Thread by @AzarsTweets

1/ The first nuclear power plant in the Arab world began commercial operations in UAE last week. Our firm acted as financial advisor to the lenders for this groundbreaking $25+bn project. What does it take to develop & finance a complex nuclear project?

reuters.com/article/us-emi…

2/ We faced multiple challenges in structuring this and other (very rare) new nuclear project financings over the last 15 years. I'll describe a few general challenges related to nuclear financings, from a bank's perspective.

3/ Construction risk (delays and cost overruns). Nuclear projects are notorious for experiencing large cost overruns and delays.

A nuclear project in Georgia, USA has nearly doubled in cost ($14 bn to $24bn+) and is more than 5 years delayed. It's still not complete.

4/ These massive overruns pushed historic construction contractor Westinghouse into bankruptcy, and nearly did the same to Toshiba, which had to sell its memory chip business for $18 billion to survive.

5/ The contractors were liable for the cost overruns. But they couldn't pay. It's a lesson that even when you contractually allocate a risk to another party, if that party ultimately can't pay, you are in trouble. These were massive, historic companies, brought down by a contract

6/ Much effort goes into proper technical diligence & relying on financially strong companies. But nuclear construction is challenging and safety standards (and costs) evolving.

Still, banks ask for guarantees of their loans by companies or host govts with strong balance sheets.

7/ A second risk: Nuclear Third-Party Liability.

While super rare, what happens if there's a radioactive release or similar event that causes significant cross-border damage (to large nearby oil and gas fields, for example).

8/ The risk is that third parties who incurred such damages may bring large claims against banks who financed the project.

The Vienna Convention on Civil Liability for Nuclear Damage is a treaty which limits liability for accidents resulting from peaceful use of nuclear power.

9/ But not all countries acceded to the treaty. Plaintiffs from these countries can file claims in some jurisdictions against the banks who financed the project under a theory of "lender liability".

10/ The theory of Lender Liability, while it doesn't exist in all jurisdictions, requires plaintiffs to demonstrate that lenders exert an "indicia of control" over the project and thus may be legally responsible for its activities (and the resulting damages).

11/ Lenders typically exert some control over projects they finance. For ex, they may control the bank accounts or potentially the project itself if it defaults on its loan. Infrastructure loans are highly structured and lenders retain a lot of control, unlike corporate loans.

12/ If you're financing a nuclear project in a jurisdiction where lender liability risk exists, you would want to reduce the amount of control that you, as a bank, exert over the project. You do this by putting distance between you and control of the project.

13/ You can do that by lending to a corporate or host government rather than to the project company directly, accepting less security over the project, its assets, its accounts, the shares of the company, etc. It may become a sovereign loan rather than a loan to a project.

14/ The banks accept to have much less control over the project (which they typically don't like to do), in exchange for less potential liability in the event of an accident, and a better credit (a strong govt balance sheet versus that of a single power plant).

15/ The banks may even ask for a sort of guarantee from the borrower to cover any potential third-party liability including any litigation costs. Banks (non-Lebanese ones) are conservative institutions and will make every effort to cover every conceivable risk.

16/ A third risk is related to nuclear non-proliferation and general regulatory and operating risk (esp in emerging market countries). A country like UAE, for example, had to build up the technical capabilities of its nuclear regulator, FANR, from scratch.

17/ Countries embarking on a nuclear program may work closely with the IAEA and nuclear regulators in countries with advanced nuclear programs to develop the capabilities of its regulator and ensure it has the technical expertise and independence necessary.

18/ IAEA's Integrated Regulatory Review Service reviews a regulator's practices & that it conforms to intl standards.

The UAE did an incredible job quickly building up FANR's capabilities, incl by hiring senior staff formerly at IAEA and nuclear regulators in various countries.

19/ A nuclear regulator's job is critical. It must be independent, provide construction and operating licenses and permits for the nuclear projects, closely monitor construction and operating activities. FANR for ex incorporated design changes to the project after Fukushima.

20/ Countries with civilian nuclear programs do best when they adopt the relevant international nuclear treaties and the Nuclear Non-Proliferation Treaty, adopt tried and true regulatory and security/safety models, & cooperate closely with other regulators to adopt best practices

21/ Finally, financings are typically very long with loans repaid over 20-40+ years. Given the massive size of these loans & the economics of nuclear, debt repayment is usually g'teed by the Govt or the power company/state agency which can pass on costs to customers or taxpayers.

22/ This is compared to a traditional project financing where the loan is repaid from project revenue with no recourse to a bigger balance sheet (i.e., a guarantor).

23/ It's the nature of nuclear power. The buyer accepts possibly paying a higher flat electricity price in exchange for lowering its exposure to volatile fossil fuel prices. It's a 60+ year bet - the electricity price from a nuclear project stays relatively flat for 60 years.

24/ Building a civilian nuclear program is a major challenge & the UAE's work is impressive. Financing such a project is also very challenging. These loans are repaid over decades and have to be structured well, financial, commercially, legally, etc with proper risk allocation.