4 months ago

Oman solar_2018-04011


FINANCING PV S Conscious of the finite life of its natural energy resources and its increasing demand for energy, Oman has recently announced two major Solar PV projects to the market. Through the projects, Oman is seeking to leverage it strong track record in the IPP market and attract third party capital to meet its long term energy needs. However, in light of the challenges currently facing the Omani market, private sector participants will have to carefully consider how this substantial level of investments ($600 million+) can be raised. The following general Oman economic risks are likely to impact the availability and pricing of finance to support the Project Downgrade to Omani Credit Rating Stability of the Omani banking sector Reduced funding appetite Shorter tenors Increased pricing Increase in Omani public sector debt Lower hold levels Additional guarantees Reliance on local market Oman political risk Downgrade to the Omani Credit Rating Although historically investment grade, Oman’s credit rating has been subject to a series of downgrades since 2015. The currently rating of BB (S&P) and Baa3 (Moody’s) creates a challenging funding environment—particularly for international funders. Stability of the Omani banking sector Oman’s banking sector is traditionally heavily reliant on government deposits. After a period of sustained pressure, during which the government successfully raised $5 billion of much needed funds through a March 2017 bond issuance, liquidity pressures on the banks look likely to ease. In addition, the improvement in the oil price, the fiscal reforms and a relatively well capitalized financial sector have all led to a fairly stable banking sector. Increase in Omani public sector debt Oman’s public debt has risen from 5% of GDP in 2014 to a projected 50% by 2020. This level of increasing debt is unsustainable in the long term and makes the economy particularly vulnerable to any further interest rate rises. A $5 billion bond issuance was required last year to restore liquidity to the domestic market and the need for external financing may continue and potentially lead to a downward debt spiral if unfavorable economic conditions persist. Oman political risk Although within the in the region Oman is viewed as a relatively stable political regime with relatively low political risk, international investment still view with caution the overall stability of the Middle East

OLAR IN OMAN MEETING THE FUNDING CHALLENGE In light of the challenges poised, developers seeking to raise capital will need to blend together a final funding package from a range of sources: Export Credit Agencies International funders Regional funders Relationship funders Equipment suppliers Blended funding package ECA solution Projects of this nature lend themselves to an ECA-backed funding solution. Most Oman IPP projects have some form of ECA support within their funding structures. However, in light of the credit downgrade, the use of an ECA may be a pre-requisite. Likely credit appetite: ✓ ✓ ✓ ✓ International funders The credit downgrade is likely to limit international funders’ appetite to support the Projects – particularly if the potential implications of the move to the BOOT structure are not supported by a suitable Government/credit guarantee. Likely credit appetite: ✓ ✓ Regional funders Local funders have been active in the funding of previous IPP structures and can therefore be viewed as potentially a key source of finance. However, prior to such an inclusion, shareholders will need to understand: • The ability to act within a funding club which potentially does not include an international funder • The speed at which a local funder can operate • Local appetite for solar technology (noting although technology risk is likely to be low, these are the first significant PV solar projects in Oman Likely credit appetite: ✓ ✓ ✓ ✓ Relationship funders The Consortium Sponsor’s primary funders (either at a corporate or project level). These funders may be either international or local. Likely credit appetite: ✓ ✓ ✓ ✓ Equipment suppliers The supplier of the PV Solar panels may look to provide a form of asset-based lease finance. Likely credit appetite: ✓ ✓ ✓ ✓ The implications of a Build-Own- Operate—Transfer contracting model It appears the Projects are to be procured under a BOOT commercial structure, as opposed to the historically typically Omani BOO structure. This change in risk allocation is likely to impact the commercial structure in a number of ways: • Requirement for Government guarantees - specifically in relation to the repayment of senior debt in the event of default or termination • Ability to IPO - the finite life of the projects under a BOOT structure means an IPO is unlike to be attractive to the market • No post PPA value - The transfer of the asset at the end of the PPA effectively prevents shareholders from realising any post-PPA value.

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