Projects are expected to secure funds, as domestic banks stay liquid.
Project financing activity is expected to step up next year in Saudi Arabia, especially in the petrochemical and refining sectors. This year has been reasonably active with the closing of some multi-billion dollar deals, but some even larger financings are on the horizon. Notable this year were signings in June of financing agreements for the Satorp 400,000 b/d refinery sponsored by Saudi Aramco and Total, and the 1.73gw PP11 independent power project (IPP) sponsored by Saudi Electricity Company (SEC) and being developed by GDF Suez and Aljomiah Holding. Satorp received $8.5bn of funding and PP11 secured $2.1bn, and at the end of November banks agreed to provide almost $2bn to Ma'aden for an aluminum smelter and rolling mill, which is the first phase of an $10.8bn integrated aluminum project.
Even if a couple of the largest deals fail to approach lenders next year, and spill over into 2012, there will still be a good pipeline of financings coming to market. The $20bn petrochemical project being sponsored by Saudi Aramco and US firm Dow Chemical may seek funding in the last quarter of 2011, and talks with export credit agencies (ECAs) have began, MEESunderstands. ECAs have been a mainstay of most deals, particularly large ones, after bank funding was constrained by the credit crunch, and they are typically approached at an early stage in project financing.
There have been suggestions that the Saudi Aramco/Sumitomo PETRORabigh Phase II petrochemical complex, which is expected to cost around $8bn, will seek financing next year, although one expert pegs it as a 2012 deal, given that there have been changes to the projects configuration and product slate (MEES, 29 June 2009). If Saudi Aramco finds a partner for the $10bn Yanbu' 400,000 b/d export refinery it may also seek funding. It had launched its funding request this year, only to pull it after US firm ConocoPhillips unexpectedly exited the project. If a new partner does not step up, Saudi Aramco will probably fund the project via its balance sheet, as is the case for its 400,000 b/d Jazan refinery project. Petrochemical giant SABIC is also implementing an investment program, but does not often use the project finance structure. An exception was its joint venture Kayan project which received $6bn in funding in 2008 and is now seeking an extra $2.4bn due to cost overruns.
Smaller Petchem Deals
Aside from these giant projects, the timing for which is uncertain, there are a number of smaller petrochemical deals being prepared for a market approach. Sahara and Ma'aden are expecting to seek funding for their $700-800mn caustic soda and ethylene dichloride (EDC) project in Jubail in the first quarter of next year. The caustic soda will be used in Ma'adens aluminum operations and the EDC will be exported. Tasnee will seek funding for its $1.5-2bn acrylates complex in Jubail in the first half of 2011, and discussions have started with Korean and German ECAs, MEESlearns.
Sipchem and Korean company Hanawa will seek funding for their $900mn ethyl vinyl acetate (EVA) project in Jubail in mid year, and given the Korean sponsor, will probably use cover and financing from the Korean ECAs. Sipchem had been given an ethane feedstock allocation from the Ministry of Petroleum and Mineral Resources, but is using one of SABICs crackers on a tolling basis to produce ethylene, which forms the basic feedstock for the EVA plant.
Ma'aden and Alcoa have said that they want to proceed quickly with the financing for phase two of their aluminum complex, which includes the alumina refinery and bauxite mine, and MEESunderstands that they plan to complete it by the first half of next year.
Currently lenders are determining which bidders they will support for SECs 1.8-2.1gw Qurayah IPP, which is expected to cost over $2bn (MEES, 15 November). Lenders are also deciding which consortia they will support for the $1-1.5bn expansion of Madinah airport, which is being implemented on a public private partnership (PPP) basis. Saudi banks are also being kept busy providing sizeable amounts of contract financing for government projects including schools, prisons etc (these are not using the project financing structure).
In Saudi Arabia, potential capital investment in the energy sector is estimated at $130bn in 2011-15, said APICORP. With Saudi Aramco and SABIC reaffirming their commitment to implement their investment programs, shelved or postponed projects are expected to decline to 6% of potential, compared to 21% in the previous review period of 2010-14 (MEES, 4 October).
Despite the growing funding requirements, bankers estimate that there will be sufficient interest from lenders. While the forthcoming Basel III banking regulations are raising some questions about lending capacity for the long-tenored loans that characterize project finance, more funding has become available from international banks after it dried up following Lehmans Brothers collapse in September 2008. And with oil prices edging higher, natural resource and infrastructure projects in the kingdom with strong sponsors are eagerly sought, bankers noted.
Furthermore, the kingdoms domestic banks have provided a lot of funding this year, and going into 2011 they remain liquid. As a result some of the projects, such as the Ma'aden phase one aluminum complex, have sought loans in Saudi riyals as well as dollars. Saudi Aramco offered banks the chance to participate in riyals for the first time in the second renewal of its $4bn revolving credit facility (MEES, 15 November). Some of the smaller projects, such as the Ma'aden and Sahara caustic soda/EDC, are likely to secure enough funding from local banks to make even ECA funding unnecessary, let alone that from international banks.
Funding Combination
However, larger projects are likely to continue to use a combination of local and international banks, and ECAs on their project financings. And some will even seek funding in the debt markets, with Satorp, for example, planning to issue $1bn worth of sukuk in 2011. Saudi institutional lenders, the Public Investment Fund (PIF) and the Saudi Industrial Development Fund (SIDF) will also continue to play a major role in providing financing to most of the kingdoms projects.
I think all this funding can be done. It will be a combination of local banks, international banks and PIF, SIDF dont underestimate what they put into these projects, said one banker in the kingdom. He notes that international banks could come into deals clean or under facilities covered by ECA insurance. These financings will be done unless there is a major shift in liquidity and pricing in the market, he maintained. Lenders also suggest that while local banks are more liquid, some sponsors will want a portion of their funding in dollars, rather than riyals only, because it gives them a natural hedge for currencies. However, any project planning to raise substantial amounts of money from domestic banks will need to take riyals. Saudi banks can only secure small volumes of dollars, and for those there is higher premium, explained one banker. On the Ma'aden financing, for example, the riyal portion of the funding saw margins of 165-245 bps, compared to 205-275 bps on the dollar tranche (MEES, 12 July).
Generally, pricing for project financing has edged down from the heights it reached in the immediate aftermath of the credit crunch, although bankers noted that there are concerns that it might be coming down too fast. They continue to warn against sponsors seeking to replicate Satorps extremely lean margins of 1.85% (185 bps) all in (including fees and margins) above LIBOR for the senior loan facilities. There is also evidence that Saudi banks will reject pricing that is too thin. The Ras al-Zour power project, which was converted from a project financing to a straight engineering, procurement and construction (EPC) contract last year, has only managed thus far to attract two banks, National Commercial Bank (NCB) and Arab National Bank, to provide a short term loan of a few billion dollars.
One Saudi banker said that he had rejected the deal on pricing alone, noting that with a change in emphasis from investment banking to commercial banking NCB in particular had more liquidity than many of its counterparts. Saudi banks are not all on an equal playing field right now and you will see that on the pricing. Some deals are already coming in at prices that are too thin, said another.
Copyright MEES 2010.
