Fujian Refining: Onshore opus

Fujian Refining is much larger than the petrochemical and LNG joint ventures that have characterised Chinese project finance to date. At $5 billion total cost, it is the largest project financing to date for a Sino-foreign joint venture in China, and the first such joint venture to include refining assets. It was also the first project financing for a joint venture to be conducted entirely under Chinese law.

Refining assets are frequently difficult for lenders to engage with, since they sometimes involve exposure to volatile refining margins and commodity prices in general. In China the issue for lenders is more the heavy hand of Chinese government regulation. The government regulates the prices of refined petroleum products such as petrol, kerosene and diesel, a factor that has contributed to the rapid growth in personal use of cars and motorcycles in the country.

The project involves the expansion of an existing refinery, located in Quanzhou, in Fujian province, from 80,000 barrels per day (bpd) to 240,000 bpd. It also involves the construction of a 800,000 tonnes per year (tpy) ethylene steam cracker, an 800,000 tpy polyethylene unit, a 400,000 tpy polypropylene unit and an aromatics complex that will produce 700,000 tpy of paraxylene. Additional infrastructure at the site includes a 280MW cogeneration project (enough to supply 80% of the complex' needs) and a berth for 300,000 deadweight tonne crude oil tankers.

The project has been in the works since 1995, when ExxonMobil approached the Chinese government about opportunities in the downstream sector, though the project broke ground in July 2005, and the state council approved the joint feasibility study for the complex in 2006. In the intervening period, in common with many projects its size, the budget has increased from $3.5 billion to $5 billion. The sponsors signed a formal project agreement on 25 February 2007. The sponsor group consists of the Fujian Petrochemical Company (a 50/50 joint venture between Sinopec and the Fujian government, which owns the existing refinery, 50%), Exxon (25%) and Saudi Aramco (25%).

Aramco will supply 80% of the project's requirements under an agreement running to an unprecedented 50 years. Exxon, Aramco and Sinopec have formed a retail venture to market the refinery's output. This downstream operation, Fujian Fuels Marketing, is owned 55% by Sinopec and 22.5% each by Aramco and Exxon. It involves managing and operating 750 filling stations and terminals throughout Fujian Province.

The marketing venture, while separate to the financing of the complex, is important to the viability of the refinery, since it guarantees the refinery a market, and deepens Exxon's footprint in the Chinese retail sector. It was the subject of a separate RMB3.3 billion ($466 million) domestic bank financing.

The financing for the Fujian Refining venture benefited from a strong suite of sponsor guarantees pre-completion, guarantees that fall off gradually during the operational period. It was documented entirely in Chinese and under Chinese law, and while it does have a US dollar component, it does not provide the sponsor with the familiarity of a deal done under Hong Kong or UK law.

But the financing was not predestined for the Chinese bank market. The sponsors' financial advisers, HSBC and China Construction Bank, went out to both Chinese and international lenders with proposals for both dollar and Renminbi tranches. Competition was brutal, but international lenders made it to a very late stage in the bidding. Of roughly 12 such banks that HSBC approached, at least ten proved comfortable with both lending in Renminbi and financing under Chinese law.

The interest rate on the Renminbi financing is regulated, and locks in a generous rate of return for lenders, meaning that they can afford to bid aggressively for dollar business. International lenders by and large found it hard to come up with sufficient Renminbi, which caused at least two lenders to pull back. The margin for the dollar debt ended up at 25bp over Libor, substantially within the 35-65bp level on Aramco's Rabigh refinery debt, which provides the nearest comparable project and risk allocation structure.

At this level, lenders still have to be comfortable both with the commitment of both sponsors to the project and its ability to cope with regulated prices for its output. At present, and despite high crude prices, the Chinese government is keeping a cap on prices. While the government will eventually raise the cap enough for refiners to earn a return, for now it is more concerned with keeping inflation in check. Refiners in turn, are diverting as much of their crude as they can towards unregulated added-value chemicals.

Even with the mismatch, the venture is likely to break even, and lenders can be assured that the refinery, the only one in the province, has in the long-term both an assured source of supply and a market that is likely to remain strong, whatever the macroeconomic outlook. Companies like Exxon and Aramco have long memories and like to have secure outlets and sources of supply wherever crude prices might be.

The financing breaks down into a 15-year dollar term loan of $730 million and a 20-year Yuan facility of RMB16.8 billion, as well as a dual currency loan of RMB4 billion equivalent and a dual-currency working capital facility of RMB3.5 billion equivalent. The five lead arrangers on the dollar term debt were China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Development Bank, which were joined on the remaining facilities by Industrial Bank, Bank of Communications, China Citic Bank, China Everbright Bank, China Merchants Bank, China Minsheng Banking and Sinopec Finance Company, the last of which is Sinopec's own captive finance arm.

The banks' enthusiasm for the deal was genuine, and the adviser received sufficient underwriting commitments to cover the debt requirements ten times. The financing closed six months after the release of a request for proposals to lenders.

The financing took a long time to come from conception to realisation, but closed in a very short period, in part because sponsors, their counsel and the financial adviser produced most of the financing's documentation before going out to arrangers. Having the world's largest publicly-traded oil company and the world's largest supplier of crude oil as sponsors helped the deal close, though it did not allow them to dictate terms to banks. If Fujian's funding competition was held today, the arranger group might be much different: like their US counterparts, Chinese banks are increasing their risk premiums, in this instance in response to government pressure.

Fujian Refining & Petrochemical Co
Status: Closed 6 September 2007
Size: $5 billion
Location: Fujian, China
Description: Rehabilitation of refinery and petrochemicals complex
Sponsors: Sinopec, Fujian government, ExxonMobil, Saudi Aramco (each 25%)
Debt: $3.962 billion
Lead arrangers: China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Development Bank
Participants: Industrial Bank, Bank of Communications, China Citic Bank, China Everbright Bank, China Merchants Bank, China Minsheng Banking and Sinopec Finance Company
Financial advisers: HSBC, China Construction Bank
Sponsor legal counsel: Latham & Watkins, King & Wood (PRC law)
Lender legal counsel: Shearman & Sterling, Haiwen & Partners (PRC law)