tenor of significantly longer?Because we are definitely hearing thatfive or 10 years is a sweet spot, but thereare projects out there that just don’t workwith five or 10 years, and if you want tolayer in some bank financing alongside it,the banks certainly don’t want to be struc-turally subordinate to the bond market interms of the bond investors getting outfirst, so how do we deal with that chal-lenge? I can tell you that, certainly fromour perspective, a five or 10-year issuanceon our PPP projects is not something weare terribly interested in. Perhaps in arefinancing spectrum down the roadsome years, but we would like to get themarket moving before that.

Andrew Davison: Given that there aren’tthat many projects that have been rated,that actually work through some of thetensions between different senior creditgroups in relation to the issues that yououtlined, the guidance that the agenciescan give to an issuer or to an adviser is tosome extent a moving feast at themoment. Some of the tensions that areclearly evident include the potential forthere to be a divergence of the pari passunature of a bond issuance vis-a-vis a banksyndicate, and that creates some degree oftension. There is, in relation to sometransactions we have seen, potential forthere to be a corrosive and adverse intro-duction of terms, which perhaps workagainst the interest of bond holders, andas a rating agency, we are sensitive to apotentially – an increase in the divergencebetween the credit quality of a transac-tion viewed from the perspective of abond investor which may be exposed tolong tenor, may be exposed to refinancingrisk in the sense that the banks are outearly and therefore the exposure isweighted more towards bond investors,and so on.

So I think it’s very much an evolvingarea, which is responding to a theme thatas a rating agency we see across a range

of different project finance sectors. Ourthinking – in terms of analytical frame-work to try and capture the issues andbenchmark them – is evolving, but clear-ly, where you do have refinancing risk inthe mix compared with a fully amortisingproject, the credit is negative. The keyquestion is how much and what it does tothe rating.

Mike Redican: We have done work with anumber of rating agencies, and on a previ-ous deal, we did a deal with Moody’swhere we had this effective amortisingstructure with a bullet, although it wasmore in a utility space type transactionrather than a project transaction. But weare very aware of the maturity bookissues on refi risk. Certainly, we recentlydid an acquisition finance structure thatwas rated where we actually contemplat-ed take-outs of the financing on a 3/5/7year basis from the bank financing, whereagain we dealt with the rating analysis ofhow a bond would look, and the inter-creditor arrangement between those vari-ous classes.

Now, this actually wasn’t somethingthat Moody’s worked on, but the princi-ples and the issues that you have justmentioned all came up in that analysis.

We were able to structure around a lotof those issues to get a decent investmentgrade rating, certainly not an Aa2 or Aa3level, but we were certainly able to get upthere by structuring it.

So we are cognizant of the issues, but Iagree with Derek: if you are doing a PPPstructure with a long economic life of theasset, and providing you manage the refirisk among the various sorts of financescorrectly, then it should be reasonable forus to demonstrate that you can managethat refinancing risk on the basis of a con-tractually robust contract structure.

I think we are looking to bring transac-tions to the market where you would give alot of weighting for their essentiality, theirgovernment involvement, and the other

Let’s just try and remember for a minute how far we have come. We arestill getting towards the end of the third quarter in 2009. Let’s remindourselves that in the first quarter there were absolutely no capitalmarkets issues in the region, whether it be sovereign, corporatefinancial or otherwise.“

”



things that we mentioned earlier, around amore robust structure. The only thing Iwould say to governments is that they haveto realise that they are not in the old dayswhere a lot of infrastructure project waspushed in the bank market right at themost marginal level, if they want access tothe bond markets in this space. But I dothink we should be able to bring deals ofsay 15 years with some amortisation andsome bullet, because we can manage theconcomitant refinancing risk.

Rajiv Shukla: Actually there isn’t much ofan investor issue as much as issuer issues,other structuring issues and perhaps cred-it rating agency issues.

In the project bond space it is a struc-tured bond and it is not the typical corpo-rate type of investor that you are lookingat. Sure, if you bring the reference back tothese two deals, there was a lot of corpo-rate feel about it. But for most of themore Greenfield-type or even the slightlymore brownfield-type project bonds, theassessment that will be done is a fairlysophisticated assessment, and for thoseclasses of investors, our analysis is, espe-cially following the last couple of deals,that if they are willing to do that sophisti-cated analysis, they will take differentamortisation profiles and more sculpturedprofiles if necessary and they will pricethe refi risk if necessary.

Simon Dickens: This is where you get anadvantage by having a multisource financ-ing, because not only do you create thecompetition between the various markets,but you are able to address certain of therisks for the overall transaction whilemaintaining a certain profile for a particu-lar product class.

We have been involved in certain trans-actions where you have a 25-year amorti-sation schedule but only a 12-year debthorizon, and in fact it was Moody’s thatwas the rating agency we were workingwith on that particular project bond thathad raised this as a particular concern.We were able to structure around that tothe satisfaction of the rating agencies andachieve an Aa rating by addressing certainof the factors in the bank pieces ratherthan in the bond pieces, and then alsocreating overall incentives for the spon-sors to address the refinancing risk early.

Mike Redican: There’s the soft mini-permrather than hard mini-perm argumenthere, because what you are always trying

to avoid is cost of default. Simple as that.Cost of default through failure to refi isthe big issue. So if you can get to a softmini-perm situation, it actually puts thepressure on the sponsors and it buys youtime to get the refi done.

Rod Morrison: Paul Fairbairn, moving on tothe question about benefits of projectbonds, I have heard a lot about the mix ofvarious sources of funding, but where doproject bonds stand at the moment in terms of the overall capital markets andwhat’s available from the capital markets?

Paul Fairbairn: We had two issues comeout of the region that had particular char-acteristics, which meant they were wellsuited to the bond market, and clearly thebenefits in terms of better pricing anddiversification of funding sources wereevident in spades on those two transac-tions. And with the very large financingrequirements coming out of the region,there are a number of projects that aremaking no secret of their plans to accessthe bond market to give that diversifica-tion to avoid over-dependency on any sin-gle debt source. That, I think, is going tobe a continuing theme.

There are two aspects: there is the posi-tive and the negative. When you look atthe negative aspects, there are constraintson liquidity, and that is impacting com-mercial bank capacity for uncovered debt;it is also impacting the ability to raisevery large amounts of export creditfinance. That is pushing people to look atalternative sources in the bond marketand has got to be there for that reason.

Maintaining parallel tracks gives youthe flexibility to be able to explore the dif-ferent alternatives, because it is difficult,given the lead times with projects, toknow that when you want to execute in18 months time that particular debtsource is going to be available. That isalways going to be an issue for greenfieldprojects.

I think what is the greatest opportunityfor the bond market in reality is that thedeals that are being done in the bankmarket and have been done in the bankmarket for the last 12 months or so havebeen done at historically very high pric-ing. They will need to be refinanced;everybody is saying they will need to berefinanced in the next two or three years.Those obviously prime candidates for refi-nancing in the capital markets as theymove out of the construction phase, and

again, once you see that momentum buildup, more and more transactions cominginto this area, you might start seeingmore venture into the – more scope forthe capital markets in greenfield projectsas well.

So I think the basic issues of construc-tion risk are always going to be there.That’s obviously mitigated to the extentthat you have very strong corporates whoare able to address that. But I think themost immediate or a fairly immediateopportunity for the bond market is goingto be refinancing of the deals that arebeing done today in the bank market.

Rod Morrison: Were you surprised that theDolphin bond came out cheaper than thebank loan? Do you see the banks havingto respond?

Paul Fairbairn: I think that is happeninganyway. Banks out there now are pre-pared to write business on the basis thatthey see this as pricing that is not sustain-able, it’s going to go south, so, frankly,they want to grab the fees while they can.

As to the particular dynamic there,that’s a function of timing. If the bankdeal had priced not in April, as it did, buthad priced in July, I’m sure it would havecome in tighter than it did. So the bankmarket is already recognising that timesare changing.

Derek Rozycki: One of the challenges thatwe have had historically, because therehave been a number of false starts in theproject bond market, is that the bank bidhas been so strong. The days of what Ibelieve were ridiculously tightly priceddeals hopefully are gone. I think that thependulum was too far to the tight pricingside of the equation for quite a long time.It’s swung back in the other directionnow, to the high side, but in our estima-tion, it’s not going back to the days ofPPPs pricing sub-100bp, and that’s a goodthing from our perspective, because it’snot long-term sustainable.

So that’s one of the key drivers of whythis market is going to develop, becausethe long tenor bank pricing is essentiallysignificantly higher than it has been inthe past.

Paul Chivers: We can observe two dynam-ics right now. We have started with theresurgence of the bond market. Actuallywe have a bank market that is undertremendous economic stress and is



deleveraging worldwide. Compounded bythat is an undercurrent of the effects ofBasel II, which I think has been over-looked in the financial press as the head-lines are caught up by other major eco-nomic and political events.

So in that context, pricing has to go up,and the effects of Basel II will be makingbank loans less competitive in the futureby them being more expensive. At thesame time, you have a resurgent bondmarket and I think that at this point intime, where the two have met. I thinkthere is some surprise that the bond mar-ket came in so fast, given where we wereat the beginning of the year, and ultimate-ly, on a swap basis, priced inside the loan.

In fairness, the loan market dynamic isquite different to the bond market, andboth Paul and Derek have pointed thatout. So the fact that the marketing exer-cise for a bond is over within about aweek to 10 days and the bond is launchedand priced gives issuers a very opportunis-tic way in which to take advantage of thatmarket to the extent that it’s there andthe underlying sort of coupon that we arepaying on the bond meets with their over-all pricing targets.

Rod Morrison: Obviously Basel II has beenaround for a long time. Is there anythingnew?

Paul Chivers: I’m not implying that it is new,but I think that as of January this year,banks were forced to adopt it rather thanvoluntarily so. As a result of that, the pric-ing models in banks are really quite radically

changing, and the cost of capital and theability to put capital out for term is reallyfocusing a lot of balance sheets right now.

Mike Redican: There are two issues, andyou have hit them in one sentence there.Pricing and term. Today, I agree with bothPauls: I think pricing will come back inthe bank market but it can’t come back toanything like it did because of the con-straints that Paul’s just mentioned.

So that starts to make, on a price rela-tionship, the bond more competitive thanit was. But what we have been finding isthat where banks have really started tobecome constrained is the number ofplayers who were really prepared to takethe basis risk of doing a 15/20-year bankloan. So they might have, say, a 15-yearlegal, but actually, if you look at the sortof step-ups they have in years seven and10 and whatever, there is no equity in theworld that’s going to want to live with it,quite frankly. That seems to me the issuethat we have to address.

If you are having a small deal, arguably,is it worth going to the project bond mar-ket? The greater the capacity of moneythat you need; the more you get. If you arejust looking at a bank deal, the more youare looking at the marginal players to fillyour capacity, and the marginal playersare the guys who have the biggest prob-lems. So the term will come in, the pricewill go up, conditions will be tougher.

What the project bond market offersover time – providing you can live withinthe rating constraints, which are both forthe agencies and for the liquidity where

the market is – will be that longer term,because of the asset liability and issue ofthe investor base. And that’s where I seethe opportunity. Because banks are strug-gling to go longer term, and I think thatreally sort of helps the development ofthe market.

But you can’t shy away from the factthat on a mixed financing you have todeal with the refinancing risk and youhave to avoid the default risk. So whenwe are talking to banks, we say: actuallyit’s helpful if you have a soft mini-permstructure rather than a hard mini-perm,because we don’t actually have thatdefault. We have a messy cash sweep todeal with, but we can honestly say handon heart to the agencies they can’t defaultthe bonds just by failure to refi, whichagain is a helpful thing in managing theposition. That’s why I think we have agood chance of getting this market going.

Rajiv Shukla: Quite apart from the diversi-fication of funding benefit that comeswith expanding it to the capital marketspace – it is perhaps just a function oftime that for some deals, the bond markethas come in below the bank pricing. Ithink the banks are going through somestress, but ultimately, if we look at it, theymay not be able to match the bondtenors, or be comfortable with the kind oflong-tenor bullet maturity. Ultimately, andsponsors play this game very well, it isgoing to be a relationship thing. Bondinvestors are relatively more agnostic,they will look at a bond, look at the com-parables and then price it up, whereasbanks will look at the other ancillaries,they will look at everything else around,and they have a much more flexibleprocess. They have a lot more to offer thesponsor in terms of the flexibility of thefinancing and the other services theybring. When things stabilise, as they ulti-mately will, and perhaps it will go againinto la la land – at that point in time bankfinancing is expected to be very competi-tive as well.

Hussain Hussain: One thing to bear inmind as well is there has been a paradigmshift of liquidity, a lot of it has gone intobond funds, and those bond funds, theyneed to invest it, they need to find homesfor asset classes. They have started offwith the best asset classes, but in time theinvestors also want to have higher returns,and this type of asset class, with therobustness it gives, with the security and

Husssain Hussain and Rajiv Shukla



all that, is going to clearly provide themwith additional yield at very attractive lev-els. So from that perspective, in terms ofthe risk they are taking, from that per-spective, clearly it is going to open up theroad for longer tenors in time and appetitefor maybe more risky, if you would like tosay, newer types of project.

Derek Rozycki: A quick thought to thatfrom the sponsor and issuer side: certainlyin our discussions with investors, as wereach out to the community both as a cor-porate and as a potential sponsor of projectbonds, we’ve found that they like the tangi-ble nature of project bonds. In other words,it’s an asset, they can very simply define it,they can go and visit it and kick the tyresand make sure it’s there, it’s not a slice of aslice of a slice of a million different thingslike we have seen in some of the structurebond space, so it’s something that is verytangible, and they get very comfortablewith and do their analysis on that.

They also, as you said Hussain, like theconcept of having yield enhancement anda yield pick-up relative to like-rated enti-ties, so a Single A sovereign, a Single Acorporate and a Single A project are goingto be priced differently, and that’s some-thing that people have identified as obvi-ously beneficial to their portfolios.

In addition to the important driversfrom the sponsors’ perspective of increas-ing liquidity, diversifying pools of capital,etc, the investors have to be there on theother side, and that dialogue is picking up.People are taking note of this investmentclass, which is fantastic news, and I thinkvery different from what we have seen inthe last ten years as the market has start-ed and stopped and started and stopped.

Rajiv Shukla: Wouldn’t you say that alsoone additional benefit to the sponsors,apart from what you have said, is that vis-ibility? It’s the natural financing progres-sion: initially you are confined to banksand when you go out to the bond class itbrings more visibility and therefore moreprofile with knock-on benefits from cus-tomers and everything else, makes you alittle more transparent.

Derek Rozycki: Absolutely, and Mubadalaitself has a drive towards transparency, asthe market will have seen in the last yearor so. We have issued our financials, weare encouraging transparency across thespectrum in our joint ventures, etc, andthat is a very important aspect for us, and

something that we look to push forward. Ithink the region needs to push forward togain increased acceptability across theglobal capital markets.

Rajiv Shukla: Just to amplify that point,because the tendency in the region, par-ticularly with relationship banks, hasbeen a very non-transparent kind of rela-tionship. This brings with it its own cor-porate governance problems and somethings have become a lot more apparentnow with some of the blow-ups in theregion. Certainly by being able to pushmore of the financing into the capitalmarket sphere, it helps the managementget the sponsors to becoming more trans-parent and taking that financing evolu-tion along.

Rod Morrison: Let’s just discuss investorsand go around the table on that. But Iwould like to finish off on the banks. Pauland Paul, do you see project finance bankscoming back to the Middle East – notwith-standing the obvious point on Basel II?

Paul Fairbairn: I think the first thing is thebanks haven’t gone away. The number ofplayers has reduced, for a variety of rea-sons. The sorts of things that they havebeen prepared to do have changed. Youhave seen some banks that have said “weneed to focus on our home countryissues”, whether it be Germany or else-where, which has meant there is less capi-tal available for Middle East projects.

Those constraints will ease but you willnot see the level of liquidity that we saw

two, three years ago come back, becausethere is a de-leveraging process, that’s afact. Banks are not going to be able tolend as much as historically they did.

In terms of the issue of maturities, it’sgoing to be interesting to see how thatdevelops. Yes, Shuweihat is out there witha 22-year tenor, and no secrets, that’s notbeen an easy process. You have had, onthe other hand, transactions like Al Dur,which have been done at much shortermaturities. There are other transactionsout there at the moment that are lookingfor the 15, 16-year full amortisers, so itwill be interesting to see, it is very mucha dynamic space.

We have had conversations with a num-ber of banks recently and frankly peopleare all over the shop as to issues likewhether they would like a hard mini-perm, a soft mini-perm or a full amortiser.There are very divergent views.

I think what we are seeing is they can’tgo beyond seven or eight years. Hard con-straint is softening; people do expect thatwe would move beyond that. But I thinkthere is going to be a real question as towhether people will go out and franklywhether sponsors will want banks to goout to a fully amortising 22-year deal,because that does lead to capital ineffi-ciency. It has to lead to higher pricing,there are very real pricing impacts ofgoing longer tenor. I don’t think it is nec-essarily going to be the most efficient wayto structure a transaction.

Derek Rozycki: If I could add very quicklyto that last point, from the sponsors’ per-spective, we are very keen on proving upto the banks that we will be able to recy-cle their capital, that we are driven torecycle their capital. We think that this isan important leg of ensuring the availabil-ity of project finance to our transactionsgoing forward. So we are spending a lot oftime internally diligencing this issue, dili-gencing how we can develop mechanicsthat will ensure that credit committeesand capital allocation committees getcomfortable with the fact that we aregoing to take these deals out of the bankmarket, hopefully post-construction, sure-ly post-construction, and put them intothe bond market.

So really from the banking side it ismore than a refinancing to another bankfacility, we really want to develop thatconfidence that the bond market, while itmay not be there at a certain time, it willbe there a year later or a year earlier.

We have hadconversations with

a number of banksrecently and franklypeople are all over theshop as to issues likewhether they would likea hard mini-perm, a soft mini-perm ora full amortiser.

“

”



So we are not proponents of short-tenorconstruction financings for our projects;rather we would like to see seven or 10-year hard or soft mini-perm facilities thatare legitimate project financing structuresbut where the sponsors have strongundertakings that are backed by activityin the market that these deals will disap-pear or be recycled in the near term. Andthat’s very important.

I very much see that as the future ofproject financing, there are not 20-yeardeals any more. There are absolutelygoing to be very successful deals likeShuweihat, we had one of our own lastDecember, a 20-year PPP financing for theSorbonne University in Abu Dhabi, butthose will very much be the exception tothe rule. We need to have the confidenceof a very strong bond market.

Paul Chivers: I think that historically,when we have been through recessionaryperiods, I have considered the bank mar-ket going from being hyper-competitive tojust super-competitive. As a result of thatjust slight deterioration for a short periodof time, inevitably the banks have comeback and we have gone back quite quicklyto very long tenors, very low pricing.

I think this is different, it feels differentthis time around. We are dealing withmuch bigger issues and more profounddynamics that are affecting the underly-ing pricing and profitability of loans.

I think the bank market and the bondmarket are highly complementary. Let’sremind ourselves, the bank market takesshort-term deposits and really is getting alittle bit out of kilter by making 25 to 30-year loans very cheaply off the back ofthat. It really needs, I think, to focus onwhat it’s really good at: sophisticatedcredit enhancements for medium-termfinancings. I believe this is where the USmarket got it very right early on: the USmarket understood risk-adjusted returnon capital very early on, the banks with-drew from the project market largelyglobally and were very happy to play arole of parcelling up risk, financing itthrough difficult, you know, periods ofconstruction, for example, and thenallowing the refi to go to institutionalinvestors. I think globally that’s a work-able model, it’s a sustainable model, andthat’s certainly where I would like to seeit end up.

Mike Redican: Derek made a very goodpoint about the importance of everyone

understanding the need for banks to recy-cle capital. If you think about it, no mat-ter what the will of the bank is, seriously,when they are looking at regulatory con-straints and everything else, if you areputting a lot of long-term assets on yourbooks, that by definition is making itharder for you to manage your balancesheet. It just is. If you have committed 25-year money at a price, then that is therepermanently for 25 years. You are goingto have less flexibility in your balancesheet.

I think it is encouraging to hear anissuer who is alive to the problem: that ofcourse it’s an equity issue if you have arefi risk. It’s very nice for equity to say,“Great, I have my financing locked in at20 years, if I manage my operational stuffokay I can manage my equity return”. Ithink it is good to hear an issuer who isactually alive to the issue for banks – obvi-ously someone wants to make his equityreturn or the return on projects as goodas possible, but recognising that you needto use the other tools available in themarket.

One of the mistakes that we saw in theUK, when the monolines were at theirhighest and we were selling AAA bondsvery tightly, was there were a lot of peo-ple entering into PFI transactions saying,“Yeah, we will do 25 at 85, because thebonds will take us out of the AAA”. Well,the monolines blew up and all those dealsare haemorrhaging. If they were mark-to-market, there are a number of bankswhose numbers would look even worsethan they currently do as a result.

So I think banks have learnt that lesson,but you are right; they feel under compet-itive stress. No project finance bankerwants to feel that he can’t lend money.He still has to make a living; he still hasteams to support, so to take Paul’s point,there are still people out there. Wherethey have the problem is with their capi-tal allocation committees, their creditcommittees are saying, “Well, the issuerwants 20-year money, you are not goingto get it unless you do this”.

I think Paul Chivers is right by saying:let’s focus on the complementary side. Ithink the bond markets have a role bothin greenfield day one and in take-outfinancing day one, quite frankly. Clearly,it’s for the rating agencies to work witharrangements and structures to determinethat the greenfield risk can be managedand get to the acceptable rating. We arelooking at very large projects, in particu-

lar some of the size of the deals comingout of this region, they need multi-sourcefinancing in any event.

So it is important that we all activelyencourage this market to develop andmake sure that the good start in investoreducation, which Rajiv, for example, andhis team have done and Paul and his teamhave done on these two important trans-actions, actually disseminates downthrough the market.

If you think about it, if the deal isstrategic and important, there’s a massiveincentive for the sponsors and the govern-ments to keep it going, much more sothan a normal corporate, if we areabsolutely honest. So I think that is a bigdriver that is not often understood byinvestors.

Rod Morrison: Moving on to investors andthe great bull run in bonds. Simon – doyou see the bond rally continuing?

Simon Dickens: I do. It is interesting asyou look historically at what bondinvestors have seemed to want comparedwith the bank markets, the banks arevery willing to roll up their sleeves andget involved with the sponsors. As prob-lems come up or difficulties arise on atransaction, they will sit at the table andwork them out with the sponsors, whichis of course not what you expect or partic-ularly want from a pretty disparate groupof institutional investors that typicallywant to put their money on the table andget their coupon and be left alone.

As you see the two sources of financingcoming together more frequently in capi-tal structures, it’s quite interesting. I am alawyer so I find this stuff interesting, howyou structure these transactions to kind ofcreate proxies for the institutionalinvestors, so the sponsors continue tohave the flexibility of being able to sitdown with their banks and have the bene-fit of having the long-term investor sittingthere without having to educate them.Now, education is a very important thing,as Mike was talking about, making surethe institutional investors really under-stand the risks that they are being askedto underwrite. And I do think that therewill be an increase in understandingamong these institutional investors, and Ithink you will see an increase in theirwillingness to accept some of the risksthat traditionally you would only expectbankers really to take, to understand, par-ticularly construction risk.



Traditionally, when you look at particu-larly the US market, institutionalinvestors would back away from any sortof construction risk. If you had an AAArated monoline insurance wrap, you don’tworry about that, and you just kind ofrely on the balance sheet of these insur-ers. When the balance sheets of thoseinsurers deteriorate, they suddenly haveto understand the construction risk.

But I do think that they are becomingmore sophisticated, and I do think thatthe differences between the two marketsand the profiles, I think they are converg-ing a little bit, and I think you are seeing– certainly from a legal structure in thesetransactions – a greater commonality interms of the bank and the bond side thanyou did 10 years ago.

Mike Redican: The one point I would add tothat, actually, is information. Because, obvi-ously, what issuers have been doing withthe banks, under confidentiality, is givethem everything under the sun. Of course,one of the issues we all have as issuers ofpublic instruments is that information hasto go into the public domain, which some-times has been a conflict for issuers. But weare certainly seeing, and we have beenworking on, for example recently, is routesof how to put formats for summary infor-mation so that investors get their informa-tion required. They don’t need to see all thenitty gritty that the banks do, but they wantto hear, for example, summary progress. Isthis performing along with the milestone?Is the current ratio on track? If you discloseit’s 1.3 or 1.4 or 2, or whatever the hell it is,it doesn’t really matter. But that’s becominga much bigger event, certainly in the UKand Europe, we are finding.

Simon Dickens: I think one of the thingsthat we are seeing more is a heavierreliance on the rating agencies going for-ward to take a look at these sorts of devel-opments on behalf of the investors. Weare seeing quite frequently rating reaffir-mation requirements. So I think the roleof the rating agencies is actually going togrow in importance as we see the devel-opment of the market.

Rod Morrison: Andrew, would you like toanswer the point about the need for moretransparency and information on the proj-ect bonds?

Andrew Davison: I think we would concurwith that observation. It is an important

jigsaw that is currently not addressed wellin many transactions, and I am speakingprimarily with reference to the compara-tor project in the PFI, PPP space.Particularly with the demise of mono-lines, there has been a very strong resur-gent interest from a number of investorsto get access to the underlying informa-tion, and unfortunately the way in whichthe transactions have been structured andthe obligations that issuers entered into toactually require them to disseminateinformation to investors – well, to do so.Those obligations are either non-existentor relatively weak.

Notwithstanding that, investors haveclearly shown themselves very interestedand have pushed hard in a number ofinstances to get access to information.

On the subject of transparency, withinour methodologies for the PPP sector, wehave a very detailed methodology thatspeaks to construction risk, and the differ-ent elements of construction risk, and theway in which mitigants may impact onour rating approach, or our rating invest-ment, rather. So I think from that respect,as a rating agency, we do feel that wehave contributed to the debate in thesense of making available and transparentand predictable rating methodologies andtools which work at a very detailed level,certainly within the PPP sector.

In the context of Gulf projects, howev-er, there is clearly more that we may beable to do as a greater body of precedenttransactions evolves. Certainly, we can tryand address the questions as they come in

on individual transactions, work withissuers and advisers on an informal basis,and then give further feedback throughrating committees, but I think it is animportant area and I would concur withthe points that have been made.

Derek Rozycki: I would agree with muchof what’s been said. In fact, on theDolphin transaction, one of the moreprominent questions that we got was,how will we be able to keep track ofwhat’s happening with the project on anongoing basis? We had structured in ourmarket standard mechanics for thatreporting, which are – you know from ourpoint of view in retrospect – probablywholly inadequate for somebody to dotheir full credit analysis if they want tokeep up with that on an ongoing basisand not just place reliance on the creditrating agencies.

So we are spending a lot of time as asponsor thinking by ourselves, with ouradvisers, and in fact we are actually evenengaging investors, about how to addressthis issue.

Of course, reporting is a double-prongedissue. There’s got to be a willingness to doit, which historically I think really hasn’texisted in the Gulf. Then there are themechanics through which you do it. Bothof those prongs need to be developed inthe Gulf. And I think the willingness to doit is certainly developing again. I thinkMubadala is at the forefront of that effort,as well as a number of other issuersaround the region.

Mike Redican and Paul Chivers



I also think the banks are going to drivethat in large part because of some of thechallenges that the region has facedrecently with transparency issues. I thinkthe banks will use their capital to pushthe process and enforce the discipline ofincreased transparency, and that’s a goodthing, absolutely a good thing, for themarkets in the long run, but will be apainful transition.

The mechanics through which we effectreporting on project bonds are a little bitmore difficult, because of the nature ofthe market, because of the lack of sort offormalised reporting for a project compa-ny, there is a lot of discussion about howwe should do that. For example, onDolphin, we are talking now should weput our financials and even an MDNA onour website. That’s a sensitive issue forsponsors and one that’s certainly going totake a lot of time to get senior manage-ment comfortable with, but I think in thecontext of enabling the development ofthe project bond market, people willmake the value decision that in fact it’simportant to do this to enable this capitalto come into the market.

Mike Redican: You have to do it because –I am sure you will bear me out hereSimon – if you just try and give the infor-mation through an encrypted website, orsomething like that, the problem is thatyou automatically make those peopleinsiders so you can’t trade their bonds. Sothe worst thing about it is you are in thisbetwixt and between of – you are happy

to give information to your lenders, evenif you’ve got registered bonds, you canidentify your own desires; as soon as youmake it an encrypted website you havethe whole issue that you can’t effectivelytrade the bonds, and of course that wouldthen massively affect your liquidity.

So you are almost forced to work out aformat that works in a public domainenvironment. We have been actuallyworking quite hard at Deutsche right nowon how we do that on a website basis andhow we do it with – what sort of frame-work should we be recommending to –issuers that we think meets as many ofthe demands of the investors as we canreasonably get away with. Plus, I think ithas been generally accepted as well, theneed for continual employment of ratingagencies for the sort of semi-annual/yearlyupdates as well, which is very good newsfor them, of course.

Derek Rozycki: It is an absolutely crucialissue. I am 100% sure that we lostinvestors on the Dolphin deal because of alack of a specific mechanic through whichthey could get ongoing financials. And ifyou have more bid, more liquidity, yourpricing is going to tighten up generally inthe market, and the after-market.

Mike Redican: It definitely helps yourafter-market point massively.

Derek Rozycki: Absolutely, and even in thepricing timeframe, because it is going toincrease the size of the book, it will bring

incremental demand to the market. So itis something we are going to focus onvery, very hard.

One of the other very important aspectsof this from an investor’s perspective isthat most of the investment community,they are not mechanically set up from aresourcing perspective to do the kind ofcredit analysis on these more complextransactions. The reliance has been verymuch on the rating agencies but certainlywe have seen an increased desire to beable to analyse these credits in-house, andthat’s going to take some time to develop.So one of the questions I wonder about aswe look down the road is do we need totake more time, and do we need to edu-cate the market to be a little bit morepatient when we are marketing thesetrades?

In the specific example of the Dolphinbond, again, it was an incredibly busyweek. The tome that we put down on thetable when we went in to see theinvestors was intimidating in some ways.There is a lot of information to get com-fortable with in a couple of hours of read-ing, and to put into reports for the creditarms of the investment community.

So how do we change our interactionwith the market to allow the investmentcommunity to do an appropriate amountof credit analysis, especially given thatmany of them are under-resourced to dothat kind of heavy lifting? How do weenable that, what can we do better asissuers and advisers on the banking sideto enhance the flow of information?

Mike Redican: I hate to say, we were get-ting to the view a while ago that some ofthe presentation packs seem to be almostlike the background for their creditreport, quite honestly. We have been sortof moving the shift of those a little bitmore to a credit focus explanation of theissues more than we perhaps used to inthe past, if I’m honest.

Rod Morrison: We will move on to second-ary markets in a minute with Paul, but Ijust want to ask Hussain and Rajiv whatthe investor base was on Dolphin and onRasGas in terms of where you saw theinvestors coming from, Middle Eastinvestors versus US and European, etc.

Hussain Hussain: On Dolphin, I think wesaw quite a balanced divide of investorinterest, of course three principle regionsbeing the US, Europe with the focus really

The discussion



with UK-based, London-based accounts,and the Middle East. We did see someAsian investors, but less so in comparisonwith what we have seen with some of thecorporate deals prior to that, but I thinkin general it came from those threeregions. Very much fund managers, insur-ance funds, pension funds driving them,as well as some banks. What was interest-ing is some banks that did not get intothe Dolphin deal on the bank financingside suddenly saw further opportunity togain exposure to Dolphin via the projectbond, and came in in size to just essential-ly offset their inability to get everythingchecked and in line in time for the bankfinancing.

Interestingly enough, I think also justone point about information to point outas well: I think the Gulf region is a rela-tively new region for fixed incomeinvestors. There has been issuance out ofthe region in the past but it has been verymuch concentrated on Dubai, and therehas been a misconception of what theGulf really is. My understandings as wellon, for example, the Qatar roadshow,when the sovereign announced the road-show, people were asking: well, youknow, how is Dubai related to yourselves,where does Dubai fit in? It was just a com-plete misconception of the different coun-tries in the Emirates and how they allfunction.

Thankfully, this year we have seen a lotof issuance come out of the region, andpeople are becoming much more educat-ed and much more focused on the region,and understand the fundamentals, whatdrives these economies over here, therapid expansion we are seeing leading toa lot of these new projects coming tostream and needing financing. I thinkinvestors are finally starting to buy in andappreciate what the background to thatis, and where it is going, and how wealthythe region is, and the reality is, where doyou get the yields that you do for the typeof credit ratings that are apparent here inthe region? You don’t really get that com-bination in many cases. So in time . .

Derek Rozycki: We don’t want to stickaround for too long!

Hussain Hussain: Well, yeah! But I thinkthere is a disparity and that’s what has ledto essentially why these types ofeconomies or these types of regions arestill paying up relative to other regions.As people become more educated with it,

as more issuance comes into the bondmarket, fixed income investors becomemore familiar and more comfortable withissuance out of this region and also inprobably what is perceived to be morerisky asset classes as well.

Rod Morrison: On Dolphin you had 24% ofthe investors from the Middle East. Is thatsustainable going forward on the project?

Hussain Hussain: On these types of proj-ects? I think on this one they know thecredit well, there is a strong name recog-nition, Mubadala, Dolphin, especially herein the UAE is a very huge project, peopleare very familiar with that and the impor-tance of it. And what you will see as wellin a lot of these deals is wherever theproject is from or wherever the deal iscoming from, the domestic investor baseis the one that really kind of helps andassists and drives it.

Clearly the UAE has a large investorbase in the fixed income project, whichcame also to the benefit of the Dolphindeal.

Paul Fairbairn: I think also the fact that weare offering a fairly short maturity.

Hussain Hussain: That is one thing. I thinkwith the 10-year tenors, the RasGas distri-bution, the Middle East was 70% at theend of the deal. The investors here in theregion are very much kind of in the five-year space at the moment, at least interms of what they are looking for.Dolphin was a bit longer, 6.1 years, someinvestors said that was a bit long forthem, but it didn’t really deter a large por-tion of investors, but we did see investorsreact to that and say: five years we aremore comfortable with.

Paul Chivers: And of course rating. Wecannot ignore that. We have come withworld-class sponsors, great names in theregion with tremendous followings. Ithink more generically, though, obviously,we hit the market right, investors don’twant to be in cash at the moment withhistorically low yields. They don’t particu-larly like the equity risk reward. So thebond market has taken off this year verysubstantially and sustained its rally as aresult of more and more funds cominginto the market and buying down.

I think a very key feature to both ofthese deals was the strong bid out of theregion, and also the Euro Dollars in

Europe, and that’s been true actually ofmost credits that we have seen out of theregion this year. About 90% of the issuehas been purchased almost equallybetween the region, Europe and NorthAmerica.

So I think, again, this is a very, veryinteresting dynamic from the bankingperspective, from the advisory perspec-tive, historically these deals have been US-dominated from an investor, and alsofrom a lead bank. And I think that it’sabsolutely critical going forward thatissuers have a strong mix of globallyrecognised banks that have that kind ofinternational footprint to make the mostof all those investors bases.

Rod Morrison: As the tenors get longer, doyou think Middle East investors will go?

Paul Chivers: I think that Hussain isabsolutely right, he has already said it: itis fair to say on Dolphin we probably losta few investors because we went over thefive years.

Hussain Hussain: You should bear in mindthat Middle Eastern investor bases are pre-dominantly banks, and banks generally donot want to go to 10 years in terms ofwhere they want to be putting theirmoney towards. There are a couple ofinsurance companies, some pensionfunds, so on and so forth, but they are nota large portion of the investor base in theMiddle East at the moment. That couldclearly evolve in time, but at the momentit is still dominated by banks.

Rajiv Shukla: On RasGas, the aggregatewas clearly underpinned by the US, withof course strong bids from the MiddleEast. The final allocations were 45% to USinvestors, 30% to European, Middle Eastgot 15%, and the balance went to Asia.

However, the mix across the threereflected the preferences there. In thethree-year market it was 20% Middle East,which went down to 7% in the 10-year.

On aggregate, it was a mix of types ofinvestors; fund managers predominated,then there were other institutionalinvestors, central banks, insurance compa-nies. But what was interesting was therewas even in this particular asset class abid from or a distribution into retailinvestors. So we are seeing that now in alot of our bond issuances, that privatebank clients are actually making bids forthese kinds of offerings.



We have talked about the strong bondmarkets since the beginning of the year,we have crossed US$1trn and this is justthe month of August. We don’t yet see asign of indigestion. We are talking justpurely project bond space: we don’t yetsee anything that would cause us tobelieve that there is indigestion. In fact, tothe reverse: given some of the holidaysthat are coming up, some black hole peri-ods that are coming up, there is almost asense of urgency among asset managersand institutional investors as to how dowe get some of this money to work beforewe have to start closing up the books,which is why we have seen a little moreactive summer than you could otherwisehave expected.

There will be issues there within theproject bond space, as you get from themore corporate like cashflow generatorstructures to the more greenfield type.We have talked a lot about the construc-tion risk, the strength of the structuring;and how the sponsor support kicks in dur-ing that construction period is going to bea key element in how these investors canget comfort and actually put their moneyto work in the project bonds.

What is also going to be important ishow important are these to the underly-ing – therefore things like utilities andthings that are very, very important to thesovereign, utilities, power, like rail, elec-tricity, etc, will get more of a tractionthan for instance real estate projects.

Rod Morrison: Re secondary markets. Pauland Mike talked about how those can beencouraged. Obviously that’s a big benefitto bond investors. What steps have beendone to encourage the secondary trading?

Paul Chivers: The first thing that bondinvestors are going to be looking for is liq-uidity, and the liquidity benchmark side isgoing to be absolutely critical. Liquidity willcome at a cost as well, and Derek talked alittle bit earlier about getting the sizing of atransaction and the pricing right.

Historically, again, we have seen theproject bond really purchased by realmoney US dollar investors, pension fundsand insurance companies, and theyhaven’t really traded that well, I have tosay. That’s not a reflection on the credit;that’s really a reflection on the technicalsin the sense that you just can’t buy bonds,really.

I think probably everyone would agreethat it’s been very difficult really coming

out of the financial crisis in terms ofworking with investors and really sort ofgiving them the confidence necessary thatthe deals would price as and where theywould.

I think a feature, however, I have seenin the new deals and the marketing –Dolphin and RasGas – is that you haveseen investors understand the relativevalue of what’s already out there, I thinkyou have seen the RasGas bonds trading inquite nicely as a result of that. There hasbeen a lot of trading certainly we know onDolphin, the bonds remain very liquid andare active. But I think it is fair to say thatover the medium term, the trading activi-ty will probably calm down as the bondsfind actually that natural home.

Mike Redican: We saw the same thingeven on the longer-term bonds, thingslike Metronet, that they actually traded alot as people reallocated, and then theyliterally did nothing. They just stoppedtrading.

The difference is that if you have a long-term bond, it is going to have a differentinvestor base than short-term bonds.Banks are going to trade more actively inthe three to five-year space and a fundmanager or a pension fund is going to be– when he is looking at asset liability, helikes the asset, he buys it – they alwaysclaim that they want liquidity, but actual-ly we found that with a lot of the UKinfrastructure bonds, they never reallytraded at all, quite frankly. You have thatinitial activity, flurry of activity, as peoplesort of get reallocated between them-selves, and then they just . . .

Rajiv Shukla: That’s why the allocationdecision at primary allocation makes somuch of a difference. It’s easy to say:those people are my friends, and we willlet the leads reallocate, but it has to be aconscious decision and a conscious impo-sition by the sponsor as well, to be able tosupport the secondary market. And ofcourse who is actually market-makingthose bonds, who are your leads, will theyactually support the after-market andquote two-way prices?

Derek Rozycki: That’s true. It is alsoimportant to note that as the marketgrows, the depth of the bid will grow also,so as more of the investment communitygets comfortable with investing in theproject bond in part, their senior peershave seen the success of deals. That will

be very helpful, and an increased flow ofproject bonds will also help investorstrade to some extent as they look at rela-tive value between a new issue trade andone that’s been on their books for sometime. So that will be an important devel-opment and an important enhancementfor liquidity also.

Rod Morrison: What is the future for proj-ect bonds in the GCC? Obviously, we havehad a couple of energy-linked bonds butthere are huge infrastructure ambitions,even industrial ambitions. There is a lot tobe financed. Maybe if I could start withAndrew.

From your perspective, Andrew, do yousee – particularly with these two issueshaving been concluded successfully – a lotmore people coming to see you from theGCC?

Andrew Davison: The short answer is yes.We have had a big pick-up in terms ofapproaches, initial discussions, and a levelof activity that is currently confidential.We have been undertaking a number ofprojects in the region that we are not ableto disclose publicly, but it goes to publicdebt issuance in all likelihood.

Other factors I would point to, there hasbeen quite a lot of discussion in relation tothe structural constraints on banks versusbonds now. I would also cover those, inparticular the strengths that the banksbring to the market: intellectual capital;flexibility of approach; a user-friendlyinterface. But on the other hand, the struc-tural constraints or impediments to thefinancing strategies of 18 months, twoyears ago, the ground has changed, andthe challenge involved in summary tenor,depth of liquidity, capital constraints,which are then driving pricing and avail-ability of bank debt, all of which are struc-tural considerations that suggest that theproject bond market will become a muchmore significant focus going forward.

Overlay that with the need to recyclebank debt that is already committed toexisting deals, and I think that suggeststhat the future of the project bond mar-ket is relatively bright in the region.

Simon Dickens: There is a very strongfuture for project bonds in the region. Justlooking at the capital markets in general,the region is under-served by the capitalmarkets. Just see a statistic here that inthe Middle East/North Africa region, only3% of their corporate capital is in the



bond and debt capital markets, comparedwith 42% globally.

As issuers in the region become morefamiliar with the opportunities the capitalmarkets provide, as they gain a deeperunderstanding that some of the things thatscared them about the capital marketsaren’t that scary – we have talked a lotabout the dissemination of information. Inthis region there is not a long tradition of aratings type of culture where people aredisseminating information about them-selves. As they see strong corporates likeMubadala and Qatar Petroleum taking thelead in this sort of space, I think it willease some of those concerns.

There have been a lot of misconceptionsin recent years, particularly as relating tothe US capital markets, what it means to bean issuer. There was this big concern a fewyears ago, and I guess it continues to thisday, that merely by issuing into the US yousuddenly become a reporting company inthe US with all of the attendant require-ments for making quarterly filings, andthat’s just not the case. If you are doing a144a or a RasGas, it doesn’t make you areporting company. People understand that.

People understand that just because youare issuing a bond, it doesn’t mean youare suddenly subject to the Sarbanes-Oxley Act in the US and the long arm ofthe US law. That takes away some of thefear that’s in the market.

But I think the most important reasonwhy there is a very strong future for it isthat we are talking about projects that arenot luxury items. We are talking aboutnecessities. We are talking about electrici-ty; we are talking about monetising theassets that are in the region; we are talk-ing about developing the infrastructure. Itwould be more difficult if we were talkingabout real estate.

But talking about necessities to allowthe region to continue to grow and toprosper, the projects are becoming bigger,the capital requirements are significantlyincreasing, and there is this pool ofmoney that just can’t be ignored.

It will be interesting to see what hap-pens with maturities, but even in theshort term with reasonably short matu-rities on the bonds, I think it is anincreasingly important market for theGCC.

Hussain Hussain: I would agree with that.Clearly, these two deals that have come tothe market in July have given both issuersas well as investors and banks pitchingthis project a lot of confidence that thereis appetite for this project; it is there; it isreal. We have seen a lot of follow-throughdemand in the secondary market fromsome of the investors that could not getthe allocations that they desired, andclearly interest for them for furtherissuance in this type of asset class.

Likewise, for issuers themselves, clearly ithas been an awakening to a new asset class;that it’s there, it is real, it is not somethingthat one has talked about a lot in the pastand unfortunately never came to fruition atthe time. I think from that perspective,especially with the projects that Simon wastalking about, these types of projects arevery important for the governments hereand for the region here. They do need to getfinance, and with bank liquidity remainingscarce and relatively expensive, they aregoing to have to look for alternative means.Institutional investors are very much readyand willing to be part of that financing thatissuers get involved in.

PO Box 45005

Abu Dhabi

United Arab Emirates

Contact Number: +971 2 413 0026

investorrelations@ mubadala.ae

www.mubadala.ae

acquisitions aerospace energy & industry healthcare info & comm technology infrastructure real estate & hospitality services

realizing opportunity



Rajiv Shukla: Yes, the future is bright. Ithink it is going to be a little more diffi-cult, the roads to be able to get there. It’snot as easy. Ultimately it’s a structuredproduct, and the challenges or the trac-tions for the bank market as it returnswill cause some amount of discussionswithin sponsor groups as to whether theyshould continue or not.

We are in discussions mandated onsome of the potential projects that I guessAndrew is talking about, and that kind ofthought process is still going on withinthe potential issuers’ minds.

At this moment in time, it makes sense totry and keep as many of the sources open aspossible. But clearly, you need absolute fullyairtight structuring to be able to take stuffout, and there are particular problems inrelation to greenfield project bonds which,in comparison to the flexibility offered bybank loans, make it seem more difficult.

Projects that have a strong state sponsorand come up to the sectors like energy,utilities, ports, rails, etc, will find greateracceptance in the investor communityand I think are the ones that will be thenatural starters.

We actually think the refinancing gameis not going to be as attractive. Or it willnot take off as much as some people aresuggesting because we have to rememberthat a lot of the projects that werefinanced in the Middle East happened at atime when bank margins were at the low-est. So it’s a very difficult sale to the spon-sors of those projects to go out and refi-nance in the bond market at much highermargins. Except if you are looking farahead, as you are, Derek, and saying: butthere is a recycling of capital thing, I needlong-term sustained access.

So there is great potential, there is cer-tainly acceptance in the investor base, wefeel, and I think that the sophistication levelof investors in the US and even in Europenow has increased. We are getting sometraction in from Asia and the Middle Eastfor the more structured project. But it’s notlike the floodgates have been opened.

One last point that is interesting – par-ticularly given the region we are in – is inrelation to Islamic finance: projects lendthemselves better from an Islamic struc-turing perspective, because they representactual hard assets, and therefore notwith-standing the complexities surroundinggeneral project financings, from purely anIslamic acceptability, it is a clearer activi-ty. You are actually financing an asset.

There will still be issues in terms of

tenor for Islamic finance and Islamicbanks, but we are getting to a stage wherethey are kind of getting more comfortablewith a tenor that is a return aspect. So it’snot something even in the Islamic financebase that will burst out, but it certainlyrepresents an opportunity.

Rod Morrison: Mike, can you do a PPPbond deal in this region?

Mike Redican: I think you would be able to,but first I wanted to agree absolutely withRajiv on the refinancing opportunity forexactly the same reasons as I think it isprobably overstated, actually. That’s thesame in the UK and in Europe as well, thereis only a very short history of bank dealsbeing done at sensible prices to encouragerefinancing. So I’m not a great believer inthe future being based around refinancing.That was the first thing I wanted to say.

Specifically on PPP, I think PPP can bedone, because people tend to forget, theUK structures were really quite aggressive:they were 90/10 debt/equity structures,25/30-year concessions, and as time woreon, the government became more aggres-sive on actually increasing the risk trans-fer to the private sector.

Do I think the same structures can beadopted here? Yes, but not as aggressively, soin other words I would not expect to see thesame degree of risk transfer, because first ofall we are not starting off with an AAA sov-ereign in most cases. I would expect there tobe more equity in the deals and/or a morepreferable composition and terminationregime and perhaps a bit more understand-ing of how the risk transfer should occur.

So I think that’s the first thing: do Ithink it could be done? Yes. Secondly forinvestors, I think they are going to focuson, as we said earlier, the sponsorship andgovernment support and the rest of that,but they are also going to be really look-ing at essentiality. I have seen a numberof projects throughout Europe, for exam-ple, that are roads to nowhere, to give anexample. If you are going to do a routethat is an absolute core route, then Ithink you can demonstrate its strategicimportance straight away. There are somein various parts of Eastern Europe that areliterally nowhere to nowhere. They willnot get funded because nobody reallywants to do them, quite frankly. There isa procurement out there to do it but theyare going to find it very hard.

I think investors will be similarly dis-criminate. They will want to know that the

government is absolutely behind this, theywill want to know it is a very core route.

Universities are something that I thinkare a very interesting space, because actu-ally it’s easily understood. We come backto things that are easily understood byinvestors. People understand the need forprovision of schools, hospitals, universi-ties. If you look, for example, at the UKexperience and even the European experi-ence, the things that have done well havebeen some of the key social infrastructurelike hospitals.

PPPs can be done, but I think there hasto be recognition from the outset that thestructures can’t be driven as aggressivelyas they were done in Europe, because wehave to achieve a higher rating thresholdto sell the deals, and you are starting offfrom a different place.

Paul Chivers: I am very optimistic for theregion, for a number of different reasons.The region’s got a long history in usingproject financing, and I think that’s verymeaningful. We have seen the regionapproach the capital market in the rightway, with top quality sovereigns accessingthe market and establishing liquid curves,and I think that’s underpinned all of thecapital market’s activity in the region andshouldn’t be underestimated.

We’ve got just great examples of world-class sponsor groups operating downhere, and there’s good supply. There’sgood supply of essential projects, as hasbeen mentioned, particularly in thehydrocarbon and infrastructure space;these are very hot sectors, investorsalways have time to hear about them.

Clearly, now we have precedent. Theregion has pioneered two tremendous trans-actions reopening the asset class globally,and I think interestingly has also contributedtowards some more international investorbase, which historically has been dominatedby the US, so now, today, we have a strongbid from the region for the right project atthe right price, as well as Europe and Asia.So that’s providing very good oversubscrip-tion and good performance.

Finally I would like to say that this coin-cides with a repositioning of the bankmarket. There’s a de-leveraging effect, andthe repricing of capital allocations reallyshouldn’t be underestimated, and I thinkthe two together combine to leave mevery optimistic that more can be done.

Paul Fairbairn: Clearly, from a demandperspective, issuers are going to be look-



ing for as many sources of liquidity as pos-sible. I think the interesting thing withthe project bond space is that it is part ofa wider story, which is that you can’t lookat project bonds in isolation of what’shappening in the wider capital markets. Ithink as you see more and more issuancefrom the region, not just on the projectbond space but more generally, that’sgoing to be a key driver for continuingaccess to the capital markets by projectsponsors.

So I think the best opportunity for proj-ect bonds will be the continued govern-mental, quasi-governmental and corporateaccess to the markets, because thatincreases the familiarity with the regionacross the investor base.

Mike Redican: I would put one caveat onthat: you can occasionally get region over-load. You have to be careful on the supplyside. But if that’s managed, then I thinkyou are right.

Rod Morrison: Paul and Rajiv. You areadvising on projects in Saudi. Can we see aproject bond from Saudi? Is that possible?

Paul Fairbairn: Yes.

Rod Morrison: Now?

Paul Fairbairn: I think it is entirely possi-ble there will be a project bond comingout of Saudi.

Rod Morrison: Into these markets we havebeen talking about?

Paul Fairbairn: Yes.

Rod Morrison: Is there anything extra thatthey need to do to allow that to happen?

Paul Fairbairn: Without talking about thespecifics of individual transactions, thereare obviously the basic requirements ofany bond that is issued into the US mar-ket. For example, if the guarantee consti-tutes a security, you have to have disclo-sure of information, and that’s an issuethat has been addressed by other spon-sors in other contexts. There are a vari-ety of different ways of handling that, soit will come down to structure. Butthat’s not an impediment; that’s simply

an issue to be addressed as you are doingthe transaction.

Rajiv Shukla: I would answer that oneword, yes, as well, at some point in time.One challenge in seeing an internationalbond out of Saudi project to corporate issimply the Saudi market is incredibly big,much bigger in terms of financing itselfthan any of the other markets, and standsalone. As an example, we led a five-yearfor a Saudi electric company a fewmonths ago and that – eventually for abond that was cut at 7bn riyals size; thebook exceeded 20bn riyals. That’s all with-in the domestic market itself.

I think for any sponsor out of Saudi, thedifficulty is going to be there is such a big– not just a bank market – but an institu-tional market within Saudi Arabia that isready to provide capital, so why shouldyou really have to go through the hoopsto access international liquidity outsidewhen this competing liquidity is there?

Nonetheless, in 2005, it led the firsteuro bond for a Saudi Arabian entity,which was one of the banks, and the issuewasn’t Saudi Arabia the country. There

Simon Dickens99 BishopsgateLondon EC2M 3XFUnited KingdomPhone +44.20.7710.1086Fax [email protected]

Kenneth A. SchuhmacherAl Khazna TowerLevel 18, Najda StreetAbu DhabiUnited Arab EmiratesPhone +971.2.495.1701Fax +971.2.495.1799 [email protected]

Dennis B. Nordstrom99 BishopsgateLondon EC2M 3XFUnited KingdomPhone +44.20.7710.1008Fax [email protected]

William H. Voge 99 BishopsgateLondon EC2M 3XFUnited KingdomPhone +44.20.7710.4789Fax +44.20.7374.4460 [email protected]

Abu DhabiBarcelonaBrusselsChicagoDohaDubaiFrankfurtHamburgHong KongLondonLos AngelesMadridMilanMoscow

MunichNew JerseyNew YorkOrange CountyParisRomeSan DiegoSan FranciscoShanghaiSilicon ValleySingaporeTokyoWashington, D.C.

www.lw.com

For Further Details Please Contact

Jonathan R. Rod885 Third AvenueNew York NY 10022-4834Phone +1.212.906.1363Fax [email protected]

A Dhabibu BarcelonaBrusselsChicagoDohaDubaiFrankfurtHamburg

MunichJerseyNew

orkYYoNewCouOrange

ParisRome

DiegoSan FrancisSan

Simon Dickens99 BishopsgateLondon EC2M 3XFUnited KingdomPhone +44.20.7710.1Fax +44.20.7374.446

.cosimon.dickens@lw

unty

sco

108660om

Dennis B. Nordstro99 BishopsgateLondon EC2M 3XFUnited KingdomPhone +44.20.7710.Fax +44.20.7374.44dennis.nordstrom@lw

om

.100860.comw

Jonathan R. RodvenueAAvThird885

orkYYoNew 10022-4834NYY

Phone +1.212.906.1363Fax +1.212.751.4864

.comjonathan.rod@lw

3

HamburgKongHong

LondonsAngeleLos

MadridMilanMoscow

FrancisSan Shanghai

alleVVaSilicon SingaporeokyoTToashingtonW

.com.lwwww

A. SchuhmKennethowerTToAl Khazna

Level 18, Najda StreeAbu Dhabi

Arab EmiratesUnitedPhone +971.2.495.17Fax +971.2.495.1799kenneth.schuhmache

sco

ey

D.C.,

macher

et

s7019

.comer@lw

oge illiam H. VVoW99 BishopsgateLondon EC2M 3XFUnited KingdomPhone +44.20.7710.4Fax +44.20.7374.446

.combill.voge@lw

478960



were very few questions about SaudiArabia. At that point in time, when SaudiArabia had issues and bond security, therewere very few questions on the road aboutthe security, and ironically the only ques-tion we got was from a GCC company.Elsewhere in Asia and in Europe they justwent straight to the credit fundamentals.

So for a Saudi international bond tocome in, we really need to stack up withthe internal competing sources of liquidi-ty and how the sponsors view that diffi-culty, rather than investor accessibility.

Rod Morrison: Derek.

Derek Rozycki: I think that the future ofproject finance, which is something thatwe are clearly keenly focused on, is large-ly a bank bond solution. We do see this asa significant market shift away from thesort of hyperactive days of the banks andhyper-competitive days of the banks.

Project bonds are going to play a role, wecertainly hope they will play a role, both atrefinancing as well as at the initial stages,and I think our past experience on sometransactions has given us confidence in thatstatement.

We are currently spending a lot of timefocusing on identifying structures as wellas mechanics that will enhance the growthof the market; that will enable the growthof the market. We are dialoguing withinvestors to find out what it is that theylike about project bonds and what theydon’t like, what’s toxic for them, what willenhance their demand and enhance thebid both in the initial stages as well as inthe secondary markets. We are talkingwith banks also a lot about that.

I am aware that there are other spon-sors in the region that are certainly push-ing along these discussions.

I think that it is imperative for thedevelopment of market that we haveincreased confidence that the marketswill be there. It’s important to the bank-ing community because it will affect capi-tal allocation; it will affect their creditdecisions. Both of these entities need tohave confidence that they are not goingto be stuck with a 20-year deal. We con-tinue to have a long string of projects thatrequire long-tenor bank debt. Well, sorry,long-tenor debt generally.

We can’t do on some of these projects a10-year fully amortising facility with a refi-nancing in year five; that doesn’t work forus, so the banks will have to start to getcomfortable with the concept of hard or

soft mini-perms. Ironically, you get stoppedby the capital allocations committee whenyou try and take a long tenor soft mini-perm facility and you get stopped by thecredit guys when you want to do a hardmini-perm with refinancing risk.

So the banks need to develop their viewsa bit more in that space, and they need tospend some time thinking about why theyare comfortable with entities like RasGashaving bullet refinancings. Of course, oneof the great points there is that it is justsuch a robust project. But bringing that for-ward and allowing and enabling the mar-ket to have refinancing risks, as long asthere is adequate time to execute a bond inthat period, so not keeping it at five yearsor shorter, but in fact having a proper proj-ect finance structure with a 10-year win-dow for refinancing. I think people need toget the confidence that they will be able torefinance in that timeframe.

Of course it is important to investors tohave confidence that the market will bethere in order to have secondary marketliquidity, and have confidence that will bethere, and to enhance the strength of theinitial bid, and in the end it is importantto the sponsors because as we get confi-dence yet another pool of capital will bethere. It will bring more projects to themarket, it will enhance and grow theeconomies of the Gulf and enable thegrowth of these economies, because thequantum of bank debt that has driven usin the past just no longer is there.

So it is really something that all parts ofthe market are aligned with, and fromour point of view, are actually eager topush this market forward.

So as we look to the future of projectbonds, it’s quite clear to us that strong proj-ects with strong sponsors will continue toget done, and that the project bond marketwill clearly play a role in this bullet sector.

Rod Morrison: What’s the quantum ofopportunity from your company say inthe next two years, looking ahead?

Derek Rozycki: I think that’s a great ques-tion that comes back around to whatMike was saying. The market is extremelysensitive to supply, and sponsors and Ithink their government entities need tobe very careful about flooding the marketwith trades. So there’s no exact answerfor that, because what we will always do,we will always approach the market withmulti-products or a multi-pool approachwhere we will optimise it on a transac-tion-by-transaction basis.

I am quite confident that where we areapproaching the market and we feel likethere has been too much issuance in thebond market, we will both sense from themarket and make the decision ourselvesnot to tap the bond markets in thatinstance.

But we certainly have a very, very goodlist of projects that we believe would bestrongly rated in the Single A and betterrange, on a standalone basis, not havingto worry about raps any more, but thathave strong importance to the govern-ment; that will allow us to credibly cometo market and say, “Hey, we have a greatproject here, is this the right time, is thisthe right space, are we not going to floodthe market?” If all the stars align, then wewill bring it to the bond market.

Mike Redican: I think you made a very goodpoint about rating there, because I don’tknow about anybody else, in my mind Iam down to Single A, I feel pretty confi-dent that we will bang that out. When weget to BBB plus, early days, and liquiditystarts to drop quite substantially, and don’teven bother with anything below BBB plus.That’s my current thinking. I don’t know ifthe rest of you share that.

Derek Rozycki: I would agree with that.Again, it comes back to the old statement:strong project, strong sponsors are goingto get done. That’s what’s going to drivethe development of this market initially,and it is some time before BBB land isprominent here. There will always be theone-off deal that surprises everyone and isa fantastic success, but it is going to takesome time.

Clearly all three legs of the markets areincentivised to ensure the development ofthis market, which is very different fromin the past.

So as we look to the future of

project bonds, it’s quiteclear to us that strongprojects with strongsponsors willcontinue to getdone.

“

”

REUTERS/Alex Grimm

© T

hom

son

Reu

ters

200

9. 4

8000

873

TIMES OF CRISIS THE YEAR OF GLOBAL CHANGE

On September 15, 2008, the 158-year old investment bank Lehman Brothers became the largest bankruptcy in U.S. history, its collapse paralyzing the global financial system.

Governments pumped in cash, but the crisis deepened and broadened, crippling industries and crushing hopes with a force not seen since the Great Depression.

As signs of recovery emerge, Reuters charts 365 days of upheaval to see how lives around the globe have changed as a divergent world embarks on a new era of historic uncertainty.

View the special web documentary and interactive timeline at reuters.com/timesofcrisis

48000905_v2.indd 1 8/9/09 15:00:35

www.mubadala.ae

Few companies have the opportunity to

act as a catalyst for growth, development

and diversification; Mubadala is fortunate

enough to operate in a region that presents

such opportunities.

Operating at the very heart of the Abu

Dhabi economy, Mubadala acts as a

catalyst for growth across a broad range

of sectors; developing and managing a

diverse portfolio of projects and initiatives;

investing for the long term as an active

and diligent partner.

Harnessing the region’s natural resources,

we look to engage in technology,

knowledge, energy and capital intensive

opportunities that help to diversify the

economic base of Abu Dhabi and yield

competitive financial returns.

We work alongside leading local and

international organizations across a range

of industries, establishing constructive,

multidimensional relationships with current

and potential industry leaders, utilizing their

knowledge and experience to enhance the

prospects of Abu Dhabi’s people.

…mubadala: helping to shape the future

abu dhabi is changing…

acquisitions aerospace energy & industry healthcare info & comm technology infrastructure real estate & hospitality services

��

GCC RT p1-20:GCC RT p1-20 - Latham & Watkins · 2009-09-29 · Simon Dickens (Latham & Watkins)...

Documents

Transcript of GCC RT p1-20:GCC RT p1-20 - Latham & Watkins · 2009-09-29 · Simon Dickens (Latham & Watkins)...