First drawdown of the $400 million offshore financing for PT Trans-Pacific Petrochemical Indotama (TPPI), the project company behind Indonesia's Tuban Petrochemical project, has taken place. The financing, arranged by SMBC and Mitsui & Co, allows the long-delayed phase one of the complex to be completed. Construction was suspended six years ago, at the height of the Asian Crisis.

According to one bank involved in the deal, the $400 million financing is comprised of two tranches, a $200 million tranche extended by Mitsui and Co, and supported by JBIC, and a $200 million syndicated commercial loan, fully underwritten by SMBC, and insured by NEXI's Overseas Untied Loan Insurance. NEXI's cover extends to 97.5% of political risk and 50% of commercial risk. "This is fairly consistent for NEXI deals in Indonesia," comments Gerard Hekker at Skadden Arps Slate Meagher & Flom, which advised TPPI.

The highly complex structural approach needed to get the deal away demonstrates that it remains a considerable challenge to finance Indonesian projects, particularly projects like TPPI that will eventually sell the majority of its output to local buyers.

To bring offshore banks into the deal on reasonable terms, both construction and repayment risk had to be removed from the $400 million financing. In order to achieve this, the project is underpinned by Pertamina support, even though a substantial majority of production (88%) will go to other purchasers.

Pertamina has taken up this role partly because of the project's strategic importance, says Mihir Taparia, managing director of TPPI. "The complex will reduce Indonesia's dependence on imported upstream petrochemicals and greatly enhance the local economy," he adds. Pertamina has an additional rationale for supporting the project because its current business plan focuses on the need to establish a larger presence in the downstream sector. TPPI is part of this long-term strategy.

Instead of relying on cashflows from the project, repayment of principal and interest depends on the cash flows derived from Pertamina's sales of Low Sulphur Waxy Residue (LSWR) to Mitsui through a Netherlands-based SPC controlled by the lenders, called KerisPetro Finance. Phase one's products are not raw ingredients for the LSWR. In this sense, the financing is somewhat reminiscent of the Blue Sky transaction in which Pertamina financed the upgrade of its Balongan and Cilacap refineries with revenue streams from totally separate projects. "The crucial difference, however, is that TPPI is not a wholly-owned Pertamina venture," says one banker, "in fact Pertamina owns only 15% of TPPI."

Pertamina, in turn, has entered into a sale and purchase agreement (SPA) with KerisPetro for the sale of LSWR to KerisPetro. KerisPetro will then resell to Mitsui the LSWR purchased from Pertamina. Mitsui is also taking LSWR in the Blue Sky transaction.

With the loan tenor set at eight years, a cut-off date is set and an additional challenge created whereby a specific value of LWSR has to be delivered within a specific time frame. In traditional Indonesian project financings structured around trustee borrowing schemes there is no such cut-off date and delivery dates of the product in question can be extended. In the Tuban project, Pertamina is obliged to deliver enough LSWR to KerisPetro to generate a value of $50 million for any six-month period over a term of 6 years. If the value of LSWR delivered by Pertamina to KerisPetro is less than $50 million in any six-month period, Pertamina is obliged to pay cash in lieu equal to the shortfall.

"Pertamina obviously wants to be sure it will receive product from TPPI in exchange for the LSWR that Pertamina supplies to the SPC," says Jon Christianson, also at Skadden Arps. "This surety is achieved through Product Delivery Instruments (PDIs)." In exchange for deliveries of LSWR and payments of Cash in Lieu, Pertamina will receive an equivalent face value in PDIs from KerisPetro. The PDIs represent TPPI's obligations to deliver middle distillate products to Pertamina and were TPPI failing to meet its obligations, Pertamina would have a legal claim to TPPI's assets. "With this triangular structure, lenders can be comfortable that the contractual relationships will stand up," he adds.

The terms of the arrangement between KerisPetro and Mitsui for the resale of the LSWR purchased from Pertamina will mirror the terms of the sale of LSWR, including price and quantity, from Pertamina to KerisPetro.

The $200 million NEXI facility was oversubscribed and the commitment of financial institutions was reduced proportionately. Lenders that have committed to the transaction in addition to SMBC are WestLB (arranger), HVB (arranger), UFJ Bank (co-arranger), Standard Chartered Bank (co-arranger), Fortis Bank (co-arranger), Bank of Tokyo-Mitsubishi, (lead manager), Natexis Banques Populaires (lead manager).

The total project cost for TPPI is approximately $1.2 billion, says Taparia, of which $500 million has already been spent. To date, the sponsors have contributed $250 million of equity to the project, he adds.

In addition to the $400 million of offshore finance, the deal also features a $150 million working capital facility and the contractors are providing additional funds. Taparia says the working capital facility will come from local Indonesian banks. The facility will partly cover costs associated with Tuban's start up and commissioning at the end of next year.

According to the current timetable, phase one will begin commercial operations in the first half of 2006. Third party consultants for TPPI are forecasting EBITDA in the first year of operation of $200 million. "The figure could be substantially higher than this if the petrochemical industry cycle hits its peak in 2006," says Taparia.

PT. Trans-Pacific

Petrochemical Indotama

Status: Closed

Size: $400 million

Location: East Java, Indonesia

Description: Offshore funding to rehabilitate the Tuban Petrochemical Complex, an aromatics plant designed to produce 500,000 mtpa of paraxylene and 400,000 mtpa of benzene, toluene and orthoxylene

Sponsors: TubanPetro (59.5%), Tuban Petrochemicals (17%), Pertamina (15%), Sojitz Corporation (4.25%), Itochu Corporation (4.25%)

Lead arranger: SMBC

Lawyers to TPPI: Skadden Arps Slate Meagher & Flom (international) Kartini Muljadi & Rekan (local)

Lawyers to lender and offtaker: Debevoise & Plimpton (international), Mochtar Karuwin & Komar (local), Nauta Dutilh (Netherlands)

Lawyers to Pertamina:

White & Case (international),

Lubis Ganie Surowidjojo (local)