Sadara tries to cut debt pricing

20 September 2012

A benchmark pricing for the $20bn Sadara complex will only please Aramco and frustrate its lenders

Financing a $20bn project in any environment will always present challenges. Trying to do so in the middle of a banking crisis, with a weak economic outlook in most major countries, makes it even tougher.

For Saudi Aramco and the US’ Dow Chemical, the sponsors behind the $20bn Sadara Chemicals plant, they are not letting that deter them. They want to set a benchmark that beats the $10bn deal secured for Qatar’s Barzan gas project in late 2011.

So far banks have shown some significant resistance to this. The sponsor’s response has been to call on other cash sources, potentially reducing the size of the commercial bank debt from $2.7bn to perhaps as low as $1.5bn. At the same time, they are applying as much pressure as they can to get banks to offer them lower priced loans, and get the banks which refused to do the deal to change their minds. The hope seems to be that by dragging in as much liquidity as possible, lenders can be convinced to compete against each other and drive the interest rates down further.

Given the state of the financial markets, trying to get a better deal than Barzan will be tough. If Aramco achieves it, they will have scored an incredible deal. To do so could require a greater reliance on local banks, which can do cheaper loans and have more liquidity than their international peers. They also tend to be more susceptible to pressure from Saudi Arabia’s biggest companies. International banks are also loath to upset Aramco, but will be less inclined to book a long-term deal on which they lose money.

With a smaller bank tranche, Aramco can easily get the deal closed. But its pursuit of a new benchmark pricing will only please itself, and frustrate its lenders.

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