The financing of an aluminium complex in Saudi Arabia shows just how much can be raised in a short space of time from the kingdom’s liquid banks
Banking key fact
The $7.5bn financing for the first phase of the complex was raised within six months
Launched to the market in early May 2010, the $7.5bn raised to fund the first phase of Saudi Arabian Mining Company’s (Maaden) aluminium complex was completed within six months.
It was an impressive achievement at a time when the rest of the regional and international banks remained lukewarm to the idea of long-term financing at low interest rates. It was also a quick turnaround for the project, which had spent the previous two years struggling with issues at the sponsor level.
Maaden’s original joint venture partner, when the project was first conceived, was Canada’s Alcan.The company was subsequently merged with UK/Australian mining firm Rio Tinto to form Rio Tinto Alcan in 2007, but a year later it decided to pull out of the project.
Maaden’s hunt for a new partner found US-based aluminium company Alcoa, which joined the scheme in late 2009.
Quick finance turnaround
From there things moved quickly. A meeting in Riyadh was scheduled for April 2010 in Riyadh to introduce Alcoa and the other project stakeholders to potential lenders. “That was really the first time we got to see what was happening on the project after a long period of uncertainty because of the issues with Rio Tinto Alcan,” says a banker, who attended the meeting.
|Maaden aluminium smelter financing|
|Public Investment Fund||1,300||26|
|Saudi Industrial Development Fund||320||6|
|Conventional and Islamic Banks||1,636||33|
Within a few weeks banks were sent invitations to join the lending group for the project. In total, the complex will cost about $10.8bn, but rather than raise all this at once the project was split into two phases.
Phase one comprises the 740,000-tonne-a-year (t/y) aluminium smelter and the 250,000-460,000 t/y rolling mill. Phase two is the alumina refinery and bauxite mine and will be financed in 2011. In total, $7.5bn was raised for phase one, split between $5bn for the smelter and $2.5bn for the rolling mill.
By early June, the financial advisers on the project – the local Riyad Bank and the UK’s Standard Chartered – began receiving responses from banks interested in joining the lending group. At this stage, there was a distinct split between international banks and local banks in their appetite for lending to the scheme.
International banks raised concerns about the lack of a completion guarantee or an offtake agreement for the output from the plant. Despite concerns, the deal was twice oversubscribed, with the majority of financing offers coming from local banks.
“This was a tough deal for international banks,” says a local project finance banker. “For the Saudi banks it was really done as a relationship deal with Maaden and that meant a lot of the problems international banks had were not as important to us.”
What made it even tougher was the pricing offered on dollar loans. Banks were surprised at how aggressive the sponsors were on pricing the deal. Pricing was set by mid-June with riyal commitments at 165 basis points above the Saudi interbank offered rate, rising to 205 basis points after construction and 245 basis points from the fifth year onwards. The dollar loans were more expensive, starting at 205 basis points above the Saudi interbank offered rate, rising to 245 basis points post-construction and 275 basis points from year five onwards.
This caused some of the local banks to change their minds about whether to commit in dollars or riyals. Around $1bn in commitments had been received from local banks before the pricing was announced, following that many shifted to just riyal commitments, due to the expense of getting hold of dollars.
Saudi banks dominate
In the end, only four non-Saudi banks ended up in the lending group: Export Development Canada, the UAE’s Emirates NBD, France’s BNP Paribas and the UK’s Standard Chartered. The rest of the lenders were local.
Sources close to the project say that because the sponsors had a preference for raising financing in dollars, deciding the final make-up of the currency commitments took some time as they weighed up cheaper riyal financing against the need for the international currency.
The project also benefited from large contributions by state-owned investment agencies, the Public Investment Fund, and the Saudi Industrial Development Fund, which put a total of $1.6bn towards the scheme.
That meant a $300m loan from French export credit agency Coface could eventually be dropped for being too expensive. By late November, everything was in place to start signing some of the loan documentation.
After the speed with which phase one was financed, there will be a great deal of attention on phase two, which is due to be launched to the market in the first quarter of 2011.
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