‘We are expecting to receive the invitations to bid by mid August,’ says a banker in Riyadh interested in the transaction.

Arab Petroleum Investments Corporation (Apicorp)is acting as financial adviser to Sadaf.

Bankers are expecting the $650 million debt package to have a tenor of between seven and ten years, and it is thought that a balloon mechanism will be included in the structure.

‘It is clear that Sadaf wants to have a balloon, but we will have to wait and see if the banking community reacts positively,’ says another banker looking at the deal. ‘Banks tend to prefer straight-line transactions.’

Balloon structures have been rare in Saudi Arabia – though they are comparatively common in ship finance transactions – but they offer corporates the opportunity to improve their cash flows, and potentially their dividend payouts.

‘Sadaf is a very strong credit, but it has cyclical revenues, incomes and cash flows, and the use of a balloon mechanism could raise some concerns if reserve building isn’t built into the structure. This would bring some comfort,’ the second banker says. ‘It will depend on just how big the proposed balloon is and whether the intention is, in fact, to trigger another refinancing later.’

Bankers say Sadaf’s aim with the refinancing is to optimise its capital structure by increasing its leverage and enhancing its returns on equity. The company has made two major borrowings: a $700 million, eight-and-a-half-year facility priced at 124 basis points (bp) over Libor was signed in late 1995; and a $300 million, eight-and-a-half-year package priced at 95 bp was secured in May 1999 (MEED 28:5:99; 24:11:95). It is understood that a total of about $500 million-550 million is outstanding on the two facilities.

‘They are looking to borrow a little more as they have some capex [capital expenditure] in the pipeline and they want to raise their leveraging,’ says the second banker. ‘It’s difficult to get a clear view of where this might be priced until we see the information memorandum but, including fees, it might be around 1 per cent [over Libor].’

Sadaf is a 50:50 joint venture between S audi Basic Industries Corporation (Sabic) and the Royal Dutch/Shell Group.