Barzan set for oversubscription despite constrained project finance market

30 August 2011

Several large deals in the pipeline for Middle East project finance sector

The financing for the $4.7bn Barzan gas project in Qatar is set to be oversubscribed by banks eager to get close to Doha ahead of an anticipated boom in infrastructure spending as the country prepares for the football World Cup in 2022.

Banks are due to respond to the financing request by 7 September, after the 29 August deadline was delayed due to the public holidays in the region. When they do, the project sponsors are expecting “a blow out”, according to sources close to the deal.

The commercial debt tranche on the project, a joint venture between Qatar Petroleum (QP) and the US’ ExxonMobil, is only $2bn and banks are being asked to provide loans of at least $100m (MEED 22:07:11). Many are expected to offer to put significantly more into the project, lured by the opportunity to get a mandate for a bond issue for the project, which will be awarded to some of the banks offering the most to the commercial debt tranche on the scheme.

The strong response has led some to suggest that bank appetite for project finance could be returning. With a raft of huge schemes that need to be financed on the horizon, that would be a relief for regional project sponsors.

“There has been a lot of interest in Barzan from banks, who have been out of the project finance market for quite some time,” says a source close to the Barzan project. “It seems that banks are now starting to get back into Middle East project finance.”

However, bank appetite may not be as strong as the Barzan response will suggest. New banking regulations, Basel 3, will force lenders to put aside more capital for long tenor loans like project finance deals. That is already weighing on the interest some banks have in financing projects.

“Barzan is not an indicator of the health of the project finance market,” says one adviser to project sponsors. “Banks are doing this deal because it has got the best sponsors, and they are positioning themselves for other work coming out of Qatar in the future. Other projects will face a much tougher time and will have to offer much higher pricing to get interest.”

On the Barzan deal, pricing is expected to come in at under 200 basis points above the London interbank offered rate for the $2bn commercial loan. It could be lower for the $2.7bn tranche covered by export credit agencies (ECAs) Japan’s Nippon Export and Investment Insurance (Nexi), Italy’s Sace, and Korea Export Insurance Corporation (KEIC). Japan Bank for International Corporation (JBIC) and the Export-Import Bank of Korea (Kexim) are due to provide direct loans to the project.

Several other huge project financing deals are expected to be launched into the bank market over the coming 12 months, including the Sadara Chemical project, a $20bn joint venture between Saudi Aramco and the US Dow Chemical. The two sponsors are understood to have started talks with ECAs about the project already and banks could be approached by the end of the year or early 2012.

Aramco is also planning another petrochemicals project, PetroRabigh 2, a joint venture with Japan’s Sumitomo Chemical Company, which could be similar in scale to the $10bn phase one. Emirates Aluminium is also planning an expansion project, which could cost around $5bn (MEED 01:04:11).

These projects will need to see a significant recovery in bank appetite to ensure they get the funding they require. But in an environment where banks are not so keen on long term assets, more sources of funding will have to be tapped. “From now on large projects will have to look at larger ECA loans, bond issues, and maybe even multi-currency loans, in order to raise the capital they need,” says one Middle East project finance banker.

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