Increased Capitalization Requirements and Rights Offerings

Omani Law Compliance Reminder

In response to the global financial crisis of 2008, the Central Bank of Oman issued a circular in June 2008 requiring Omani financing and leasing companies to comply with the following capitalization requirements:

• By June 2009, each Omani financing and leasing company must have increased its capital reserves to at least OMR 10 million and maintain such minimum reserve amount at all times going forward; and
• By June 30, 2012, each Omani financing and leasing company must have increased its capital reserves to at least OMR 20 million, and maintain such minimum reserve amount at all times going forward.

Understanding that many Omani financing and leasing companies initially did not satisfy the OMR 20 million capitalization requirement, the Central Bank of Oman has encouraged Omani financing and leasing companies to conduct incremental capital raises each year, or otherwise periodically, in order to facilitate an orderly and less burdensome capitalization process. The heightened capitalization of Omani financing and leasing companies would then serve to strengthen their financial positions, augment their growth plans, and expand their business operations. As we approach the two-year anniversary of the issuance of this circular – and two years from the deadline to meet the OMR 20 million reserve requirement – this article highlights one way Omani financing and leasing companies can meet their reserve requirements: rights offerings. In order to satisfy the Central Bank of Oman’s capitalization requirements, Omani financing and leasing companies should consider, among other options, conducting one or multiple rights offerings in amounts sufficient to satisfy any shortfall. Pursuant to a typical rights offering, an Omani financing and leasing company, often with the assistance of a bank, distributes to its existing stockholders the right to subscribe to newly issued stock, possibly at a discount from the price at which the stock later may be offered to the public. Stockholders who do not exercise their right to purchase the offered stock then typically would be diluted by the offering. The company conducting the rights offering also may seek to obtain a “Standby Commitment” from the bank conducting the rights offering, under which arrangement the bank would agree to purchase any stock not subscribed to by the stockholders.

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IWPP Finance in Oman and the GCC

After years of remarkable expansion followed by a precipitous decline in the wake of the global financial crisis, the credit market for international water and power projects (IWPPs) in Oman and the GCC appears poised for a recovery. While 2008 saw a project volume in the Middle East of about US$50 billion, nearly six months passed before the GCC saw its first IWPP financing of 2009. Bahrain’s Addur IWPP closed on 29 June, raising US$2.1 billion and bringing the overall project volume for the region to US$6.7 billion for the year. The financial crisis forced project lenders to write down the value of project debt, driving up the cost of borrowing. Further, it wiped out the secondary market for project loans as banks shunned the formerly popular practice of packaging debt in off-balance sheet vehicles. The capital that commercial banks were willing to lend came at a higher cost and decreased tenor. Whereas tenors running from 15 to 20 years at 100 bps over Libor were once common, the Addur project received debt at a tenor of eight years at 350 bps over Libor. Today, the cost of capital averages at 250 bps over Libor. The revival of IWPPs in the region has been driven by loosening credit conditions linked to new trends in IWPP finance. Specifically, banks are making increasing use of hard or soft mini-perm structures. In a hard mini-perm, debt is offered at a short tenor, in the range of seven years, requiring early refinancing. In a soft mini-perm, a longer tenor is used, but incentives are used to encourage the lender to refinance well before maturity. Another key trend has been the rising profile of export credit agencies and international development banks. Export credit bodies provide access to large amounts of relatively inexpensive capital and offer added confidence to commercial banks. Development banks have also played a key role by providing an additional source of capital and a backstop for project debt. Finally, banks have been favoring government supported projects. For instance, an IWPP with a concession or off-take agreement is a stronger candidate for financing given its relatively secure future cash flows. Additionally, governments may guarantee the obligations of state-owned parties entering into such agreements. Increasing electricity and water demand has led the government of Saudi Arabia to tender projects in form of engineering, procurement, construction (EPC) contracts, rather than build, own, operate (BOO) or build, own, transfer (BOT) contracts. Oman aims to avoid such a measure. Continuing on its program of privatization, Oman expects to see the close of a club financing of an IWPP in Salalah this year. RFPs have been released for projects at Barka, Sohar, Duqum, and Ghubrah, with another for an IWPP in Mirbat on the way. Additional projects are being studied, including a solar plant in the south of the country. In past projects, the Oman Power & Water Procurement Company (OPWP) has entered into off-take agreements. In the case of the Barka and Sohar IPPs, the OPWC will purchase the output under a 15-year agreement. IWPP finance and execution in Oman implicates a range of complex legal issues, including:

• Licensing – procurement of generation and desalination licenses and exemptions from the Authority of Electricity Regulation;
• Financing – the creation and registration of security interests in Oman, as well as review of loan and facilities agreements;
• Land Issues – entering into a concession agreement with the Government and or any usufruct agreements as may be required;
• Environmental – Compliance with the Environmental laws of Oman in coordination with the environmental authorities;
• Labor and Employment – Fulfilling the Omanisation requirements during the life of the project.

In addition, it is often necessary to put in place all the project agreements in order to obtain IWPP finance. Depending on the project, these agreements may include:

• Power and/or Water Purchase Agreement;
• Electrical Connection Agreement;
• Water Connection Agreement; and
• Gas Supply Agreement.

As the credit market revives -- and as the oil prices rebound -- Oman grows increasingly likely to meet its goal of increasing output through an ambitious program of privatization.

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