Federation of GCC Chambers Conference on Frameworks for funding industrial projects

1. Federation of GCC Chambers Conference on Frameworks for funding industrial projects 12 October 2010

2. Agenda Lay of the Land What is Project Finance? Structuring Considerations Sources of Liquidity Financial Process & Scheduling

3. New questions over Europe Global - Real GDP growth 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -2.00% -4.00% -6.00% Developed Emerging The Economic Backdrop - Global What has happened is known; what will happen is now the subject of much debate ..... Source: HSBC Research

4. Volume (US$m) No. of loans 2007 2008 2009 2005 2006 Source: Dealogic, 12 May 2009 Key Player – The Middle East Despite significant regional government liquidity, the Middle East has not been immune to the effects of external liquidity constraints

5. What is Project Finance?

6. Shareholders Commercial and Financial Completion support Project Lenders Relative Repayment Risk Low High Shareholders = Lender credit risk Project Lenders What is Project Finance? A form of asset based finance driven by cashflow analysis Significant advantages to lenders as well as owners • Form of lending which can be be applied to a wide range of industries and involves the financing of a single major capital investment • For which repayment (either largely or exclusively) of the lenders relies on the cash flow and assets of the project, with such debt facilities being “limited” or “non-recourse” to the owners of the asset • Project finance facilities are typically provided to a SPV (a project company) established by the project sponsors solely to own and operate the project

7. Why is Project Finance used? Depending on the country / industry, project finance may offer significant advantages for Project hosts or sponsors... • Allows for high levels of leverage and is therefore investment enhancing • Enables cash constrained - or risk averse - project sponsors to raise significant amounts of debt - and share risks - whilst still retaining the benefit of equity upside • Enables sponsors to leverage off general banking relationships to (1) potentially circumvent constraints on corporate debt, and / or (2) access longer term funding • Facilitates multiple joint venture partners raising finance to undertake major projects, especially if the partners have different credit standing

8. Corporate Lending Full recourse Lenders rely on established balance sheet and cash flow Credit analysis and rating Usually unsecured Limited covenants (financial, cross default and negative pledge) Relatively low fees and margins Short to medium tem tenor Refinancing risk Project Finance Limited or non recourse Security over project assets including physical and accounts Detailed economic and financial analysis carried out by lenders with support of independent consultants Comprehensive covenant package (affirmative, negative) Usually relatively high fees and margins, although current trends favourable to borrowers Long term tenor Project Finance vs Corporate Lending Key differences between corporate lending and project finance

9. Structuring Considerations

10. Project Economics and Rational • Lenders closely scrutinize the Project’s rationale and its ability to withstand difficult market conditions. The following aspects in relation to project economics are analyzed: • Demand / supply analysis and likely competition • Evidence ability to generate sufficient cash against credible product pricing forecasts • Project’s competitive advantage, including: • Feedstock volume and pricing • Terms and conditions of the offtake arrangement In structuring the financing, it is important to ensure complementary contracting and product marketing solutions

11. Project Finance – identifying the risks The risks associated with the repayment of the project debt can be categorised into three broad areas: • Completion Risk • Operational Risk • Revenue Risk

12. Completion Risk Engineering EPC Contractor(s) Vendor Performance Process technology Process Licensor(s) Insurers Insurable Force Majeure Residual Risks (non-insurable FM, EPC performance) Sponsors Lenders Completion Risk & EPC Contracting Strategy • Completion risk for projects is basically a function of construction strategy: • Which parties are responsible for completion? • Lenders’ “default” position will be a full completion guarantee (full repayment) • There are other forms of completion support Completion risk is at the core of any project finance structuring given that this determines the availability of future cash flow If a full guarantee is to be avoided then completion risk mitigation and allocation become the critical elements of the financing

13. Revenue Risks • It is usually necessary that an independent market advisor to lenders indicate that the Project will be competitive based on • Relatively low feedstock costs • Economies of scale • Detailed marketing and logistics planning • Lenders will require independent product price forecasts • Lenders will expect term sheet risk mitigation items for short term variations • Debt Service Reserve Account • Dividend lock-up tests • Variable repayment schedules • Occasionally contingent equity is required Lenders will usually take some revenue risks when they are comfortable with the Project Utility projects are often financed without such risks, however

14. Revenue Risks • In other sectors the long-term offtake obligations come from one or a small number customers (for example in the LNG or power and water sectors) • Due to the nature of the petrochemical business and the large number of customers, long-term volume offtake commitments from shareholders are often considered, provided they are “natural” petrochemical players; third parties may be considered if shareholder group not sufficiently experienced • Product sale contracts can vary between long-term marketing arrangements and long-term volume offtake commitments • Production ramp-ups are usually built into the contracts Lenders will usually take some revenue risks when they are comfortable with the Project

15. Technical & Operating Risks Operational reliability post-construction is a critical area for lenders and external advice will be sought to analyse the risks involved • Technical risks relate to the risk of the plant being capable of operating reliably on the basis that it has been designed to – one of the two components determining the plant’s cash flow (the other being refining margins) • Technical problems can be either process or mechanically based • Mechanical problems will usually be covered under the terms of the EPC contract • Although the process technology deployed in refining tends to be viewed as less of an issue than in typical petrochemical plants, the multiple processes involved can give rise to concerns over inter-licensor disputes in the event of non-performance • In addition to concerns over technical operating issues, lenders will also require comfort that the operator of the plant is sufficiently experienced • Different models can be used, usually either an external O&M contractor (which could be sponsor) or operating staff hired directly by the project SPV • Lenders will require a detailed due diligence report by an engineering firm to review these risks and it is important that this process is controlled

16. Key Due Diligence Areas

17. Sources of Debt

18. Saudi Commercial Banks • Despite difficult market conditions, the Saudi-based institutions have actively provided balance sheet capacity for top-tier Saudi projects and relationship clients. • 12 primary domestic Saudi banks, out of which 7 are considered to be active in project finance transactions in Saudi Arabia • Inma Bank, Rajhi Bank and to a certain extent National Commercial Bank finance only Sharia compliant debt facilities. Other active banks in the PF market will have the capability to fund on Islamic or conventional basis • Saudi banks have fared better compared to other international and regional banks. None of the Saudi banks have had to request any government support or to raise additional equity to shore up balance sheet • Due to severe shortage of liquidity and risk averseness in the international market, Saudi banks have significantly reduced their lending in US Dollars Aided by a stable depositor base, strong capital adequacy ratios and continued growth in the local economy, Saudi banks continue to represent an important source of funding for projects in KSA

19. Regional and International Banks • Regional and international banks have been severely impacted by the financial crisis, with most of the banks having to resort to government funding due to significant investment writedowns • It will take these banks some time before they are able to restore their financial strength and play a major lending role in projects in the region and Saudi Arabia • Currently, the pool of liquidity available to projects from international and regional banks is much smaller than that seen during times before the financial crisis. The international and regional banks have the following characteristics: • Selective participation in projects within the region with focus on enhancing existing relationships • Understand the risks of project finance lending activity in Saudi Arabia but focussed on reducing their Risk Weighted Assets • Concern over tenors and pricing are a dominant theme • Likely to increase involvement in ECA covered facilities • Appetite from this liquidity pool is mostly dependant on availability of ECA cover

20. Saudi Industrial Development Fund • The SIDF usually has a longer approvals process as it involves detailed review of technical and market issues by SIDF’s own experts. • SIDF has a normal lending limit per project of US$160m for an LLC. However if there the Project comprises multiple plants then multiple loans can be granted of up to 50% of project cost or US$530m whichever is lower • In order to manage the timing issue, SIDF as soon as possible upon completion of the feasibility study and completion of application formalities such as application form, copies of industrial licences, commercial registration of project companies applying for the loan, copies of commercial agreements, quotes from EPC contractors, etc. • Given the time required for first drawdown, SIDF loan will however still need to be bridged by Saudi commercial banks. SIDF remains an important participant in project financings in KSA

21. Public Investment Fund • PIF is a main source of concessionary financing available in the Kingdom • One of the main conditions for PIF participation is direct or indirect government ownership of at least 5% of the project. In any case, PIF's board of directors has the discretion to set PIF's investment strategy, as well as the parameters that must be met before PIF makes an investment • PIF currently has increased its limit to lower of 40% of total project cost or US$1.3 billion (US$ 800 million where the project company is not majority owned by the government) • The terms and conditions generally match those of the commercial tranches which make it an attractive source of concessionary financing • From our experience, if both SIDF and PIF are considering participation in a project, PIF approvals will almost always follow SIDF approvals. • If PIF financing is not available at financial close, additional commitments can obtained from the local commercial banks to bridge the financing gap on temporary basis The PIF is a main source of concessionary financing available in the Kingdom

22. Export Credit Agencies (ECAs) - I • ECAs are government sponsored agencies which exist to promote the export of goods and services from within their countries • They function by providing direct loans, guarantees or insurance policies to commercial banks • In most cases the level of ECA support is directly ‘tied’ to procurement of eligible goods and services although ‘untied’ facilities are also possible • The financing terms ECA can provide are governed by the OECD Consensus Guidelines. This covers areas such as: • Specific ‘content’ requirements • Minimum contract down payment of 15% • Support capped at 85% of contract value • Maximum repayment term of 14 years (with average life of 7.25 years) By providing credit enhancement to lenders ECAs can facilitate greater appetite, longer tenors and cheaper pricing than purely commercial sources of funding

23. Loan Agreement Project Company Lenders Principal & Interest Goods & Services Political or comprehensive insurance and/ or direct loan Commercial Contract Drawings Premium Application Documentation Exporter ECAs Export Credit Agencies - II Increasing proportion of hard currently liquidity …but critical to pair with a considered procurement strategy. • Commercial banks provide a loan to the Borrower. This loan benefits from a guarantee or insurance policy from the ECA • The proceeds of this loan is used to pay for specific goods and services from the exporting country • The ECA is paid a premium/guarantee fee

24. Export Credit Agencies - III Since 2002, ECAs became an increasingly important source of financing in the region. Pre-financial crisis the ECA lending to project increased due to: • Upgrade in OECD country risk classification for Saudi Arabia from category 3 to category 2 in Nov 2005 • ECA financing became much more competitive compared to cost of borrowing from commercial banks • Scale and number of opportunities combined with historically low exposure to Saudi Arabia resulted in substantial ECA appetite • Strong track record of ECA support was established for both limited and full recourse financings in Saudi Arabia, for example SEPC, Hadeed, Yansab, Petro-Rabigh, and Shuaibah • Interest of ECAs was not limited to tied facilities linked to specific exports of goods and services but also started extending to untied facilities where there was a wider national interest. • For well-structured projects in Saudi Arabia, we anticipate that ECAs would be keen to continue providing support with expected participation dependant on the EPC procurement strategy.

25. Export Credit Agencies - IV • In light of reduction in appetite from international and regional banks post financial crisis, there is substantially increased demand from sponsors for ECA support. This has led to: • ECAs focussing more on supporting projects involving contractors and equipment providers from their home countries (ie less focus on untied ECA financings) • ECA premiums have increased in some cases to reflect changes in perceived risk while bank pricing for funding ECA assets has risen substantially as a result of liquidity charges • ECA supported financing continues to be very competitive for borrowers and attractive for banks given very low return on weighted assets • Where ECAs provide direct lending programmes these have also seen increased demand, given the attractive long-term fixed interest rates and the reduced liquidly of commercial banks even for covered facilities • For well-structured projects in Saudi Arabia, we anticipate that ECAs would be keen to continue providing support with expected participation dependant on the EPC procurement strategy.

26. Multilateral Agencies • Multilateral Agencies are financial institutions jointly owned by a group of countries and designed to promote international and regional economic co-operation • Examples of Multilateral Agencies include: • International Finance Corporation (IFC) • European Investment Bank (EIB) • European Bank for Reconstruction and Development (EBRD) • Asian Development Bank (ADB) • Islamic Development Bank • Have ‘developmental’ agendas and can be useful in certain markets • Can provide a range of funding including direct lending and equity participation • Commonly used instruments on project finance transactions are: • EIB direct loans (with or without bank counter guarantees) • IFC / EBRD ‘A’ – ‘B’ Loans

27. The Financing Process

28. PHASE 1 PHASE 2 PHASE 3 PHASE 4 PHASE 5 1. Prioritise Key Project Objectives 2. Finalise JV Discussions 3. Obtain Stakeholder Approval 1. Tender for Contractors 2. Commercial Development 3. Term sheet development 1. EPC bid review 2. Lender due diligence 3. Document drafting 4. Info Memo 1. EPC finalisation 2. Launch to market 3. Preferred bank selection 1. Negotiation of Project and Finance Agreements 2. Achieving Financial Close Estimated Timeframe: 2 - 4 months Estimated Timeframe: 2 - 4 months Estimated Timeframe: 3 months Estimated Timeframe: 3 - 6 months Such may vary materially depending on the progress of commercial and contractual negotiations The Project Finance Process: Summary Timeline

29. Managing the Project Finance Process: Delivering the Financing Plan and Strategy • Size the project and define the funding requirement; • Assess the potential debt sources for the financing for the Project, with particular attention to appetite, tenor, capacity, liquidity and pricing; • Advise the sponsors on the commercial contractual negotiations to ensure such contracts are bankable; • Identify studies typically required to successfully obtain the Financing, including technical, market and environmental reports. • Appoint and manage the lenders’ technical and environmental consultant to identify key lender issues that need to be addressed in the structuring; • Develop a financial model to analyze the economics of the Project and provide information to support the Sponsor’s investment decision; and • Recommend an appropriate financing plan and strategy taking into account current financial market conditions. The Financial Advisors can support developers in structuring a bankable project and securing an optimal funding package The Financial Advisor can act as Lead Consultant to coordinate and manage technical, legal, marketing, environmental and other advisors

30. Managing the Project Finance Process: Marketing Phase - Achieving Financial Close • Develop a bankable financing structure using data from the financial model and bank market practice and taking into account inputs from the Sponsor’s tax, legal, and accounting advisors; • Develop an engagement timetable for the different sources of liquidity, bearing in mind that certain pools of liquidity will require longer lead times than others; • Assist in the development of a preliminary term sheet in order to secure Sponsor approval; • Prepare a bid package for potential debt providers including an invitation letter, a confidentiality agreement, a draft arranging and underwriting mandate letter, a draft term sheet for the Financing and its security package, a preliminary information memorandum (the “PIM”), a preliminary Bank Financial Model and summaries of third party reports; • Review and summarise the financing bids and assist the Sponsor in selecting the optimal financing group; • Assist the Sponsors and Legal Counsel in the negotiation and finalization of the financing documentation until signing of the documents, satisfaction of conditions precedents and draw-down of the facilities.

31. Conclusions • Economic outlook remains uncertain, however the GCC is well positioned for robust and sustainable growth • Select the right financing methodology that suits your requirements and objectives ie corporate vs project financing • Financiers are now far more selective with transactions so maximise the sources of funding – tap the Money Tree • Focus on developing well structured and viable projects that have a clear competitive advantage, are aligned with the government’s industrialisation strategy and are supported by credible financial and technical sponsors