Where banks fear to tread, the EBRD steps in

By bne IntelliNews May 13, 2009

Nicholas Watson in Prague -

News on May 11 that the European Bank for Reconstruction and Development's first role in Turkey would be to step in and save a wind farm project with a €45m loan confirms a trend that has been establishing itself since the global economic crisis engulfed emerging Europe: where once banks were happy to lend money for energy projects in the region, now multilateral lenders like the EBRD are having to fill the funding gap.

The EBRD's remit since its establishment in 1991 has been, in addition to promoting the development of market economies including increasing competition and raising corporate as well as environmental standards, to make available project financing in Central and Eastern Europe where either commercial banks wouldn't lend at all or only lend in part, providing so-called "additionality." Now with commercial banks around the globe becoming more risk averse and pulling back from lending as the crisis has deepened, "this additionality has come back with vengeance," says Anthony Williams, head of media relations.

In the power sector, Nandita Parshad, director of power and energy at the EBRD, tells bne that her department is seeing increased demand for financing generally across the 31 countries of its operations, including the more advanced countries such as Poland and the Baltics where it had not expected to see any more requests, as well the less advanced countries of the Balkans and former Soviet Union.

"Clearly, we find ourselves being drawn into a number of projects where originally the idea was to have commercial banks, but the fact is at the 11th hour the commercial banks weren't there," Parshad says. "A very good example of this is the EBRD's first financing in Turkey since it became a country of operations in November. HSBC and DenizBank together with the International Finance Corporation were going to fund this wind farm, but HSBC and Deniz couldn't get credit approval to do this directly, so it's now a completely multilateral lender deal."

The EBRD is providing €45m toward the construction of what will be the largest wind farm in the country, located in Osmaniye in southern Turkey, to be built by a subsidiary of Zorlu Holding, one of the largest conglomerates in Turkey. The project is co-financed with the IFC, a member of the World Bank Group, which is providing €55m towards the overall cost of the project, and the European Investment Bank (EIB), which is providing €30m, with guarantees from HSBC and DenizBank.

This deal followed the signing a few days earlier on May 8 of a €200m loan to Romanian energy firm Petrom to finance the construction of an 860-megawatt combined-cycle gas turbine plant at Brazi, north of Bucharest. The total value of the project, which includes a new 30km gas pipeline to feed the power plant with natural gas and a 3km transmission line to connect the new unit to the national grid, is around €500m, with the EIB also providing €200m and the rest being funded by the company. Once operational, the plant will account for 8-9% of the installed power in Romania.

Parshad said the power sector is a vital area for the EBRD to serve if the crisis-hit banks balk at funding the projects, because Central and Eastern Europe faces a power deficit and there is a time lag of about four to five years between when the investment is made and the project is up and running. "You can't postpone these investments because the economy will come back one day and this power will be needed," she says.

The EBRD lent about €600m to the region's power sector in 2008 and expects this to rise to €850m this year. In the first quarter of this year, the EBRD doled out a record quarterly amount of €1.1bn, which was 64% more than the same period of 2008. The EBRD says it plans to invest €7bn this year compared with €5.1bn in 2008, which Williams says is more likely to be a "floor than a ceiling."

On May 13, the EBRD announced it plans to invest €3bn-5bn in energy efficient and renewable energy projects in CEE over the next three years. "The Bank's own investments in sustainable energy projects through 2011 of €3bn-5bn are expected to attract further co-financing of up to €10bn," it said in a statement.

On May 7, the Financial Times reported that the EBRD's 60-odd government shareholders, who before the crisis were considering reducing the bank's activities, were now leaning toward giving the bank a huge capital increase to help it meet its newly expanded role. The paper quoted Thomas Mirow, EBRD president, as saying that the bank could continue doing business at its current level of €7bn-8bn annually without an increase. But "if our shareholders want us to do much more, that is something around €10bn, then they would need to put more resources on the table," he told the paper. The EBRD holds its 18th annual meeting on May 15-16 in London.

Oil in troubled waters

In the oil and gas sphere, it's the same story. Kevin Bortz, director of natural resources at the EBRD, says that a number oil and gas firms with whom the bank had worked with in the early years of the region's transition to a market economy were once again turning to the multilateral lender for help. "We have a number of clients who over the years were able to, as oil and gas prices increased, beef up their balance sheets and able to do more financing without the EBRD," says Bortz. "But now with the crisis and the strong limitations on balance sheets, some of these oil and gas companies are coming back to us because they have operating and capital expenses and the commercial banks aren't there."

On February 20, the EBRD announced it had raised $250m in long-term funding to help the Russian oilfield services provider Integra Group restructure its balance sheet. Despite the financial crisis, the EBRD said it managed to syndicate a large part of the loan, some €175m, to eight international and local commercial banks.

The EBRD's renewed effort to reach out to oil and gas firms has come as a welcome surprise to some. Junior oil and gas firms, many of them listed on London's Alternative Investment Market (AIM), have seen their shares hammered down by the crisis and left with little or no money to explore. According to Ernst & Young, junior oil and gas companies listed on Aim raised just £23.6m in the fourth quarter compared with £229m in the previous quarter and £325m in the year-earlier period. This worrying trend is continuing into 2009, with just £1.19m raised by the sector in January. In October, the consultancy calculated that 65% of the Aim-listed juniors had less than £10m cash left in the bank to spend on existing opportunities or new projects.

Frank Jackson, managing director of the Aim-listed Aurelian Oil & Gas, said he recently received a call from the EBRD out of the blue. "It was curious, because I actually went to them about a year ago and asked for a meeting, but I didn't get in the front door. And now here they are asking me for a meeting - there's a turnaround in that marketplace," he says.

Bortz says it's not just explorers that the EBRD is looking to help weather the crisis. January's spat between Russia and Ukraine over gas, which yet again reduced supplies to Europe, has forced the issue of ensuring oil and gas supplies to the top of the agenda once again. "A lot of people are concerned about the interruption of gas supplies to Europe and so we're busy looking at gas storage facilities in most western geographically located EBRD countries and trying to deal with those energy security issues," says Bortz.

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