It suffered from rising costs and a margin that makes bankers wince in discomfort. But the $5.84 billion debt package supporting the $9.9 billion Rabigh refinery and petrochemicals project in Saudi Arabia closed on time on 2 March, with 17 financial institutions participating.

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.

Sponsored 50/50 by Saudi Aramco and Sumitomo Chemical, through special purpose company PetroRabigh, the project involves the upgrade of Saudi Aramco's existing refinery at Rabigh, together with the development of a 1.3 million tonnes per year (tpy) ethane cracker and various downstream petrochemical process units, and a 350MW captive oil-fired power and water/steam project (IWSPP).

PetroRabigh will benefit from economies of scale and a stable supply of cheap feedstock provided by Saudi Aramco. Once operational the complex will be one of the world's largest export-oriented refinery and petrochemical operations and produce 18.4 million tpy of high value petroleum products and 2.4 million tpy of ethylene- and propylene-based petrochemical derivatives.

The multi-sourced debt for the project comprises a $2.5 billion loan from JBIC, a $1 billion loan from Saudi state investment vehicle Public Investment Fund of Saudi Arabia (PIF), a $1.7 billion commercial facility and a $600 million Islamic facility. All tranches are pari passu.

Both Islamic and commercial facilities have pricing equivalence and, despite attempts by lenders to negotiate margins up to 75bp last November, the strength of the sponsors, and more significantly Saudi Aramco, kept margins painfully tight: 35bp over Libor during construction, rising to 55bp on completion and 65bp late in the 15-year term.

SMBC was financial advisor to the sponsors for the commercial tranche, with HSBC Amanah performing the same role on the Islamic tranche. Banks joining with mandated lead arranger status on the commercial tranche are: Apicorp, Bank of Tokyo-Mitsubishi UFJ, Banque Saudi Fransi, BNP Paribas, Calyon, Citibank, Gulf International Bank, HSBC, Mizuho, Riyad Bank, Saudi British Bank, Saudi Hollandi Bank, SMBC, Sumitomo Trust & Banking Co, and WestLB.

MLAs on the Islamic tranche are: Apicorp, Bank Albilad, Calyon, Citibank, Gulf International Bank, Islamic Development Bank, Riyad Bank, Saudi British Bank. The inclusion of Bank Albilad – a newly established Islamic institution – and the Islamic Development Bank in the lender line-up gives the facility a stronger Islamic flavour than the norm, where Islamic finance is supplied by arms of international and regional commercial banks.

Take-up of the deal by Saudi banks is surprisingly strong, since they rarely lend at such low margins and, unlike the Shuaibah IWPP deal, for example, there is no sweetener in terms of higher fees for Saudi lenders – a measure of the relationship strength of Saudi Aramco, which is currently one of the most courted sponsors in the world.

Because of the project cost increase to $9.9 billion, against initial forecast of $4.3 billion and then revised to $5.5 billion – a rise due primarily to inflation in materials and EPC costs, along with the addition of further units to the planned configuration including the IWSPP – the debt-to-equity ratio is 60:40. The cost increase was also partly offset by the four Japanese banks and Riyad Bank increasing their commitments by $300 million.

Furthermore, the IWSPP, although incorporated into the Rabigh debt raising, is in practice a separate $1.2 billion project sponsored by Marubeni, Itochu, JGC Corporation and ACWA Power. It sells its output under a 25-year water energy conversion agreement with PetroRabigh. The IWSPP is being financed through a loan on-lent from PetroRabigh's debt facilities, because Aramco could raise cheaper money than the IWSPP's own sponsors.

Legal counsel for such a big deal was extensive: Herbert Smith is counsel to Sumitomo, with the Law Office of Dr Mujahid M Al-Sawwaf providing local counsel; White & Case advised Saudi Aramco, with The Law Office of Mohammed Al-Sheikh providing local counsel. Clifford Chance advised JBIC and the commercial lenders, with Al Jadaan Law Firm providing local counsel; Norton Rose advised the consortium awarded the contract to build the IWSPP.

PetroRabigh
Status: Financial close 2 March 2006
Size: $9.9 billion
Debt: $5.8 billion
Sponsors: Saudi Aramco, Sumitomo Chemicals
IWSPP sponsor: Marubeni, Itochu, JGC, ACWA Power
Financial advisers: SMBC, HSBC (Islamic tranche)
Commercial lead arrangers: Apicorp, Bank of Tokyo-Mitsubishi UFJ, Banque Saudi Fransi, BNP Paribas, Calyon, Citibank, Gulf International Bank, HSBC, Mizuho, Riyad Bank, Saudi British Bank, Saudi Hollandi Bank, SMBC, Sumitomo Trust & Banking Co, WestLB
Islamic lead arrangers: Apicorp, Bank Albilad, Calyon, Citibank, Gulf International Bank, Islamic Development Bank, Riyad Bank, Saudi British Bank
Legal counsel to sponsors: Herbert Smith, White & Case, The Law Office of Mohammed Al-Sheikh
Legal counsel to lenders: Clifford Chance, Al Jadaan Law Firm
Legal counsel to IWSPP sponsors: Norton Rose