Saudi Polyolefins Company Secures $280Mn From Mainly Regional Consortium

VOL. XLV

No 2

14 January 2002

SAUDI ARABIA

Saudi Polyolefins Company Secures $280Mn From Mainly Regional Consortium

Saudi Polyolefins Company (SPC) announced on 23 December that it had secured a $280mn syndicated loan from a consortium of mainly regional banks to finance the construction of a $525.7mn propylene and polypropylene plant. The transaction was lead-arranged and equally underwritten by Saudi Fransi Bank (facility agent), Riyad Bank (documentation agent and secured accounts bank), Arab Petroleum Investments Corporation (Apicorp – regional book and financial model bank and technical bank) and Sumitomo Mitsui Bank (insurance bank and international bookrunner). The lead arranger group was mandated in November last year. General syndication for the transaction is expected to be finalized this week with six new banks joining the consortium. Sources close to the deal were unable to confirm which institutions would participate, but told MEES that they were “predominantly regional and mainly Saudi.” The facility carries a tenor of 9.75 years, is priced at 130bps over Libor pre-completion and 120bps post-completion and has incurred fees described as “appropriate”.

SPC was established in 2001 with a capital of $160mn as a joint venture between the Saudi National Petrochemical Industrialization Company (NPIC – with a 75% stake) and Basell (25%), a joint venture between Royal Dutch/Shell Group and BASF AG which is the world’s largest producer and marketer of polyolefins. NPIC is owned by various prominent investors from Saudi Arabia and the Gulf, the largest single shareholder being National Industrialization Company (NIC), which owns 51% of NPIC’s shares.

The plant, which will be built under lump sum turnkey contracts by a consortium of ABB and Samsung Engineering with ABB taking the lead role, is expected to be completed in early 2004. The company is planning to produce 450,000 tonnes of each product annually. SPC has already secured $106.7mn from the Saudi Industrial Development Fund and will also be financed by equity of $160mn from NPIC and Basell. A further $259mn will be drawn from the bank loan with an additional standby equity of $9mn and a standby bank facility of $21mn to provide funding in the event of cost overruns.

MEES understands that while a downturn in global market sentiment did affect the transaction to some extent (notably in terms of the participation of international banks), a more immediate challenge was posed by the security structure, described by one source as “a nightmare because of Saudi law or lack thereof.” The lack of a completion guarantee – attributed to the size of the majority shareholders and the lack of associated enforcement mechanisms – posed further problems. “There is no SABIC in there for example,” said one banker, “and enforcement of a guarantee against a local company would be doubtful. You could make a lot of effort to get the guarantees but then not be able to use them or pursue action, making it difficult to establish the real completion risk.” Resolving the issues involved a thorough review of the EPC contract structures and of the completion guarantees in terms of performance from the EPC contractors, which were reportedly “more strict than usual,” in addition to the technlogy.

Since 11 September regional banks have stepped in where some of their international counterparts have feared to tread. Kuwait’s Equate project is a case in point, where international banks withdrew en masse from the refinancing transaction late last year, despite the fact that, as one source pointed out, they could have simply held their existing positions (MEES, 3 December 2001). At the time this lack of faith was attributed to less than aggressive efforts to sell what is a strategic petrochemical player into the international market, but other bankers argue that Gulf risk aversion also played an important role. “The attacks on the US did have an effect on international banks, there’s no doubt about it. You can always criticize the syndication groups, but the fact is that banks will always go into transactions in which they are interested whoever sells to them.” The same source points out that as a refinance deal, it was not a complicated transaction and should have received more international support, suggesting that the withdrawals were a clear indication that global banks were and may still be seeking to reduce Middle East exposure without having to sell at a discount into the secondary market. Sources say that local banks are increasingly being offered attractively priced paper on regional transactions from their international counterparts seeking to reduce their Gulf risk.