The project financing for the Oman Polypropylene (OPP) project is reputedly the fastest Oman has yet witnessed. OPP's financial adviser, Apicorp, pulled in four lead arrangers on 20 May for a $240 million loan - Apicorp, Arab Banking Corporation (ABC), BNP Paribas, and HSBC - and closed on 31 May.

The Omani government originally planned to bundle the polypropylene plant into the Sohar refinery as one project but ultimately carved it out for financing and logistical reasons. The financial mandate award, which Apicorp won in September 2003, was delayed while the refinery financing was sealed.

OPP was originally a consortium of state-owned Oman Oil Company (60%), LG International of South Korea (20%), and ABB Lummus Global (20%). However, ABB withdrew and Oman Oil Company took over its shareholding. Gulf Investment Corporation (GIC) has since bought a 20% stake from OOC, and completed this 28 June.

Fortunately these shifts in equity did not slow the financing, and construction on the 340,000 tons a year polypropylene plant is expected to be complete by late 2006. The plant will be located in Sohar Industrial Area next to the Sohar refinery, from where feedstock and utilities are supplied. The Oman Refinery Company will supply the Sohar refinery with a mixture of crude oil and long residue that will produce a range of products including the polypropylene feedstock for OPP. The polypropylene plant will be capable of producing a range of homo-polymers and random co-polymers.

Once the task for pulling together the financing was up and running, the process went very smoothly. Beyond bringing aboard three other mandated lead arrangers, the allotments for general syndication were made at the end of June and documents signed on 25 August - a turnaround of less than a year.

The MLAs were joined at lead arranger level with commitments of $20 million by 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 came in. At co-arranger level, with commitments of $10 million, were: Qatar National Bank, Bank of Bahrain & Kuwait and First Gulf Bank.

All Omani banks were approached and a select number of regional banks were invited. Only those international banks that made reverse enquiries participated. Between them, the four lead arrangers took some $100 million. Participation fees are 40bp. In general syndication allotments were scaled back and finished 25% - 35% oversubscribed.

Set against the benchmark of the $646 million Sohar refinery commercial financing, the $240 million OPP term loan is priced more cheaply. This is principally because OPP is much smaller and the market conditions have swung from the lenders' favour to the borrower's. For Sohar's financing, lenders took on real underwriting risk, with the Iraq war and its associated uncertainties exerting an upward pressure on price.

When Sohar syndicated in December the arrangers were surprised by the number of banks that came in - an indication that market sentiment was not as timid as anticipated. But the Omani government's undertaking to service the debt, should the borrower default in construction, will have helped. Fees on the Sohar loan were 110bp over Libor at the top-level with margins starting at 90bp during construction, 115bp for the first five years stepping up in increments to 160bp by year 14.

Unlike Sohar, OPP does not benefit from direct government support. However it does get some benefit from a shorter tenor: construction plus 10-years (about 12 years). The debt is priced at 100bp pre-completion and steps down to 90bp from completion to the plant's third anniversary. The margin then ratchets to 110bp from the third to eighth year and then again to 145bp for the final two years.

The lead arrangers were able to make lenders comfortable by alluding to the relatively low technology and construction risks on a polypropylene plant. There is a $179 million turnkey contract in place with LG Engineering and Construction. OPP's largest working capital outlay, its feedstock obligations, is lower in the cash waterfall than debt service. Marketing fees are also below debt service.

Oman Polypropylene will market production in the Indian subcontinent, Iran, the Middle East and east and southern Africa, and LG International will be the marketer in the rest of international markets. Ninety percent of the production will be exported and the remaining 10% will meet local existing and future requirements.

As LGI has secured rights to a portion of the offtake, it potentially profits on three fronts from the project: a dividend gain through the investment; plant construction cost through the EPC; and marketing earnings by an off-take copyright agreement. Through this agreement LGI expects sales of $170 million each year for 13 years. It plans to deploy active marketing activity targeting Europe, South-east Asia and China.

The project benefits from favourable feedstock pricing that softens the plant's exposure to the polymer market - effectively the margin is made on the difference in the price of the feedstock and the price of the processed product. Polypropylene is used in manufacturing of plastics and furniture.

Oman Polypropylene (OPP)
Status: Closed 31 May 2004, general syndication signed 25 August 2004
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 arrangers: Arab Petroleum Investments Corporation (Apicorp), Arab Banking Corporation (ABC), BNP Paribas, HSBC
Lead arrangers: Arab Bank, SMBC
Arrangers: Oman Arab Bank, National Bank of Oman, Ahli United Bank, Bayerische LB, Fortis, Natexis, National Bank of Dubai, Nord/LB
Co-arrangers: Qatar National Bank, Bank of Bahrain & Kuwait, First Gulf Bank
Legal counsel to the lenders: Allen & Overy, Al Alawi, Mansoor Jamal & Co
Legal counsel to OPP: Clifford Chance, Trowers & Hamlins