Oman Polypropylene: Fast and unfettered

Oman's government has started to test the limits of banking appetite for commodities risk. Proof is in the $313 million financing for the Oman Polypropylene (OPP) financing, which closed in August. The financing is far less dependent on the credit of the Sultanate than its predecessors ? particularly the Sohar Refinery Company (SRC) project, which closed in 2003.

OPP is a companion project and financing to Sohar, since it was conceived as part of the larger Sohar industrial development, and relies upon SRC for feedstock. Moreover, at the time of close the Omani government owned, through the Oman Oil Company, 80% of the OPP project, with LG International taking another 20%. Since financial close, Gulf Investment Corporation has bought a 20% stake from OOC.

The OPP financing, once carved out, was designed to have a much greater level of foreign participation ? ABB Lummus global was once a prospective 20% shareholder. LG's involvement, though, is substantial ? it is the engineering, procurement and construction (EPC) contractor, and has a marketing contract for much of the output.

The plant will produce 340,000 tonnes per year of polypropylene, and buys its feedstock from the Oman Refinery Company (ORC), which in turn buys it from the Sohar Refinery Company. ORC is a 99% subsidiary of the Sultanate, while the remaining 1% is in the hands of the country's central bank.

ORC is also the polypropylene buyer, so that the supply and offtake agreements amount to a tolling agreement, and that credit is ultimately that of the government. LG's marketing efforts encompass the world, excluding the Middle East, India, and some African and Near Eastern countries, but do not enhance the project's credit, except to backstop any failure to perform on the part of the government.

But the project is still at the mercy of volume risk, since the global polypropylene market is highly volatile. The structure of the financing, therefore, includes a dual repayment schedule ? a minimum mandatory one, and a target schedule that should be used if cash is available for repayment. The project company is also allowed to defer payments for feedstock in the event that it cannot cover meet minimum debt service obligations and operating costs. In any case, in the cash waterfall, these payments are below debt service.

On 20 May the sponsor mandated Apicorp, its financial advisor, Arab Banking Corporation (ABC), BNP Paribas, and HSBC as lead arrangers for a $240 million loan ? and 11 days later the deal closed. The speed of this closing was unprecedented, and was followed on 25 August with the signing of the loan.

The the other participants were: lead arrangers with commitments of $20 million, Arab Bank and SMBC. For $15 million, and the title of arranger, Oman Arab Bank, National Bank of Oman, Ahli United Bank, Bayerische LB, Fortis, Natexis, National Bank of Dubai and Nord/LB. At co-arranger level, with commitments of $10 million, were Qatar National Bank, Bank of Bahrain & Kuwait and First Gulf Bank.

OPP's terms defy a simple comparison with those of Sohar. Sohar operates in an industry with even less predictable margins, and thus required much more comprehensive government support. But OPP was launched into a much more settled market ? and thus priced more cheaply ? 100bp over libor precompletion, and then 90bp to 145bp over the life of the loan. It does, however, also have a 12-year, as opposed to Sohar's 14-year tenor, which would also justify Sohar's 10bp premium.

While the project benefited from a more stable syndication environment ? something that the sponsors of the Sohar IWPP project also enjoyed ? it also shows that the Sultanate can expect its downstream projects to support themselves to a far greater extent than before. But the limits, as well as the structural enhancements required, are also apparent.

Oman Polypropylene (OPP)
Status: Closed 31 May, signed 25 August
Size: $312 million
Location: Sohar, Oman
Description: 340,000 tonnes a year polypropylene plant
Sponsors: Oman Oil Company (OOC) (60%); GIC (20%); LG International (20%)
Debt: $240 million
Mandated lead arrangers: Arab Petroleum Investments Corporation (Apicorp); Arab Banking Corporation (ABC); BNP Paribas; HSBC
Legal counsel to the lenders: Allen & Overy; Al Alawi; Mansoor Jamal & Co
Legal counsel to OPP: Clifford Chance; Trowers & Hamlins
Technical adviser: Jacobs Consultancy
Insurance adviser: Miller
Market consultant: CMAI