If everything goes according to plan, Saudi Arabia will be the biggest project finance market in the region in 2010. With two Aramco refineries totalling about $20bn to be financed, as well as a power project, an aluminium smelter, and several other smaller schemes, Saudi Arabia could complete around $30bn-worth of deals this year. This figure is impressive, considering in 2009 in the whole of the GCC, only about $20bn of project finance deals were completed.

Liquid market

Financiers are talking optimistically of a strong recovery in the Saudi market following the difficulties of 2009, when banks were rocked by a dramatic slowdown in the world economy and the defaults at two large local conglomerates, Saad Group and AH al-Gosaibi & Brothers.

“Last year [2009] was a difficult year coming out of the storm from the global financial crisis,” says Mansour Durrani, head of project finance at local National Commercial Bank. “What we are seeing now in activity levels is partly the result of that storm in 2008-09.”

“The Saudi market has increasingly become separate from the rest of the Middle East,” says a project finance banker at an international bank. “The local banks increasingly represent a completely different liquidity source, lending in the local currency and only looking at local deals.”

Saudi banks already dominate the financing of the two Aramco refineries at Yanbu and Jubail, and are also expected to constitute the major part of new deals coming to the market. “There has never been a shortage of liquidity in the Saudi market,” says a project finance banker at a local lender. “We’ve seen margins increase because of constrained liquidity, but there has always been enough liquidity in the banks to fund the projects in the market.”

Although local banks remained liquid, albeit at higher borrowing costs, international banks became more wary about committing fresh loans to the kingdom. This was the result of concerns about the way the defaults at the two Saudi corporates were being handled.

The local banks increasingly represent a completely different liquidity source, lending in local currency

Local project finance banker

“During 2009, it was getting difficult to get credit committees in London or Paris to approve large loans to Saudi Arabia, where they had just suffered a huge loss that no one really understood the reason for,” says the project finance head at an international bank.

The concerns about the two firms have passed now to a great extent, and while optimism has returned to the Saudi project finance market, deal flow has yet to pick up. The pipeline is burgeoning, but banks have yet to complete a deal this year.

In fact, no new deals have been completed since the $2.5bn Rabigh power project closed in July 2009. For the rest of that year, banks concentrated on corporate-style deals in the telecoms sector, rather than traditional project finance. Already one of the largest financing deals of this year, Saudi Aramco’s $10bn Yanbu refinery on the Red Sea coast, is on hold until the state energy giant decides how to proceed with the project following the walkout of the US’ ConocoPhillips as a partner on the scheme. Bankers say this deal may now not reach financial close until early in 2011.

The lack of activity is not confined to the kingdom. So far this year, not a single project in the whole region, let alone Saudi Arabia, has managed to reach financial close.

In numbers:

  • $20bn: Combined value of Saudi Aramco’s refineries at Yanbu and Jubail
  • $3.9bn: Loan secured by Saudi Binladin Group to fund King Abdullah Financial District projects
  • $1.9bn: Debt committed to Rabigh power project in July 2009

Source: MEED

Making progress

The financing raised by a consortium led by the local Acwa Power for the Rabigh power project was the only deal completed in Saudi Arabia in 2009.

And the only project expected to reach financial close in the kingdom in the first half of 2010 is the PP11 power scheme in Riyadh. The deal is expected to be completed in June, making it almost a year since the last financing was completed in the country.

At about the same time, funding for the $10bn Jubail refinery, a joint venture between Aramco and France’s Total, is expected to be concluded.

Banking sources expect the Jubail deal to be closed by the end of June, as Aramco is keen to get the final parts of the deal ironed out before finance commitments expire at the end of that month.

However, bankers are questioning why everything is taking so long. “We have been surprised by how slow progress has been,” says a Saudi project finance head. “We thought Jubail would be closed by now, maybe PP11, and that closing the Yanbu refinery would quickly follow.”

One Bahrain-based banker says there is only appetite for about $25bn-worth of deals in the whole region, and once a few large deals have been booked, banks will become more cautious in committing to new deals. It looks like that may well be the case.

The project finance community in Saudi Arabia is likely to end up concentrating on just three main deals: The Jubail refinery; PP11; and an aluminium smelter sponsored by state-backed Saudi Arabian Mining Company (Maaden).

Saudi project finance deals, 2008-09
Project Project value ($m) Debt Equity Financial close Sector
Mobily refinancing 400 400 14/10/2009 Telecoms
Zain Murabaha refinancing 2,500 2,500 12/08/2009 Telecoms
Rabigh IPP 2,503 1,903 600 22/07/2009 Power
Saudi Kayan petrochemical complex 10,000 2,403 3,998.00 06/11/2008 Petrochemicals
Chemanol expansion at Jubail 322 322 16/09/2008 Petrochemicals
Arabian Amines petrochemical complex 289 195 94 01/08/2008 Petrochemicals
NATPET refinery 893 459 260 25/06/2008 Oil & Gas
Maaden phosphate project 5,579 2,106 1,668.00 16/06/2008 Industry
NCP Jubail petrochemical complex – Saudi Polymers 5,213 1,870 1,633.00 27/05/2008 Petrochemicals
Sipchem Jubail acetyls complex 741 741 28/04/2008 Petrochemicals
Jubail seamless pipe project 138 138 29/01/2008 Industry
Source: MEED

Equity issues

The slow progress in closing deals is not a reflection of weak appetite among the local banks. All the deals launched, even Aramco’s two refineries, have been oversubscribed. The problems have generally stemmed from equity investors in projects.

The cancelling of the Ras al-Zour independent water and power project – now to be relaunched as a government procurement scheme – was the result of equity problems rather than debt. The latest issues with the Yanbu refinery are also equity related.

The Maaden smelter is itself a legacy deal that had been expected to be launched in 2008, but the previous sponsor, UK/Canadian mining group Rio Tinto Alcan, walked away because of its own financing issues. Now US-based aluminium company Alcoa has stepped in and the project is back on track.

A banker close to the Maaden deal says the company wants to get the financing completed before the end of the first half of the year.

“Banks have to respond to the financing request by 29 May, then terms and allocations should be finalised by mid-June, with final signing by the end of the June,” the source says. He confirms the majority of the funding is expected to come from local banks.

The high liquidity in the Saudi banking sector and the dearth of deals over the past 18 months, has prompted project finance teams to look at deals that would not traditionally fit their expertise.

Liquidity is available in dollars for our biggest clients, and banks need to be competitive in their dollar funding

Local banker

“With the government announcing huge infrastructure spending plans and getting several large projects started, there is the opportunity for quite a number of contractor financing deals,” says a local banker.

In such deals, banks are asked to put money upfront for contractors working on government-financed schemes to allow them to begin buying materials and starting development work. Local contractor Saudi Binladin Group has raised about $3.9bn from local banks to finance the construction of a large part of the King Abdullah Financial District, in the north of Riyadh.

Other loan deals to finance construction contracts for the redevelopment of Jeddah airport, the construction of Princess Noura Women’s University in Riyadh, and the Ras al-Zour power project, are all expected to be completed over the next 12 months. But a more significant shift could be under way in the coming months. At the outset of the financial crisis, Saudi banks switched from lending in dollars to riyals to accommodate their lack of long-term dollar funding base and the excess liquidity in the local currency.

All the deals that received lending commitments from banks in the past two years were denominated in riyals, rather than dollars. The last financing package in which Saudi banks contributed primarily in dollars was the $10bn Saudi Kayan petrochemicals scheme in late 2008. There are signs now that this trend could be starting to reverse.

Local banks committed both dollars and riyals to the two Aramco refineries as a result of the state energy firm’s bargaining power. At the same time, banks are increasingly looking for ways to get new dollar funding sources. The local Banque Saudi Fransi’s $650m bond issue in March was an attempt by the bank to get some additional dollars to help support the project finance sector.

National Commercial Bank is also looking at the options to help fund the dollar lending ambitions of its project finance team. And other banks are also keen to make sure they have dollar funding available for top-tier project sponsors. But a large-scale return to dollar lending is still unlikely.

“Liquidity is available in dollars for our biggest clients, and banks need to be competitive in their dollar funding, but the majority of lending is likely to still be in riyals for some time,” says a local banker.

While 2010 does not look set to be the recovery the project finance market was hoping for, it should be an improvement on 2009, and the continued development plans of the kingdom will ensure a robust pipeline in the coming years. New projects are already starting to queue up for finance.

Since the start of 2010, the UK lender HSBC has been awarded four advisory mandates in the petrochemicals sector alone.

The development of the kingdom’s mining sector also has the potential to be an active source of new project finance deals, though it is a sector of which the local banks currently have limited understanding.

For now though, the focus needs to shift to completing the deals already on the table. The longer the market goes without a deal closing, the more difficult it will be to build some much needed momentum.