Commercial bank tranche oversubscribed and could be reduced in size
Saudi Arabia’s Sadara Chemical Company has received bids from banks interested in financing the firm’s $20bn petrochemicals complex.
About 16 international banks are understood to have responded by the 23 July deadline to fund the $2.7bn commercial bank tranche, along with the majority of the local banks. The deal is now understood to be oversubscribed, although it is still unclear what the total commitments offered by banks was.
Despite the oversubscription, sources close to the deal say, the bank tranche could be reduced in size as a result of an expected increase in the size of export credit agency (ECA) commitments, a potentially larger loan from the Saudi Industrial Development Fund, and a planned local currency sukuk (Islamic bond) that will be issued before the end of the year.
Saudi Aramco and the US’ Dow Chemical, the joint venture partners behind Sadara, are understood to be targeting pricing below the Barzan project in Qatar, which had $3.9bn of commercial debt with pricing starting at 130 basis points above the London interbank offered rate (Libor).
Several sources involved in the deal say pricing is likely to end up in the high double-digits for the Saudi riyal-denominated portion of the debt and in the low triple-digits for the dollar-denominated debt. “All the pricing talk is driven by being less than Barzan,” says one UAE-based banker, who has made an offer for the project.
The sponsors had put pricing starting at 35 basis points above Libor in the financial model they sent out to banks, a move that caused some concern among bankers.
“Aramco made it clear that this is a relationship defining deal, so if you want to bank them in the future, you have to take a bit of pain now,” says another international banker that is expecting to be a part of the funding group on the project.
With expectations that the deal will be priced at a loss for most banks, some international lenders are understood to be already planning to sell off their allocations to the final deal, rather than hold the loans for the 16-year tenor.
An international bond issue is also still being considered by the project sponsors, but even if it does go ahead it is unlikely to take place until next year. By that time the sponsors hope the financing will be closed and the bond would then be used to reduce other forms of debt.
The financing plan is currently split between $12.4bn of debt, and the rest equity contributions, including an initial public offering in Saudi Arabia.
Under the current funding breakdown, which could change in the next few months, the debt is made up of:
- $6.5bn from ECAs
- $2.7bn from commercial banks
- $1.4bn from a sukuk
- $1.3bn from the Public Investment Fund
- $530m from the Saudi Industrial Development Fund