The financing of Saudi Arabia’s $9.6bn Jubail export refinery has defied the worst banking crisis in decades, by securing more bank commitments than it needs in order to fund the project. This is a remarkable achievement given that many international banks were no longer actively looking at the project finance market as a result of the liquidity crisis of 2008.

As MEED went to press, there was still some detail outstanding in the funding structure, but the financing of Saudi Aramco’s Jubail refinery has demonstrated to the Middle East project market just how far lenders are still willing to go for their top clients.

The road to getting the Jubail refinery and its financing in place has, however, been long. Sponsored by a Saudi-French joint venture, Saudi Aramco & Total Refining & Petrochemical Company (Satorp), the project has been in the planning since 2007.

Export credit

The deal was first launched to the banking market in June 2009, with Satorp’s financial advisers, France’s Calyon and its affiliate Banque Saudi Fransi working on an ambitious plan to complete the financing arrangements by the end of the year.

At that point, bankers close to the project, aware that to get a financing of this size done would require tapping several pools of liquidity, were working on the assumption that financing would come from a diverse mix of sources.

The initial plan was to raise a debt tranche of $8.3bn, split between a Saudi bank tranche of about $1.4bn denominated in riyals, a similar-sized dollar tranche from international banks, and $2.2bn in loans financed by banks, but with export credit agency (ECA) guarantees.

The remaining $3.3bn would come from direct export credit agency loans, and loans from the Saudi Industrial Development Fund and the local Public Investment Fund.

However, it is now likely that the international tranche will decrease to about $1bn and the Saudi and sukuk tranches make up the rest.

Later in the summer of 2009, Satorp appointed the UK’s HSBC as a lead arranger on a potential international bond issue. Satorp hoped to emulate the success of the financing of the Dolphin Energy scheme, which in late July of that year had raised a $1.25bn bond at a rate of 337.5 basis points above US treasuries, competitive to the pricing on its bank facility of 275 basis points above the London interbank offered rate (Libor), rising to 350 basis points above Libor.

Calyon and Banque Saudi Fransi had requested that banks respond to the Jubail financing invitations for the bank tranche by 18 September, but several missed the deadline.

The high levels of risk that lenders had to shoulder, coupled with the default on around $20bn of debt by two of Saudi Arabia’s biggest conglomerates – AH Al-Gosaibi & Brothers and the Saad Group – left credit committees in many international banks agonising about the deal.

“There has been a bit of knee-jerk response to the Saad and Al-Gosaibi issues from the bank’s management,” says a UAE-based project finance banker, who adds that those defaults had left several banks questioning whether they wanted to make fresh deployments to Saudi Arabia.

“Right from the start, this was a very aggressive structure, with the banks being asked to take on refinery margin risk, and pricing in the financial model that would not give a good return in exchange for the risks we had to take,” says one banker who eventually lent to the project.

Despite these issues, a banker close to Aramco says that within a few days of the September deadline passing, both the inter-national bank tranche and the Saudi riyal tranche were oversubscribed.

“We knew some banks would complain about certain aspects of this deal and have issues with Saudi exposure, but Aramco is one of the best clients in the region, so it attracted a good response anyway,” says the banker close to Aramco.

Even with two of the best sponsors in the oil industry, the strength of the response from banks by the end of September surprised some in the project finance community. But the project financing would become more complicated now.

Aramco was keen to see the Jubail refinery set a new pricing benchmark for project financing in the region, and even before the September deadline for bank responses, it was talking of pricing the Jubail debt under the Shuweihat 2 (S2) independent power and water plant (IWPP).

S2 had managed to get $1.1bn of bank debt at pricing between 225 basis points and 350 basis points above Libor. The amount of debt secured was substantially smaller than Aramco and Total were seeking, but even getting banks to agree to that pricing level had been a difficult task.

Even with all the signs indicating that Aramco was planning to strike an aggressive deal, many banks were surprised by just how low the pricing eventually offered in late November was. Saudi banks were being offered pricing of less than 100 basis points above the Saudi interbank offered rate (Sibor), rising to about 150 basis points above Sibor after three years.

Complex structure

For the international tranche, banks were offered pricing between 150 and 200 basis points above Libor. Banks baulked, but the huge liquidity present in the Saudi market, coupled with the importance of Aramco as a client of the local banks, enabled them to get away with pricing that was far below every other deal that had been done in 2009.

Even the Rabigh power project, the last Saudi deal to be financed in mid-2009, carried a pricing of more than 200 basis points above Sibor.

“They have been very fortunate to be launching this deal at a time when the bank market has largely been improving every month,” says one banker close to Aramco, who adds that pricing has been coming down with each successive deal and Aramco has just been able to ride that out and take the benefit.

Satorp may have succeeded in getting banks to digest the lowest pricing of the year, but now a new problem emerged. The complexity of trying to secure the most efficient financing package out of so many different funding sources now meant that getting to financial close before the end of 2009 would be impossible, and the deal drifted into early 2010.

“It is an incredibly complex process, with many moving parts,” says one Riyadh-based banker. “Obviously the cheapest source of funding is in riyals, but then the sponsors have to weigh up how much is their preference for dollars over riyals, and what are the implication of foreign exchange risk from choosing one over the other.

“You also have to factor in the preferences of all the banks in terms of what currency they want to commit, how much, and is it direct loans or the ECA-covered tranches.”

“Part of the success of the Jubail financing has been the fact that Aramco is a client of everyone”

Dubai-based banker

To add further complexity to the financing, in late 2009 in an effort to further diversify its funding base, Satorp appointed Banque Saudi Fransi, Samba and Deutsche Bank to arrange a local sukuk that could be as large as $1bn.

Neither the sukuk nor the international bond had been issued by early February 2010, but it is expected that a roadshow for the sukuk will start before the end of the month. Given the strength of the Aramco name, the company should again get access to a competitively priced source of funding.

This could help Aramco further reduce the size of the bank tranches. Banks were still awaiting their final allocations in early February, but it is expected that the riyal tranche will have been increased in size to take advantage of its lower pricing and the international tranche scaled back. By the end of February, the deal should have reached financial close, making it the biggest project finance deal since the $10bn Saudi Kayan petrochemicals project was financed in late 2008.

Part of the importance of the financing of the Jubail refinery is that Aramco plans to use the structure of the deal as a model for financing its future refineries. Plans are already being worked on to launch the financing for the Yanbu refinery, a joint venture with the US’ Conoco-Phillips, later this year.

The Yanbu refinery will be another $10bn project that will again require as many different sources of liquidity as possible.

The challenge for Aramco will be how much appetite banks have for another large Saudi refinery project. “Part of the success of the Jubail financing has been the fact that Aramco is a client of everyone, and a client that you always want to lend to,” says one Dubai-based project finance banker. “The question for them is how long can you get leverage over the banks based on ancillary business, because deals like Jubail are not that profitable for the lenders so they need something else to get them interested.”

With a huge pipeline of projects planned for 2010, there will also be questions asked about how much bank appetite there might be left toward the end of the year when Aramco launches its next refinery.

One thing is certain though – Aramco will continue to be one of the best banking clients in the region. That alone will generate huge interest in any projects it launches. But if Aramco is hoping to continue to drive down pricing on subsequent deals, then the banking market will have to improve: Jubail has already stretched how far lenders are willing to go.