Banks Turn on to Utilities: The Power and Water Sector Offers Some of the Safest Assets for Banks Looking to Lend in the Project Finance Market. but There May Be Some Reluctance to Support Projects from Unproven Sponsors

Martin, Matthew, MEED Middle East Economic Digest

During the financial crisis, 'flight to quality' has been a frequent refrain in the global banking community. Assets such as the US dollar and gold have benefited as investors look for a safe place to park their capital.

A similar phenomenon has occurred in the Middle East project finance sector. Risky asset with exposure to variables, such as commodity prices, have fallen out of favour, and hanks have instead concentrated their lending on the top-tier projects in the region, in particular power and water schemes.

Banks are attracted by utilities projects as they typically benefit from stable cash flows, with little or no competition from other providers, and they are also of strategic importance to their government sponsors. As one Dubai-based project, finance head says: "The relative predictability of cash flows, the proven bankability, the strategic asset nature for the expanding local economies and the credit strengths of the government-related off takers make independent power and water projects [IWPPs] very attractive to finance."

"People always need electricity, and that makes IWPPs a good asset to finance," adds another banker.

Liquidity crisis

A good gauge of the strength of appetite among banks to fund power deals is the fact that bidders on the myriad utility projects planned in the region have not struggled to get together a financing group to support their bid. Sources close to the PP11 independent power project (IPP) in Saudi Arabia say banks have been desperate to lend to the deal, despite it being fully underwritten during the bidding stage and not requiring any additional bank involvement.

However, that is not to say that utilities schemes have not experienced financing problems over the past year. The financing of …

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Publication information: Article title: Banks Turn on to Utilities: The Power and Water Sector Offers Some of the Safest Assets for Banks Looking to Lend in the Project Finance Market. but There May Be Some Reluctance to Support Projects from Unproven Sponsors. Contributors: Martin, Matthew - Author. Magazine title: MEED Middle East Economic Digest. Volume: 54. Issue: 20 Publication date: May 14, 2010. Page number: 30+. © 1999 MEED Middle East Economic Digest. All Rights Reserved. COPYRIGHT 2010 Gale Group.

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