Financing for the upgrade to the Bahrain Petroleum Company's (Bapco) Sitra refinery has been some eight years in the making. Fortunate then, that when the financing went out to market the original $675 million that the lender sought was bumped up to $1 billion on the back of strong bank appetite. But despite the uptick in size, many banks were left standing outside, unable to get a piece of the deal.

Bapco's refinery has been operating since the early 30s, is the oldest refinery in the region, and the oldest continuously operating refinery in the world. The proceeds from the financing will fund environmental upgrades and expansion – the principal project component is the anticipated $675 million capital cost low-sulphur diesel production (LSDP) unit. The project also includes a refinery gas desulphurisation (RGD) scheme and a lube base oil refinery project.

The delay in financing centred on the nature of the Bahraini government support to the project. Previous deals of similar import, such as the $1.7 billion Alba aluminium project, which closed in April 2003 (for more deatils search "Alba") were conceived before the implementation of the new Bahraini constitution. For Bapco there was much debate among scholars as to whether state support to a project could be authorised by Royal decree alone or whether Parliamentary consent was necessary.

Under Article 108 of the constitution, if the Kingdom gives direct financial assistance to a borrower or a guarantee, then Parliamentary approval is required. Yet, in the first version of the financing structure from August 2002, Bapco – advised at the time by Citigroup – was to receive direct government support through a guarantee that could see government cash undertakings to service the debt if Bapco was in default. However, given the political climate Parliamentary approval was unlikely, so this structure was pulled.

Instead, Bapco, in negotiation with the state, and now using BNP Paribas as financial adviser, decided that government support would be channelled through a concessionary price of oil. This required the approval of the Supreme Oil Council, but circumvented the need for Parliament's consent.

For Bapco the concessionary crude oil price is a generous $1 per barrel, plus the associated cost of production. That cost equates to roughly $3-$4 a barrel. Given that the refinery processes about 270,000 barrels a day and the other pillar of security for lenders to the deal are the long-term contracts for the refinery's products, it is little wonder bank appetite was strong. Effectively, given the generosity of the concession, the project is sovereign-backed but without a direct guarantee.

The $1.011 billion financing splits into three tranches: a $370 million commercial facility, a $330 million Islamic facility and a $311 million export credit agency facility. There are seven mandated lead arrangers on the commercial facility: Arab Banking Corporation, Apicorp, BNP Paribas, Mizuho, GIB, HSBC and National Bank of Bahrain (GIB was facility agent, BNP Paribas and HSBC were joint structuring agents).

There are eight banks on the Islamic tranche: Kuwait Finance House, Dubai Islamic Bank, BNP Paribas, GIB, HSBC, Apicorp, National Bank of Bahrain and ABC Islamic. And lending through the ECA JBIC-Nexi facility are BNP Paribas, HSBC, and Mizuho.

JBIC is directly lending $0.50 in every dollar of the $311 million ECA facility with the three banks lending the other half with political and commercial risk insurance from Nexi.

The facilities have a 12.5-year tenor, and both the commercial and Islamic portion pay the same margin. Participation fees are about the market norm at 105bp and pay a margin at a step up pricing structure of 85-105bp, with average margin in the low 100s.

It is unclear what the ECA tranche pays, but given that it was put in place first with the bank debt fitting around it, and it was the aggressiveness of the arrangers' bid that ultimately led to an upsize in the deal, it is unlikely the ECA tranche is priced as low as bank and Islamic portions. And other banks are unlikely to have much of a chance joining at the sub-underwriting deal. There will be a very limited syndication, that should finish by April, of about $100 million, with the average MLA hold position about $40 million.

Although Bapco is a private entity, it has long been seen as an extension of the state. This financing and its delays have been a consequence of Bahrain's push toward reform, straddling the pre- and post-constitution eras. The shift in government support from a direct financial undertaking to an oil concession – a move to a commercial obligation from a financial one – marks the commercialisation of Bapco, and Bahrain's wider transition toward greater transparency and a more open economy.

This financing raises awareness in the lending community of Bapco, but it is a deal that is unlikely to be repeated anytime soon – given that there are no similar entities in Bahrain and that Bapco's expansion needs have been met well into the medium term. The next frontier could be downstream facilities that rely on Bapco for their feedstock and on its credit strength.

Bahrain Petroleum Company (Bapco)
Status: Closed 7 February 20004, in limited syndication
Size: $1.011 billion
Location: Sitra Refinery, Bahrain
Description: Financing for upgrade
Sponsor: Bapco
Lenders: Arab Banking Corporation, Apicorp, BNP Paribas, Dubai Islamic Bank, GIB, HSBC, National Bank of Bahrain, Mizuho, Kuwait Finance House
ECAs: JBIC; Nexi
Lenders'/ECA legal counsel: Norton Rose
Borrower legal counsel:
Shearman & Sterling
Principal EPC contractor: JGC