DEWA's big deal
There was a price to pay, but DEWA drew in the dollars it needed
To find US $2.2 billion in refinancing, given the current economic mood, cannot be an easy task. If you pull it off, you’ve got a right to look happy and as DEWA’s CEO Saeed Mohammed Al Tayer announced, with some pride, that he had done just that, he did look pleased.
The deal was done with the help of 18 banks, six more than DEWA’s last loan deal, and the margin is 300 basis points over Libor, compared to 50 or so last year.
The increased cost of borrowing and rise in the number of banks involved are changes that reflect the shift in the financial landscape that has happened since last year’s loan deal was done. But the fact that the deal was done at all also demonstrates that there is financial faith in what the infrastructure market has to offer.
“The keen and timely response elicited from banks for the programme , notwithstanding the prevailing exceptional circumstances, is testimony to DEWA’s reputation for being one of the more advanced utilities in the region,” said Al Tayer, at a press conference.
It helps that providing power and water to Dubai is still, for now, a growth business. According to Al Tayer, DEWA has been running on its ‘high demand’ scenario, seeing demand growth in the teens in the first two months of this year – 13% more in January and 17% more in February.
“We did not expect growth for the first quarter,” said Al Tayer. “But we see it, measured on a monthly basis. If you look at the news and what you are seeing overseas, growth was better then expected.”
While the authority is waiting until summer starts to bite before reviewing its growth predictions, Al Tayer made mention of the new buildings, both on Sheikh Zayed Road and in the area of Mirdiff, that were likely to add to the power demand load in the near future.
DEWA offers reasonable numbers to back its position. It made a profit of AED 4.24 billion ($1.5 billion) last year, and put it down to higher revenues and lower generation and distribution costs. Figures show that DEWA’s revenue during 2008 increased by 52.5% to AED 9.29 billion, while the cost of generation and distribution fell by about 32% to AED 4.34 billion.
On the whole, utility investments, whether government or independent, offer long-term and predictable returns, remaining attractive even in the worst of times. Still, the money DEWA secured had to be courted and from plenty of sources too, proving once again that cash is the new asset in tight economic times, but also that investment dollars are still available for the utilities sector.
“I think anyone who has liquidity is very popular,” said Saadia Khairi, senior partner and chief investment officer Manara Equity Partners (MEP), a private investment fund. “A year ago it was no big deal, unless you had assets to sell. Now it’s a big deal if you have cash.”
While investment funds, such as MEP, are looking to get involved with private projects at a ‘deep discount’, DEWA is also looking at alternatives, having started finding funding from export credit agencies (ECAs). It is not alone.
Utilities around the region have to be clever in fund sourcing. ECAs are an important alternative source of funding according to Vivek Gautam, senior research analyst, Environmental and Building Technologies Practice, Frost & Sullivan.
“Some of the ECAs like Japan Bank for International Cooperation (JBIC) and Export Development Canada (EDC) are already active in the market,” he said. “ECAs are not affected by the sub-prime crisis and have the ability to provide finance on long term basis. Other than the source of funds, the cost of borrowing is also a major concern.”
This was certainly the case for DEWA, which has seen the margin on the money it needs rise by 250 basis points. Al Tayer acknowledged that this was unavoidable given the economic shift since the last round of funding. It was, quite literally, the price the authority had to pay.
The need to raise further funds will continue to be a challenge for all regional utilities in the next couple of years.
“In the next two years, I see significant challenge facing the tendering authorities and sponsors in raising finance,” said Gautam. “They will have to look for alternative ways of financing the projects. On the brighter side, infrastructure projects can expect to see less of competition from other sectors in tapping the financing sources.
“Governments in the region will have to play an enhanced role in financing the utilities infrastructure development in the region. Governments across the world have acted to provide support to economies and there is no reason why governments in GCC should not do so.”
The money will be needed. Regardless of economic circumstances the demand for what utilities offer, often pre-dates their ability to supply it. There is old plant to be phased out, networks that need replacing and regular maintenance on a growing installed base. Utilities know the work is there to be done, they just need to find a way to pay.
Amount US$2.2 billion
Margin 300 basis points over Libor
Tenor 3 years
Average tenor 2.5 years