A rough ride in the syndication market for the $2,322 million Saudi Yanbu Petrochemical Company (Yanpet) loan suggests that a two-year downtrend in pricing for Gulf project finance has come to an end, bankers say.

The loan is priced for most of its 101/2-year life at 50 basis points over Libor. Eleven banks signed up as arrangers and 17 as co-arrangers and the loan went into syndication late last year. Unfortunately, this coincided with economic crisis in East Asia, a flare-up in the confrontation between Iraq and the UN and the launch of a finely-priced sovereign loan for Saudi Arabia itself. (MEED 21:11:97).

Bankers close to the deal say that when syndication closed in late December, some co-arrangers were left holding much of the debt they had hoped to sell down. 'The general syndication was a total failure because it happened at the height of the Asia crisis, and because a lot of banks did not like the pricing,' says one banker close to the deal. Another adds: 'Those of us at the head level had very limited expectations of the deal. But I think there were some naive people at the co-arranger level.' Some banks are now said to be selling off their Yanpet debt in the secondary market at big discounts.

Pricing for Saudi project financings is widely expected to rise in the wake of the Yanpet deal - one source suggests that the next financing will have to be priced at around 75 basis points, around the levels of a year ago, if the borrowers want to interest international banks.

The next deal to test the market is likely to be a $700 million expansion financing for the Al-Jubail Petrochemical Company (Kemya). Like Yanpet, it is regarded as a high-quality deal. A $400 million loan for another project, the Saudi European Petrochemicals Company (Ibn Zahr), is being arranged as a quasi-club deal by Arab banks, who still have a lot of appetite for project finance and will accept lower margins than their global counterparts.

Bankers say big Japanese banks took part in Yanpet, but there was almost no demand from smaller Japanese lenders or banks in South Korea and Taiwan. Asian banks in general are likely to be absent from the lending market in the Gulf for some time to come.

Korean banks are embroiled in problems at home, and even the big and relatively sound Japanese banks are unlikely to commit themselves to new lending before the end of their financial year in March because they need to pep up their capital adequacy ratios.

'We can commit to participate in projects but we are not in a position to disburse funds,' says Shigenori Imai, BTM's chief representative in the UAE. An official at another big Japanese bank, based in London, admits that he would not have chosen to take part in the Yanpet deal under the current market conditions.