The SIDF has raised concerns over the $10bn Saudi Kayan project, which could result in it pulling out of a planned $530m investment in the petrochemicals scheme.

The concerns are understood to relate to the structure and pricing on its tranche of the debt. The terms of the SIDF’s loan have not been revealed, but the commercial bank tranche of the debt starts at 50 basis points over the London interbank offered rate (Libor), rising to 75 basis points after the construction of the project.

This is far lower than other recent financing deals in the region, most of which have been priced at more than 200 basis points over Libor.

If the concerns raised by the SIDF are not resolved, the government-backed fund may decide to pull its investment in the project, according to project sources.

“The SIDF has identified several problems with the structure of the deal that it wants addressed before it commits money to the project,” says one banker close to the project.

Under the terms of the financing deal, the fund has until the end of the construction period, which is likely to be October 2010, to resolve its concerns over the project. If by that stage it still has doubts, it could pull out.

Saudi Basic Industries Corporation (Sabic), a 35 per cent shareholder in the Kayan project, says if this happens, it will step in and fill the funding gap to ensure the scheme proceeds.

The deal was signed in July 2008 with a group of 15 banks, as well as the SIDF and the government-backed Public Investment Fund (PIF). Several export credit agencies including Korea Export Insurance Corporation, the Export Import Bank of Korea, Italy’s Gruppo Sace and the UK’s Export Credits Guarantee Department also signed up to the deal.

The SIDF’s concerns are the latest in a series of problems with the financing for the huge petrochemicals project. In late 2007, syndication of the $1.8bn commercial debt tranche was delayed by Sabic, which was trying to raise a $1.5bn bond to fund its GE Plastics acquisition at the same time and wanted to avoid having two deals in the market concurrently.

Financial close on the project was further delayed as the commitments of some banks expired while Sabic waited for the PIF to sign the documents on the financing deal.

Sources within the financing group say most banks that financed the deal did so in an attempt to ensure their existing relationships with Sabic were not undermined.

However, the structure and pricing of the deal leaves little room for them to make any profit, especially given the sharp increase in the banks’ own costs of funding since the deal was signed.

The Jubail-based Saudi Kayan complex will be the largest single-phase integrated petrochemicals project ever built, and will produce more than 6 million tonnes a year of chemical products.

Key facts

  • 200 basis points: Amount over Libor at which other deals have been priced

  • 75 basis points: Post-construction price over Libor for Saudi Kayan finance

  • 50 basis points: Preconstruction price over Libor for Saudi Kayan finance

Libor=London interbank offered rate