SAUDI Basic Industries Corporation (Sabic) has, in recent months, commanded the attention of the banking community with a string of financing deals. Three Sabic affiliates have had to call in the bankers to rearrange old loans and a new $600 million facility for Petrokemya, the wholly-owned producer of petrochemicals, has moved on to the syndication stage.

For all involved, the issue of pricing lies at the heart of the matter. Unsurprisingly, the lenders and the borrowers don't always see eye to eye. The process is reminiscent of souk trading. Vendors bemoan the gradual reduction in prices as negotiations advance while buyers raise eyebrows at the extortionate prices being asked. Despite the protestations, one thing is clear: if either party really doesn't like the deal, it will not be done.

It is much the same with financing deals for Sabic affiliates. If there can be such a thing as a price trend for project finance in the region, Sabic deals have consistently come in cheap: over the last year, most deals in the Gulf have closed around, or above, 100 basis points (bp) over Libor, but Sabic's loans have been consistently cheaper.

Each new deal provokes some of the banks to mutter about cut-throat pricing tactics, to murmur that Sabic is little more than a play-ground bully throwing its weight about, and to complain about margins so tight they can barely turn a profit. But, over the long term, they would not be lending if they could not see some benefit.

'It gives a false impression to say that pricing on Sabic deals is low because Sabic beats it down,' says Carl Perdue, a legal adviser to the company. 'Ultimately, the pricing is just a reflection of the quality of the deals being done.' Not all the bankers looking at specific deals would necessarily agree. But it will probably be the bankers not participating who are the most vociferous with their complaints. Such disagreement has long been part of the game, but financing continues to be arranged.

However, the rules of the game were altered in 1997 when Sabic imposed a new structure on the financing process for the $2,322 million loan to Saudi Yanbu Petrochemical Company (Yanpet). 'We introduced standard financing conditions and have used this system for subsequent deals,' says Perdue. 'The process is based on a detailed term sheet being drawn up at the beginning of the process which is designed to address all the major provisions in the documentation.' He says the new system allows for much more information to be disseminated up front: in the groundbreaking Yanpet deal, the standard financing conditions documentation ran to more than 55 pages. 'We're doing all the work at the front end rather than having mandates awarded and then having a long process going through the documentation process,' says Perdue. 'The plan is designed to put the borrower and the lenders on the same playing field.'

Scepticism from bankers was quickly overcome. 'There was initially some resentment from the banking community as they felt that terms were being dictated to them up front,' says Michael Parkhouse, head of GCC investment banking at Gulf Investment Bank (GIB). 'But they soon found the new system saves them from a tortuous process later on. It allows the whole process to be much quicker. Sabic has set a good precedent.'

Speed is not the only advantage. 'We are looking for a fair process,' says Khaled al-Rowais, head of Sabic's finance department. 'One that is fair for the banks, and fair for the affiliates.' Even the banks are treated equally: if one asks for specific information relating to any particular aspect of a deal, the information provided will be disseminated to all the other banks involved. 'It is a very transparent process,' says Al- Rowais. 'It allows focus and understanding at the negotiating stage. By bringing the documentation up front, it gives the banks a chance to say whatever they want, earlier, and the process is smoothed.'

Those excluded from some of the deals have used the word 'dictat' to describe the new system - a charge refuted by other bankers. 'There is still plenty of room for negotiations,' says Parkhouse. 'In the case of Petrokemya, some parts of the term sheet were accepted by the banks and others provoked counter proposals from the banks. The negotiating process is still dynamic, but it is now much smoother.'

If plagiarism is the highest form of flattery, Sabic should be permitted a smile. 'This process - the standard financing conditions - is a model that will increasingly be copied elsewhere in the region,' says Parkhouse. 'There is already one other institution in the region which is using this approach and others will follow suit.'

Building relationships

Some disgruntled bankers, both local and international, say the pricing of some recent deals has been so low that it can only be the product of banks lending to build relationships. After all, Sabic is by some margin the largest user of project finance in the country, consistently generating opportunities for the banks to make long-term placements. Forging close relations with such a regular borrower is a staple part of the investment banking profession: bankers build relationships with the Exxons and BP Amacos so it should be expected to happen with regional giants such as Sabic. 'Banks might initially want to be involved for relationship reasons,' says Perdue. 'But in the final analysis, it is the quality of the credit that counts.'

With all financing for Sabic affiliates arranged on a non-recourse basis, the focus of the negotiations and the structure of the deals is on the fundamental strength of the borrowing institution. The state of the markets being lent into, the identification of revenue streams and the quality of the projects themselves are scrutinised closely. These are the core determinants of risk assessment and loan pricing but, despite the independence of the affiliates, the parent company remains a crucial variable in the equation. 'The banks look at the fundamentals of the deal and the quality of the credit,' says Perdue. 'They will then look at Sabic's strength and its history and this will influence their view on the risk and the pricing.'

It works well for Sabic. 'The banks still look at the parent companies even if it is a non-recourse facility,' says Parkhouse. 'Sabic has an impeccable record and the bankers take this into account.'

The Petrokemya financing is a good example. The $600 million general purpose corporate loan is based on the balance sheet strength of the affiliate, analysis of the global petrochemicals market in which it operates, and an assessment of the quality of its business. 'Petrokemya is very robust,' says Parkhouse. 'It has healthy and identifiable income streams from the provision of raw materials to other members of the Sabic family. This gives good cashflows.'

The strength of the company is reflected in both the interest shown by banks and the pricing of the facility. Four lead arrangers and three co- arrangers have been mandated and it is understood the eight-year package has been priced at 72.5 bp over Libor. Of the 19 institutions invited to bid only three declined, supporting Sabic's claims that the standard conditions approach is working well.

The attractions of the financing opportunities created by Sabic are visible in the broad array of banks involved. On the Petrokemya deal there are international, regional and local institutions at all levels. Riyad Bank, Arab Petroleum Investments Corporation, Industrial Bank of Japan and Arab National Bank were mandated at lead arranger level, and Dresdner Kleinwort Benson, GIB and Al-Bank Al-Saudi Al-Fransi at the co-arranger level.

'There are a number of international banks that seek to get involved in Sabic financings,' says Al-Rowais. 'The difference in their attitudes is usually determined by their knowledge of the country. Those with greater experience, and the local and regional banks, might have a better understanding of Saudi Arabian country risk, and of the way in which Sabic does business. Some international banks know both the kingdom and the company well and they are very supportive.'

There are some signs that the style of project financing for Sabic is diverging from the practice elsewhere in the Gulf. Many of the other big ticket deals done in the last 12 months have seen large blocks of banks coming in at the lead arranger level to spread the risk: 24 institutions took part in the$750 million financing for Qatar Chemical Complex, and 14 lead arranged the $400 million package for the Qatar General Petroleum Corporation NGL- 4 project.

Refinancings

'The massive block approach has not taken off here,' says Parkhouse. 'The need for sharing risk is different in Saudi Arabia in general and with Sabic in particular.' With the Saudi economy much larger than its neighbours in the Gulf, and the country risk smaller, many international banks, and certainly most regional banks, have much higher levels set for single country exposure to Saudi Arabia than they do for other markets in the region. With Sabic seen as one of the strongest local lending opportunities, it is not surprising that many banks remain eager to take larger loans onto their books.

But not all financings, even those for Sabic, run completely smoothly. Adverse market conditions for three of its subsidiaries had an impact on project development and led them to return to the banks for refinancing last year. The first of the refinancings, a $1,260 million loan for Saudi Iron & Steel Company (Hadeed), was completed at the end of October, and the second, a $138 million facility for Saudi European Petrochemical Company (Ibn Zahr), in late November. The third rescheduling, of an $850 million package for Arabian Industrial Fibers Company (Ibn Rushd), is yet to be completed.

The process seems to have run easily. The banks have been given the opportunity to improve the pricing on the facilities and the affiliates have seen the tenors of their loans extended. 'The negotiations for the two completed restructurings were pretty easy,' says Al-Rowais. 'The banks looked at the shortage of cashflow and appreciated that it was caused by little other than weak market prices for the products being produced. They could see that the prices would recover and they could see when they would recover. The underlying fundamentals have not changed.' He says that progress is being made on Ibn Rushd and the main reason that it has not been completed yet is because the process started later than on the other two. 'The crucial element has been timing,' he says. 'Ibn Rushd will be completed sooner rather than later.'

When the Petrokemya deal is completed, and Ibn Rushd refinanced, a lull is expected to follow. 'Sabic has been very active in the past five years in terms of raising finance for new projects,' says Al-Rowais. 'Petrokemya was the last project of this era. While Sabic is orientated towards growth, nothing new will come to the market in the immediate future.'

Most of the local banks will look forward to the next phase of Sabic's development, and the financing opportunities it will generate. In the meantime, with their deposit bases burgeoning, new investment opportunities will have to be found. They may come to miss the arrival on their desks of Sabic's standard financing conditions, and the bartering and horse- trading that follows.