Middle East Water/PPP Deal of the Year 2011: Muharraq STP

The $328 million Muharraq STP and Sewage Conveyance PPP project – sponsored by Samsung, Invest AD and United Utilities – is the first PPP in Bahrain’s wastewater sector and a flagship deal for Bahrain’s long-term privatisation programme.

The deal closed against the backdrop of unprecedented political risk in Bahrain – the Arab Spring demonstrations – and the downgrading of Bahrain’s long-term rating to BBB by S&P and Baa1 by Moody’s. Yet the financing documents were signed on 19 July 2011, less than two months after the lifting of marshal law in the kingdom. And despite the Bahraini government’s recent increase in funding costs, to 450bp for a seven-year sovereign bond issuance, debt pricing for the transaction remained at pre-crisis levels of mid-200bp for the 22-year tenor.

The 29-year build own operate (BOO) PPP concession was first roadshowed in 2009 and after pulling in 15 bidders at prequalification, followed by six technical bids in February 2010, the financial and operational expenditure bids arrived in May 2010, resulting in five bidders going through to discussions to harmonise their bid components.

On a tariff basis, the Samsung/United Utilities/Invest AD bid beat the nearest rival offer from Acciona Agua/Besix/Kuwait Finance House. Samsung bid Dh0.55 per cubic metre and the Acciona-led team bid Dh0.6072 per cubic metre. Samsung’s consortium was named preferred bidder and signed the sewage treatment agreement with Bahrain’s Ministry of Works in February 2011.

The project involves the construction of a greenfield 100,000 cubic metres per day (with potential expansion up to 160,000 cubic metres per day) wastewater treatment plant. The wastewater treatment plant will be located on reclaimed land east of Muharraq and will incorporate standard by-pass systems, including a terminal lifting station by-pass outflow, a secondary treatment by-pass outflow, tertiary treatment by-pass outflow and treated sewage effluent by-pass outflow. The project is intended to reduce the influent to, and outflows from, the ageing Tubli plant.

The concession is backed with monthly availability and consumption payments and was originally for 27 years. The Bahraini government extended the term to 29 years after signing of the sewage treatment agreement, as a sweetener to offset lender concerns over continued civil unrest.

The Ministry of Works is the offtaker, and is backed by a Ministry of Finance guarantee. The plant is scheduled to achieve completion in the fourth quarter of 2013. A joint venture between Samsung Engineering and United Utilities will operate and maintain the facilities.

With financial advice from Macquarie Capital, the sponsors went out to the bank market before signing the sewage treatment agreement and got credit committee approval from Credit Agricole (technical bank), Natixis (documentation) and SMBC (agency bank). All three banks then worked on finalising the term sheets for a deal that is geared at roughly 80%.

The $285 million financing comprises a $124 million direct loan from Kexim, an $83 million Kexim-covered tranche and a $43 million uncovered tranche. The senior term loan has a tenor of 22 years and is fully amortising without cash sweeps. All three commercial banks participated equally in the covered and uncovered debt.

The uncovered tranche is priced at 225bp over Libor, rising to 275bp, and the Kexim-insured tranche is priced at 180bp to 220bp. Upfront fees for the export credit agency facility are 150bp, and 225bp for the uncovered.

Given the difficulties the project had to overcome it is not an exaggeration to say that Muharraq has established a proven structure for the Bahraini government to procure future improvements and assets in the wastewater sector using PPP.