Equate, the Kuwaiti-US petrochemicals venture, plans to refinance the $1,200 million in loans that it raised last year, according to sources close to the project. The refinancing will enable Equate to cut its borrowing costs by as much as one-half, confirming that project financing costs in the Gulf are continuing to fall.

The original financing, signed last September, was arranged by a group of international, regional and Kuwaiti banks including Citibank, JP Morgan and Chase Manhattan of the US, the regional Gulf Investment Corporation and Gulf International Bank, and the local National Bank of Kuwait. The deal was unusual at the time because of its large size and the fact that it was done on a purely commercial basis, without sovereign or export credit agency guarantees. The Equate Petrochemical Company is owned by Union Carbide Corporation of the US (45 per cent) and the local Petrochemical Industries Company (45 per cent) with a 10 per cent stake owned by the Bubiyan Petrochemicals Company, which is listed in Kuwait (MEED 27:9:96).

The refinancing is expected to be concluded in the next two or three months. MEED understands that the borrower approached the arrangers and asked for a refinancing after being presented with similar proposals from third parties. It was not clear who the third parties were or whether their offers were still on the table.

The refinancing is likely to be priced at around 80 basis points (bp) over the London interbank offered rate (Libor). This is a lot cheaper for Equate than the margin on the original loans, set at 162.5 bp over Libor before the project goes on stream and 187.5 bp over Libor after that. 'They're going to save a bundle. The new deal will come in at a very attractive rate,' says one source. The original package was divided into a 10-and a-half-year, $500 million tranche provided by Kuwaiti banks and an eight-and-a-half-year, $700 million tranche provided by foreign banks. Each tranche included a component of Islamic financing.

The petrochemicals project is due to come on stream in the next few weeks, which means that the pricing of the refinancing does not have to cover much construction risk. However, some say that the original loan package was expensive, possibly because commercial financing had to be arranged quickly after the collapse of plans by the US' Export-Import Bank to provide export credit agency cover. 'I think it was grossly overpriced', says one source. Others differ. 'That can be said with hindsight about any deal which is heavily oversubscribed,' says another source close to the deal, who notes that lending margins for project finance in the Gulf have fallen steadily since the Equate deal was done. This reflects fierce competition among international lenders, whose worries about political risk have also diminished.