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Watch the Cycle

Can the upward swing in global power infrastructure investment be sustained?

Fortnightly Magazine - February 2007

of the sector in the United States, in contrast to the past, is being financed via highly liquid instruments placed with hundreds of institutional investors, as opposed to small groups of relationship banks. The implication is that the time frame within which changes in market sentiment are translated to share valuations has been reduced. This may result in increased speed in the recognition of market information. However, it may also be a source of increased volatility.

Asia and Australia

The total value of power sector transactions in Asia rose to more than $15 billion in 2005 from $6 billion in 2003. The largest of these include the $1.9 billion takeover by two Indian companies of the previously Enron-owned Dabhol assets, and the $1.6 billion purchase by Hong Kong’s CLP holdings of SPI Australia’s power assets. Significant new capital has been raised over the past couple of years via IPOs in Singapore and Hong Kong, and via Australian infrastructure funds active in the region. Australia has witnessed sector consolidation as natural gas retailer Alinta recently won approval for its $6.8 billion purchase of the country’s largest power utility (AGL Energy). While India and China are the two fastest growing markets in Asia, the majority of investment under way is largely funded by state-owned entities.

The GCC Region

Rapid population growth together with sustained high oil prices (the region supplies about half of the world’s oil production) is supporting a booming construction sector across the Cooperation Council for the Arab States of the Gulf (GCC) region and a staggering rate of growth in demand for electricity. In the past five years, 20 projects with total new capacity of more than 17,500 MW have achieved financial close, raising some $15 billion of debt in the process, and another 8,600 MW currently are under tender. During the next five years, it is estimated that the region will demand an additional $25 billion in capital for the sector.

The trend in lending has been toward increasing levels of leverage, longer tenors, and narrowing price margins. This clearly follows from improved sovereign credit ratings, significant liquidity, and competitive lenders. All projects across the region are supported by 20-year off-take agreements (except in Oman, where 15-year contracts are the norm) and government guarantees of various designs. The six GCC countries all are rated investment grade by major credit rating agencies.

Pricing of debt facilities has averaged in the range of 80 to 150 basis points. Pricing on the most recent financings (in particular in Qatar and the UAE) reportedly has been below 40 basis points for financing during construction, with refinancing of 10- to 15-year term debt rising to around 70 basis points. In many cases, arranger fees also are being reduced.

Global institutions, mostly European and increasingly Asian, are the leading providers of syndicated loans in the region. While regional banks typically are relied upon for syndication, they have been less willing to accept the longer tenors and reduced margins that international banks have been willing to take. At present, the long-term fundamentals in the region override political