The $3.5 billion debt backing the Yanbu National Petrochemical Company (Yansab) petrochemicals project set a new benchmark for both the Saudi project lending market and project sponsor Saudi Basic Industries Corporation (SABIC).

SABIC's first true project financing and Saudi Arabia's largest greenfield project financing to date, the Yansab deal also features the biggest single bank project debt underwriting in the MENA region and the largest Islamic tranche in any multi-sourced financing.

Yansab is a $5 billion grass roots integrated petrochemical complex to be built in Yanbu in the Western Province of Saudi Arabia (the plant will produce1.3 million tonnes per annum (mtpa) of Ethylene).

SABIC (see box for profile) and ABN Amro successfully closed financing on 18 June 2006 with 19 local, regional and international banks participating along with two Export Credit Agencies (ECAs), namely SACE and ECGD, and the Public Investment Fund (PIF). The project is part of SABIC's strategy to increase its olefins and polyolefins profile in the international markets and take advantage of the favourable global outlook for these products. When Yansab comes into full operation, SABIC will become the world's largest producer of ethylene glycol.

SABIC owns 51% of Yansab, while a further 4% is owned by a wholly owned subsidiary – SABIC Industrial Investments Company. A further 10% of the equity is held by 17 private companies (none of which owns more than 2%) and the remaining 35% is publicly owned through an initial public offering that closed in December 2005 (2.8 times over subscribed and with nearly half the 18 million population of Saudi Arabia holding shares).

ABN Amro, with support from Saudi Hollandi Bank (40% owned by ABN Amro although managed fairly autonomously), acted as financial advisor to the project and fully underwrote the entire debt. The dual mandates reflect the considerable confidence the sponsor had in ABN Amro's ability to successfully execute both mandates whilst avoiding potential conflicts of interest.

The project benefits from an agreed allocation of gas feedstock from Saudi Aramco, the competitive pricing of which is the basis of the primary advantage of such projects in Saudi Arabia. The project also benefits from a firm marketing agreement with SABIC for all the Project's production, with the project being further enhanced by the use of proven technologies and appointment of renowned contractors to implement the project (see Figure 1 for a summary of the contractual structure).

Project economics

Saudi Aramco will supply Yansab with very competitively priced feedstock (ethane/fuel gas and propane). The ethane/fuel gas is sold on a fixed price basis, with the next review due in 2015, and the propane is sold on a formula based on a discount to international pricing of naphtha with the current discount fixed until 2011. Saudi Aramco operates one of the largest ethane supply systems and natural gas liquids (NGLs) supply systems in the World, and has already announced further expansion plans.

Yansab also benefits from a marketing agreement with SABIC for all production whereby Yansab receives a netback based on the actual realisation and hence is subject to market fluctuations. The economic assessment of the project was based on a conservative average $40 per barrel crude oil price with Chemical Market Associates, Inc. (CMAI), the lenders' market consultant, developing feedstock and product prices based on this oil price assumption. Nonetheless, SABIC's experience as a marketer and strong market presence ensures access to the most favourable markets and so realisations.

The Yansab financing was a major success in many respects. Some of the highlights (already outlined) are:
• Yansab is SABIC's (the largest public company in Saudi Arabia in terms of total assets) first true project financing.
• Yansab is the largest ever greenfield project financing in Saudi Arabia to date, other larger projects have closed in Saudi, but these have been expansion projects or otherwise with significantly different risk profiles from a true greenfield project and thus the depth of the market was in many ways being tested for the first time.
• Yansab was the first company to successfully close an initial pubic offering at the inception stage in Saudi Arabia (and likely anywhere). The IPO was closed before the debt financing which presented many unique challenges, such as the restrictions that a public shareholding places on any sponsor recourse (especially in respect to mitigating the completion risk). This was successfully structured around, providing the comfort required by the lenders and with an equitable arrangement between the sponsors reflecting their relative capabilities.
• Yansab is the largest financing in the MENA region to close on a sole-bookrunner basis
• The Yansab financing includes the largest ever (globally) Islamic finance tranche in any multi-sourced project financing. Islamic financing on a limited-recourse basis in Saudi is still relatively new, but the Sponsors had a strong desire to maximise it. Through careful structuring and marketing to prospective lenders it was possible to achieve a level of Islamic participation significantly higher than for any previous project financing in Saudi.

Financing structure

The project cost is $5 billion. The sponsor and financial advisor sought non-recourse project financing on a 70/30 debt-to-equity ratio and successfully raised $3.5 billion of debt. The debt comprises the following tranches:

The commercial facilities and the ECA covered tranches are repaid by semi-annual repayments over 9.5 years following a 2.5-year grace period. The repayment profile was sculpted to accommodate the ramp up period.
PIF offered the most competitive financing and longest tenor hence this facility was maximized. The facility is repaid by equal semi-annual repayments over 10 years following a 3-year grace period.

The Islamic facility was structured as a standard forward lease (Ijara mousofa fil thimma) where the investors, through a special purpose vehicle, acquire the asset under construction and lease it to the project after completion. Islamic finance receives considerable attention and is strongly favoured in the Saudi market. SABIC sought to maximize the Islamic tranche to contribute to the national interest in promoting Islamic finance. The repayment terms are the same as the commercial facilities.

The working capital facility, $350 million, was structured as a revolving facility with a bullet repayment at final maturity and the added flexibility to allow usage during the construction period to cover cost overruns. At project completion however, any drawing under the working capital facility to meet cost overruns will be repaid by drawings under a sponsor support facility leaving the working capital facility fully available to meet working capital requirements. This flexibility allowed the sponsor to defer any additional capital commitments that might be required and to ensure any cost overrun was a true cost overrun and not just an advance in the timing of construction payments. It also offered the lenders the potential for better returns, with the working capital facility possibly being drawn prior to completion so the project paid the full interest rate plus margin rather than just commitment fees.

The margins (as shown in Table 2) reflect the strength of the case presented to the lenders and the confidence they have in Yansab and its main sponsor. The step-up reflects the fall away of the sponsor completion support at financial completion.

The financing structure includes a standard debt service reserve account covering 6 months of debt service. The covenant levels include a Debt Service Coverage Ratio (DSCR) of 1.5x as a minimum. Distributions to the sponsors are blocked at 1.3x DSCR while default is triggered by a DSCR of 1.1x or less.

The lenders benefit from an uncapped quantum, but limited period of availability, cost overrun and delay in start-up commitments provided by the sponsor. In addition to the flexibility offered in the use of the working capital facility pre-completion, the Project is also allowed to use pre-completion revenues and to reduce the sponsor's contingent capital commitments. The delay in start-up commitment covers debt servicing in case project completion is delayed.

Syndication process

At an early stage it was decided to go with a sole mandated lead arranger (MLA); ABN Amro initially underwrote the entire debt, although this was reduced by the early commitment to participate from the PIF. Syndication launched on 28 March 2006 and closed a month later.

The transaction was significantly oversubscribed at a senior level, with the underwriting commitments exceeding the target amount by approximately 48% and the final hold commitments exceeding it by 38%. In view of the over subscription, and in view of the syndicate members being allocated final takes at or close to what they wanted, no general syndication was necessary, although this was provided as a possible option.

Yansab is a strategic extension of SABIC's olefins operations considering the favourable market outlook. SABIC and its advisors structured the $3.5 billion debt to attract the highest possible interest from the banking/financial community, and it was a major success. Yansab was able to maximize the Islamic Facility as desired by the sponsors.

It was also able to optimise the financing cost by maximizing the PIF Facility, which provided the lowest overall cost of financing. The strength and experience of the Sponsor and careful crafting of the completion support to address the pertinent construction risks attributed to the lenders' satisfaction of the overall credit profile whilst limiting the Sponsor's support and not unnecessarily over committing its financial obligations. The debt structure also allowed smooth debt servicing while still maintaining its acceptability to lenders.