The $2 billion financing for the Tasnee cracker complex, otherwise known as the Saudi Integrated Petrochemicals Project (SIPP), 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 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 is currently $872.5 million, but this will decrease when the Public Investment Fund comes into the deal for an amount that has yet to be determined. The project has a 70:30 debt-equity split.

SIPP is sponsored by Bassell Polyolefins, which owns 25% of the project, and Tasnee Petrochemicals, a holding company owned by National Petrochemical Industrialisation Company, Sahara and Saudi International Petroleum Company.

The consortium appointed HSBC as its 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.

Though the pricing on the 15-year commercial debt is high in comparison to other big project finance deals that have recently closed in the region, it is low for a project of its type – private sector. Margins are 115bp over Libor during construction, dropping to 100bp in the first two years of operation. Between years three and seven the margin is 120bp, rising to 135bp thereafter.

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 SIPP with a $200 million direct loan. The margin on the Sace tranche is 15bp and it is 25bp on the Hermes tranche. The KEIC-covered debt priced at 37.5bp, while Kexim lent at 25bp.

Margins on the commercial debt are around 50bp higher then the recently-closed Rabigh refinery financing and the Yansab petrochemicals project, which is currently in the market. This is to be expected, however, given that those projects involve Sabic and Saudi Aramco respectively. The country's first private sector deal, the $750 million Alfasel project, closed earlier this year and was financed in the local debt market. That deal priced at around 200bp.

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. This 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 SIPP's entire output for the duration of the loan. Two-thirds of the polyethylene output will be bought by Bassell, 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 Bassell and Sahara. Al Waha is currently in the market, with HSBC and SBB acting as financial advisers, and will be fully financed with Islamic debt.

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.

The sponsors wanted to keep the arranger group down to six banks in order to keep things as straightforward as possible considering the number of ECAs and other lenders involved in the deal. With so much liquidity in the international bank market it was inevitable that local lenders would be squeezed out. For now they will have to content themselves with projects like Alfasel where the sponsor and offtake agreements are slightly weaker.

The deal is an important milestone for project finance in Saudi Arabia. Previously the petrochemicals market had been dominated by Sabic, which has 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 – some of which are already in the market – are likely to follow Tasnee.

Saudi Integrated Petrochemicals Project
Status: Closed 2 June
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