Saudi Aramco and the US’ Dow Chemical are set to reduce the size of the commercial bank tranche of the financing for their $20bn Sadara Chemical project by almost half to secure the lowest pricing possible on the deal.

The two sponsors behind the project are considering decreasing the size of a commercial bank tranche for the $12.4bn debt funding for the project from $2.7bn to about $1.5bn. The reduction in the bank tranche has been possible because of an increase in the size of a Saudi Industrial Development Fund (SIDF) loan to $1bn, a larger export credit agency (ECA) tranche, and expectations that a local currency sukuk (Islamic bond) will be much larger than the $1.4bn originally anticipated.

Financing breakdown ($m)
  Original plan Potential revised plan
Export credit agencies 6,500 6,700
Bank debt 2,700 1,500
Sukuk 1,400 2,000
SIDF 530 1,000
PIF 1,300 1,300
Source: MEED

The sukuk, which will be launched in October, could now be about $2bn in size. “[Aramco and Dow] are now waiting for the sukuk, which is expected to be a blowout. From there, they will see how much they need from the banks,” says one source close to the project.

Aramco is understood to be disappointed with the pricing offered to it by banks and has spent the last few weeks requesting that banks reconsider their bids, and trying to encourage banks that did not submit a bid to do so. “The hope is that by getting as much liquidity into the bank tranche as possible, they can use that to get the loan pricing down even further,” says a second source.

The sponsors had put pricing starting at 35 basis points above the London interbank offered rate (Libor) into the financial model sent to banks earlier this year. Lenders have tried to resist calls for pricing to drop that far. Aramco wants the deal to beat the pricing achieved on the Barzan gas project in Qatar, but banks say that financial markets have deteriorated since then.