No one imagined that raising $20bn for a major petrochemicals plant in Saudi Arabia would be easy. But it proved to be longer and more time-consuming than anyone expected. In June, Saudi Aramco and the US’ Dow Chemical finally completed the funding for the Sadara Chemical scheme after six years in the planning.

The deal is the largest ever project financing in the Middle East and is set to be the largest project finance deal in the world in 2013. It will result in the construction of the largest single-phase integrated chemicals facility ever built.

It has not been without its challenges. In 2010, the project was moved from Ras Tanura to Jubail and significantly redesigned. Although this helped bring down construction costs from an estimated $26bn, it caused delays to the timeline. One source close to the project says that during this period, “we spent six to nine months doing absolutely nothing”.

Funding plan

The sponsors appointed the UK’s Royal Bank of Scotland and the local Riyad Bank as financial advisers in July 2008. But it would not be until three years later that the advisers would start the first round of talks with export credit agencies (ECAs) about funding the scheme. This is when work on putting the financing in place really began.

It was late 2011 and several strategic decisions were made. The funding would come in a single phase, rather than be split into several tranches over a few years. “There was a plan B that if we hit problems because of the size of the financing required then it would be split up, but it never became a problem,” says one source close to Aramco. The sponsors had also decided that the majority of the funding would come from ECAs and would include a small bank tranche, a local currency sukuk (Islamic bond), and an initial public offering (IPO) on the Saudi Stock Exchange (Tadawul).

In most project finance deals, the ECAs are usually what slows the process down. To mitigate this, the sponsors initiated talks with them as early as possible. They approached banks about nine months later in May 2012. At this stage, the funding plan for the $12.4bn of debt required for the project was split between $6.5bn from ECAs, a $1.4bn sukuk, $1.3bn from the state Public Investment Fund and $530m from the Saudi Industrial Development Fund. The bank tranche would make up only $2.7bn.

This made sense as ECAs can typically lend at lower margins than banks, and a smaller bank tranche would also make it easier for the deal to appear a success by gathering an oversubscription. This could then be used to bring down the pricing on the bank loans.

In the end, dollar loans for the Sadara scheme were priced at 125 basis points above the London interbank offered rate (Libor), stepping up to 155 basis points after construction is completed, and then 185 basis points during the 16-year tenor of the loans. Saudi riyal loans start at 75 basis points above the Saudi interbank offered rate (Sibor), stepping up to 120 basis points, and then 135 basis points. The pricing achieved Aramco’s aim of being lower than the last big oil and gas project in the region, Qatar’s $8.6bn Barzan scheme. But it came at a cost.

Because so much of the bank liquidity was directed into the commercial loans, some of local banks had to be redirected into lending on the ECA-guaranteed tranches. “The Saudi riyal loans were reduced from the original financing plan and rerouted into the [South] Korean ECA-covered loans as there was not enough international bank appetite for them,” says one banker involved in the deal. Another banker close to the deal says this was always the plan to help ensure that pricing ended up as low as possible.

The sukuk also helped achieve this. Raising SR7.5bn ($2bn) from the local capital markets helped reduce the reliance on bank funding even further. As the first project bond in the kingdom, it took longer than expected to complete, and ultimately it was this, not the ECAs, that delayed the financing.

Bond delays

“The bond took longer than expected as it was the first time this had been done in Saudi Arabia before the rest of the financing had been arranged,” says another banker in Riyadh.

The wait was worth it as the sukuk was about $500m bigger than expected, and priced at just 95 basis points over the six-month Sibor. Aramco and Dow then quickly moved forward on reshuffling the rest of the funding package. It finally closed the debt tranche in June.

Now, the two sponsors will be turning their attention to the IPO, expected to raise about $2bn from selling 30 per cent of the equity in the firm at a nominal value of SR10 a share. This is expected to happen in early 2014.

While a big success for Aramco and Dow Chemical, it is difficult to say the deal is a sign that project finance market is recovering.

“Banks did this deal because of their relationships with the sponsors,” says one banker lending on the scheme. “While it is an overstretch to say they remain allergic to long-term project lending, it is not much of an overstretch.”