The low rumblings of revolution in the Saudi and regional GCC syndications market were heard last month when ABN Amro brought Sabic's Yansab petrochemicals financing to market.

Not only has the project priced very competitively – a pre-completion margin of 45bp over Libor, stepping up to 65bp once the project is complete, over a 12-year tenor – but the large take syndication strategy pursued by sole underwriter ABN Amro prompted some non-compliant bids on the hold size.

The local and regional bank discontent with Yansab is symptomatic of a redrawing of the lending lines across the GCC project market. Local and regional banks started feeling the pinch last year, when it became clear that never before have there been so many international banks willing to lend to the region, underwrite very large numbers and price that debt at very low margins over long tenors.

But the changes in GCC project lending go further. The spate of new offices opened by banks, law firms and even ratings agencies in the region; the headline grabbing size of deals and the fact that GCC was the number one taker of project debt last year – primarily because of the vast volume sourced by Qatar Petroleum – are only one perspective on the GCC market.

At the heart of a number of the region's markets is a contradiction. International banks, politicians and sponsors have long stated the desire to incorporate more local and regional lenders (often via Islamic facilities) to create greater project funding diversity. The argument has always been that the sheer project volume being produced in the region made that a necessity.

But the reality is that sponsors' demands for cheaper margins and a quick deal turnaround, and the growing number and willingness of international banks to lend to the region, is beginning to preclude local and regional participation. Even the international banks are struggling with some of the margins on offer. Standard Chartered was significantly absent from Saudi Aramco's Rabigh deal earlier this year, and margins have got so low that JBIC, by far the biggest multilateral lender to the region, is considering scaling back its loans for projects such as IWPPs that do not involve natural resources.

Furthermore, the shift in the project lending landscape looks set to be matched by a shift in borrowing strategy. In the past two months a number of the region's quasi-sovereign project sponsors have announced corporate loan and bond facilities, many of them first attempts at tapping the corporate debt market.

ADNOC has sent out requests for a $3.5 to $5.5 billion five- or eight-year corporate loan, some of which will fund the Borouge petrochemical expansion project for which HSBC is adviser. Qatar Petroleum is going corporate for the refinancing of its NGL4 facilities, and has mandated Citigroup and Credit Suisse as lead managers, and Commercial Bank of Qatar as co-manager, for a $1.5 billion bond issue. Sabic is raising a $1 billion murabaha via Deutsche to finance expansion projects. National Industrialisation Petrochemicals Company has signed a $270 million murabaha with Samba as a bridge for its equity share in the $2.5 billion Tasnee petrochemicals project in Saudi Arabia. And there is talk of a bond for an ADWEA project take-out.

The move to corporate facilities is a trickle – the tenors on offer in the loan market are not adequate for major greenfield projects and, for example, it is still not certain that the Borouge project will be corporate financed. But the trend is building, with more major sponsors expected to tap the corporate bond markets in the coming year, particularly for project refinancings.

A number of recent project deals across the region illustrate the direction the market is heading. The $5.84 billion debt package supporting the $9.9 billion Rabigh refinery and petrochemicals project in Saudi Arabia (for more details search 'Rabigh' on www.projectfinancemagazine.com) was the first to hammer margins for non-Qatari projects.

The deal is a significant package – not only for its size and cheapness, but because it includes both the largest JBIC loan to any project in Saudi Arabia and the GCC to date; the longest tenor Islamic tranche in a multi-sourced Saudi project; and the first Shariah-compliant procurement agreement followed by a forward lease agreement (Ijara-fil-thimma) to be used in a limited recourse deal in the Kingdom.

The project debt priced at 35bp over Libor during construction, rising to 55bp on completion and 65bp late in the 15-year term, and despite initial reservations a number of local banks participated.

Yansab followed with a 10bp higher margin – a reflection of the sponsor strength of Aramco over and above Yansab sponsor Sabic. But the deal has put even more local bankers noses out of joint. The $1.8 billion commercial debt backing the project was completely underwritten by ABN Amro, which then repeated the strategy begun by Citigroup on the Sohar Aluminium deal (for more details search 'Sohar' on www.projectfinancemagazine.com) in Oman of calling for very large take and hold positions.

International banks were asked to sub-underwrite $250 million for a final hold of $175 million, while regional banks were asked to sub-underwrite $200 million for a final hold of $125 million. The average comfort holding ranges for local and regional banks vary across the region, but for projects in Qatar the norm is $100 million, in Oman $60 million and in Saudi Arabia $50 million.

The takes called for on Yansab are made doubly difficult to swallow by the pricing, which, although slightly higher than Rabigh, and over a shorter tenor, are not for a sponsor of the same strength and the project does not come with a completion guarantee. Furthermore, Aramco is perceived as a relationship play, a source of future ancillary business, while Sabic has a reputation for getting the cheapest money and nothing more.

Nevertheless, at least 16 banks have committed to Yansab (for more details see Deals & Developments p.10), including all three regional lenders – GIB, ABC and Arab Bank – although some bids were non-compliant and Saudi bank participation is lower than on Rabigh.

That such deals get done almost irrespective of local and regional lending sentiment is a measure of international bank appetite for the region. Although the recent $2.5 billion Greater Equate petrochemical deal has been sold into the market in the old fashioned manner of a massive club-style deal, and features a number of local and regional banks, some of the names in the bank line-up are surprising. Banco Santander is joint bookrunner with GIB and Mizuho on the deal – the first foray into the Middle East by the Spanish bank. Similarly National Bank of Greece is an MLA, along with Hypo Public Finance Bank, a start-up bank (a spin-off from Hypo Real Estate) that has only been in the project market for two months and for which Equate is its first deal.

The difference between Yansab and Equate also illustrates the disproportionate appetite for Saudi risk in the GCC – even for a sponsor like Sabic, from which future ancillary business for lenders is not expected.

Although a rare Kuwaiti deal and a very popular sell, the 14-year Greater Equate debt is priced at 50bp over Libor for the first seven years and then steps up to 60bp from years seven to 10 and 70bp for the remainder. Many bankers argue that Yansab should be priced at or above Greater Equate since the equity contribution of the sponsors – PIC and Union Carbide – is the existing Equate 1 facility, which the lenders will have recourse to. This gives the project an average DSCR that is close to 4x and a gearing of only 50%.

Similarly, Saudi quasi-sovereign project debt is now on a par with Qatari debt in terms of popularity and is priced at similar margins, despite not having a track record in the project market: For example the commercial bank debt on Qatargas 3 is the same as Yansab until year 13 and pays a pre-completion margin of 45bp over Libor, rising to 60bp post-completion through to year eight, 65bp from years nine to 12, and 70bp from years 13 to 16.5.

Ironically, the hunger for Saudi assets has also prompted a shift to lending to Saudi private sector projects, primarily petrochemicals, where risks are higher but so are the margins. Private sector deals in the market at the moment include the Tasnee/SIPP cracker project, Al Waha and Sipchem.

Calyon with Banque Saudi Fransi, HSBC with SABB, Royal Bank of Scotland, Samba Financial Group, Societe Generale and WestLB are MLAs on the $820 million of commercial debt for the Tasnee project which is sponsored by National Industrialisation Company, Sahara, Basell and Sipchem.

Pricing on the 15-year deal starts at around 60bp over Libor during construction, rising to 100bp until year seven and then 135bp to term, and a number of local banks claim to be looking at the deal. That said, the pricing is still said to be half that of the first private sector deal – Alfasel – which was financed in the local markets.

The Al Waha deal is also expected to close soon and will be a local and regional bank line up. The project is sponsored by Sahara Petrochemical Company and Basell Polyolefins, with HSBC (and its affiliated Saudi British Bank) acting as financial adviser, and will be the first major GCC project to be fully financed by Islamic debt.

The financial structure, which comes with no pre-completion guarantee, features a co-purchase agreement between equity and Islamic lenders who will own and lease back part of the asset.

The MLA shortlist for the financing is said to include ABC Islamic Bank, Bank Aljazira, Banque Saudi Fransi, Gulf International Bank and Saudi Hollandi Bank. The level that the 14-year deal prices at will be a significant benchmark for future fully-Islamic funded projects, as will the final lender line-up, which appears to feature very little international commercial debt in Islamic guise.

Rising EPC costs, and sponsors then trying to regain some of those costs by stamping down loan margins, is an additional feature of the region that is contributing to the relandscaping of the lending market.

Rabigh readjusted its borrowing forecast three times because of climbing costs and costs on Al Waha are rumoured to have risen by 60% over initial predictions. But with international banks willing to assume very large takes in the region and at margins that initially appear very low, but are in fact on a par with lending opportunities in developed European markets, there does not appear to be any likelihood of margins for quasi-sovereign project borrowers climbing again.

And more work can only go the way of the internationals in light of the growing line of Middle Eastern borrowers to approach the international corporate loan market for debt to support both infrastructure and overseas expansion.

Etisalat has recently mandated Barclays Capital to arrange a $3 billion syndicated loan to replace the $2.1 billion Islamic financing that was closed in September 2005 but never drawn, and backed Etisalat's $2.6 billion purchase of a 26% stake in Pakistan Telecommunications – a deal announced in June 2005 but only completed in April.

Disagreements with Pakistan's Privatisation Commission over the payment schedule meant Etisalat never used the money.

The new $3 billion loan, which is likely to have a one-year tenor with extension options, signals Etisalat's intention to remain on the acquisition trail. Three senior banks are likely to join before the end of the month, with syndication to follow in June.

Kuwait's Mobile Telecommunications Co is also finalising a $4 billion five-year acquisition line that it will use to fund as yet unspecified deals. And Dubai Holding, an infrastructure investment company, has mandated Emirates Bank and Standard Chartered to arrange a $2.25 billion 18-month loan to back its purchase of a 35% stake in Tunisie Telecom.

The signs are that the Middle East project market will continue to boom. That there is vast sponsor project volume – particularly in Saudi Arabia, where more petrochemical and IWPP projects are coming to market – is a fact. That it will all be project financed, particularly project refinancings, is arguable. And that local banks will be able to make a meaningful contribution to the project debt market, without cross-subsidy from their retail bases, appears very unlikely if margins go any lower.