Sabb ousts rivals to underwrite Sipchem

04 April 2008
Eight regional banks lose out on $745m project finance deal for Jubail plant after slow response.

The local Sabb bank has agreed to fully underwrite a $745m project finance loan to Saudi International Petrochemical Company (Sipchem), after the banks originally approached to fund the deal took too long to confirm their commitments.

Sabb’s sudden decision to underwrite the whole debt has shocked rival local banks that failed to respond to requests from Sipchem to increase their funding commitments. Sipchem originally approached eight other banks as well as Sabb.

“Sipchem is a rapidly growing company and is starting to get tired of certain banks wasting its time,” says a financial adviser close to Sipchem.

The deal is likely to be the first major project finance deal to be completed this year and comes after many local banks have predicted that project finance activity will drop sharply in 2008.

Sipchem originally received commitments from seven Saudi banks and two Bahraini banks for a $564m loan in December 2006 for its acetyls project at Jubail.

However, cost overruns during the construction phase led it to look at extending the facility to $745m, and it began seeking commitments from its banks for the additional cash in December 2007.

Problems arose when none of the banks responded by the February 2008 deadline.

Sources close to the situation say banks believed that, given the current market conditions, they would be able to convince Sipchem to pay higher fees, above the 150 basis points over the London interbank offered rate (Libor) agreed in 2006.

Instead, Sabb came in and took on the whole debt package at a reduced margin, with the intention of profiting from syndicating the debt to a smaller group of banks at a later stage.

The interest rate has yet to be finalised but the deal will have a 12-year tenor.

Banks that had originally committed to the deal in 2006 are now understood to be eager to get back in favour with Sipchem to maintain their lucrative roles as relationship banks to the firm.

But it will be too late for some, with Sabb planning only a limited syndication to three or four banks with which Sipchem is interested in continuing to work.

“There was no reason why it took so long for banks to agree to the deal,” says the financial adviser. “They already had credit approval, it was only a small increase in funding and the major risk phase of the project had passed because Sipchem has funded the initial construction with equity.”

The original nine banks involved in the deal were Arab Banking Corporation, Arab National Bank, Banque Saudi Fransi, Gulf International Bank, National Commercial Bank, Riyad Bank, Sabb, Samba Financial Group and Saudi Hollandi Bank, with Sabb and HSBC acting as financial advisers.

The loan is now expected to reach financial close and have its first drawdown by the end of April. The deal is also considered a sign that although dollar liquidity is tight, deals with strong sponsors at good prices will get done.

“I know that a lot of banks have trouble with access to dollars, or the expense of dollars, but this deal shows that some banks in Saudi Arabia can still get funding when they see the right assets,” says one project finance banker at a major Saudi bank.

Banks in Saudi Arabia currently pay up to 50 basis points above Libor for dollar funding.

However, the Sipchem project has some characteristics that mean it is unlikely to be a useful model for other deals.

Because the acetyls plant is about 60 per cent complete, Sabb has taken on debt with a significantly lower risk profile. The Saudi Industrial Development Fund is also expected to come in and finance a portion of the debt. Sipchem has also spent about $800m on funding the project and has already placed orders for a lot of the equipment still needed.

There has been speculation in recent months that Saudi banks are eager to convince sponsors to accept Saudi riyals to fund their projects, because of increasing difficulties in securing dollar finance (MEED 29:02:08).

However, Kevin Hayes, vice-president of corporate finance at Sipchem, says while he will be flexible in what currencies deals are structured in, to support local banks, it is unlikely that Sipchem will look at financing in riyals.

“Our obligation for repayments is mainly in euros and dollars,” he says. “While we will accommodate regional banks the best we can, and are open to the concept of financing in riyals, it does cause some problems for us as we will be taking on risks outside the scope of the project.”

He adds that because of the way commercial agreements have been written, it would be dif-ficult to refinance a project in different currencies. But the commercial agreements for future projects could be written to reflect euro and dollar-denominated debt funding.

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