The $802 million equivalent bond and bank debt financing for the Optimal Group's integrated petrochemical complex has closed. Those close to the deal have billed it as the largest project bond financing in Asia since 1997. But Optimal is a mixture of Malaysian Islamic bond debt, and dollar bank debt, all of which carry strong sponsor support.

Optimal is a group of three petrochemical joint ventures located in the Kerteh industrial area on the east coast of Peninsular Malaysia and owned by Petronas, Malaysia's state oil company, Dow Chemical and South Africa's Sasol Ltd. The complex includes a 600,000 tonnes per year ethane and propane cracker, and production units for chemicals including ethylene oxide, glycol and butanol.

The overall financing was split into four separate components. Two of these components, a $200 million, US Dollar-denominated bank loan, and a RM250 million ($66 million) Ringgit bond, were for Optimal Olefins. The other two, a $268 million, US Dollar-denominated bank loan, and a total of RM1.02 billion in Ringgit bonds, were for Optimal Glycos and Optimal Chemicals. The bonds are known as Al-Bai Bithaman Ajil Islamic debt securities (BaIDS) and were arranged by Aseam-bankers Malaysia, HSBC and Maybank. HSBC and Maybank were bookrunners for the syndicated loans.

"Optimal Glycos and Optimal Chemicals borrowed from banks as a joint credit entity, which is effectively a single company from a credit perspective," says a banker involved in the transaction.

This structure was set up because of the significant operating synergies between the two firms. "It would have been more difficult to finance the companies separately. Any lender who was financing only one of the two companies would be worried about the traceability of cashflows and profits between the two entities and would be concerned that cashflow could be diverted away from its debtor to the other company," says a second banker involved in the deal.

The joint credit entity financing involved limited sponsor support, says the banker, in the form of cash deficiency support. The corporate guarantee associated with this support is from Dow Chemical. The financing for Optimal Olefins did not feature any sponsor support.

The bank loans were put in place primarily to provide a US Dollar hedge for the companies. Had the hedge not been called for, the Optimal companies would probably have raised all or almost all the funds from the Malaysian bond market. "If a company wants to borrow in Malaysia and in local currency, the most efficient and cost-effective way to do so is via the debt capital market not the bank market," one banker comments.

Optimal Olefins issued five tranches of BaIDS with maturities from one to five years. They were priced at par and paid yields to maturity of between 3.25% and 4.6%.

For their bond funding, Optimal Glycols and Optimal Chemicals issued separately. Optimal Glycols issued approximately RM453 million of BaIDS and Optimal Chemicals issued approximately RM567 million. However, the structure of the two launches were identical. Both companies launched 10 tranches of BaIDS with maturities from one to 10 years. The notes paid yields to maturity of 3.3% to 6%. The Olefins issue was rated AAAid by Malaysian Rating Corp (MARC). The Glycols and Chemicals issues were rated AAAids. One financier says AAAid denotes MARC's top rating for an Islamic instrument. The 'S' highlights the sponsor support for Optimal Glycols and Chemicals.

The two loans for the Optimal group carry different tenors and pricing. Optimal Olefins is borrowing for five years at a margin of 44.5bp over Libor, says one of the participants.

Optimal Chemicals and Optimal Glycols are borrowing for eight years, at 70bp over Libor.

Both the loans and bond issues were well received. The bank debt was more than 30% oversubscribed, while the BaIDS were four times oversubscribed. Investors based in Malaysia bought all of the bonds.

The loans were syndicated among a group of 13 banks. RHB Bank, Bank of Tokyo-Mitsubishi, Mizuho, Bumiputra-Commerce Bank, Sumitomo Mitsui Banking Corp and United Overseas Bank joined HSBC and Maybank as lead arrangers.

Standard Chartered, DBS, Overseas-Chinese Banking Corp and Bank of East Asia came in as arrangers, and AmInternational joined as manager.

"It's a good credit benefiting from very good trading conditions," says one bond specialist. The complex's target customer base is Asia and in the region, Chinese demand growth has been particularly strong, helping to push the price of ethylene, Optimal's main product, to about $1,190 per tonne. The take-or-pay stipulation in Optimal Olefin's ethylene sale agreement ensures that a minimum quantity is purchased by the offtakers. "For Glycols and Chemicals there is no take-or-pay agreement, but in its marketing efforts, Dow Chemicals has agreed to give preference to the two companies' output over products produced at other Dow facilities or facilities which Dow has control over," says a banker. Dow is responsible for marketing the products of Glycols and Chemical.

In view of the cyclicality of the petrochemical market, several structures have been established to underpin the bond issues, including a six-month liquidity buffer, a special reserve account to capture at least 25% of total principal outstanding and the undertaking from the shareholders to meet any cash shortfall of up to 30% of the principal outstanding in the Glycols and Chemicals bonds.

On the supply side, MARC states that supply risk is minimal because of a long-term supply agreement with Petronas that carries a favourable pricing structure compared to other producers in the region.

Partly because of rising ethylene prices and demand, Optimal's operating profit leapt to about RM810 million for the year ended 31 March compared a RM69 million loss a year earlier. Sales rose 80% to RM3.34 billion.

Optimal petrochemicals

Status: Closed

Size: $1.35 billion (total project cost)

Location: Malaysia

Description: Financing to part replace shareholders' equity in Optimal's petrochemical complex. The three plants in the complex have the capacity to produce 1 million metric tons of olefins, glycols and other chemicals a year.

Sponsors: Petronas, Dow Chemicals, Sasol.

Debt: $802 million (total financing amount, US Dollar equivalent).

Total bank debt $468 million.

Total bond amount RM1.27 billion.

Arrangers: Aseam-bankers Malaysia, HSBC and Maybank.

Legal counsel to sponsor:

Shearman & Sterling

Legal counsel to lenders:

Allen & Overy Shook Lin & Bok