SEPC: Private sector pull

The $1.8 billion Saudi Ethylene & Polyethylene Company financing (SEPC), originally know as the SIPP deal, reached financial close on 2 June. The project is groundbreaking for being Saudi Arabia's first large scale fully privately sponsored, non-recourse petrochemicals financing.

The deal is linked to three other projects – Saudi Polyolefins Company, Al Waha and Sipchem Acetyls – which are all part of a $5 billion petrochemical development in Jubail, and all of which have been project financed.

The SEPC deal is a complex structure featuring tranches from four different ECAs totalling $970 million, in addition to a $160 million loan from the Saudi Industrial Development Fund (SIDF). The uncovered commercial tranche was $872.5 million, but this will decrease to around $500 million when the Public Investment Fund puts $320 million into the deal. The project has a 70:30 debt-equity split.

SEPC was sponsored by Basell Polyolefins, which owns 25% of the project, and Tasnee Petrochemicals/ National Petrochemical Industrialisation Company, Sahara Petrochemicals and Saudi International Petroleum Company (Sipchem).

HSBC was appointed financial adviser in May 2005, and asked about 30 banks for responses around the turn of the year. The sponsors wanted a club of only six banks to arrange the debt, and subsequently mandated Calyon (with Banque Saudi Fransi), HSBC (with its local affiliate Saudi British Bank), Royal Bank of Scotland, Samba Financial Group, Societe Generale and WestLB.

Given the private sector status of the deal pricing on the 15-year debt was very competitive – 115bp over Libor during construction, dropping to 100bp in the first two years of operation, then 120bp in years three to seven and rising to 135bp thereafter. The country's first private sector deal, the $750 million Alfasel project, closed earlier last year and was financed in the local debt market at around 200bp.

The ECAs on the deal are Sace and Hermes, covering Eu250 million ($316 million) and Eu200 million respectively; Korea Export Insurance Corporation (KEIC) is covering a further Eu160 million, and Kexim is providing SEPC with a $200 million direct loan. The margin on the Sace tranche is 15bp and 25bp on the Hermes tranche. The KEIC-covered debt priced at 37.5bp, while Kexim lent at 25bp.

The financing will fund the development of a cracker at the Jubail complex producing 1 million tonnes per year of ethylene and 200,000 tpy of propylene. The cracker will be built by EPC contractors Linde and Samsung. Italy's Technimont is the other EPC contractor and will build two plants each producing 450,000 tpy of polyethylene.

It was vital for the project's financing to get the ECAs on board as there was not enough interest in the Saudi bank market to raise more than $300-$400 million. International lenders, perceiving greater political risk in Saudi Arabia than Oman or Kuwait, and lacking the experience of a prior such deal in the country, would not have provided the necessary $1.6 billion at such a good price without strong ECA support.

The biggest challenge for lenders and ECAs was security. Under the peculiarities of Saudi law, SIDF gets first ranking in the event of a payment default. Normally ECAs also hold first ranking on project finance deals, but in this instance SIDF was not keen on sharing its position. An inter-creditor agreement was put in place that gave the ECAs certain safeguards, but ultimately the deal passed because of its strong economic fundamentals.

Fuel and feedstock for the project is provided by Saudi Aramco, while strong offtake agreements are in place for SEPCs entire output for the duration of the loan. Two-thirds of the polyethylene output will be bought by Basell, with Tasnee Petrochemicals buying the remaining third. The ethylene and propylene output will go to the Al Waha dehydrogenation project, also located in Jubail and sponsored by Basell and Sahara.

The sponsors also managed to secure reasonable EPC prices. The contracts with Linde and Samsung were put in place in last July, when prices had already started rising but before the EPC shortage had shifted the market in favour of the seller to the extent that it subsequently did. The project's average debt service coverage ratio is 2.5x, while the minimum is 1.8x.

SEPC is an important milestone for project finance in Saudi Arabia. Previously the petrochemicals market had been dominated by Sabic, which has traditionally financed projects on a quasi-corporate basis. But since the sector is driven by the availability of feedstock, which is in plentiful supply from Saudi Aramco, and lenders can get comparatively higher margins, more privately sponsored petrochems projects are likely to follow.

SEPC
Status: Closed 2 June 2006
Size: $2 billion
Description: Financing for an ethane and propane cracker complex in Jubail, Saudi Arabia
Sponsors: Sahara Petrochemicals, Sipchem, NPIC, Basell
Financial Adviser: HSBC
Lead arrangers: Calyon/Banque Saudi Fransi, HSBC/Saudi British Bank, Royal Bank of Scotland, Samba Financial Group, Societe Generale, WestLB
EPC Contractors: Linde, Samsung, Tecnimont
Borrower legal: Milbank Tweed Hadley & McCloy
Lender legal: Linklaters