Petrochemicals financings have recently largely been the preserve of the Middle Eastern banker. But 2003 will be remembered for a Eu350 million ($378 million) financing for a petrochemical plant in Poland, Basell and PKN's Plock project.

The deal comes during a quiet period for energy financings in the region, and is a rarity for mainland Europe, which has not seen a polyolefins deal since the Netherlands deals of the late 1990s. KBC Bank, Bank of Tokyo-Mitsubishi and SG are the debt's mandated leads, while the European Bank for Reconstruction and Development has a key lending role.

Plock is the current site of two aging polypropylene (PP) and polyethylene (PE) plants with capacities of 140,000 and 150,000 tonnes per year respectively. The two plants are owned by PKN, the dominant player in oil and gas in Poland. PKN is 28% state-owned, although its shares trade on the polish stock exchange. The project will give it a polyolefins facility that will dominate the regional market and compete for western European markets.

Plock is situated inland, and is also the site of the PKN cracker that supplies the ethylene feedstock to the current and proposed plants. It is located on the Peace pipeline that brings Russian oil into central Europe. The new plant will have annual capacity of 400,000 tonnes of PP and 320,000 tonnes of PE.

PKN's partner is Basell, which was formed in 2001 from the assets of Eleniac, Montell and Targor, all subsidiaries of BASF and Shell. Basell dominates the European polyolefins industry, partly in production, but also by licensing its Spheripol polypropylene process and Hostalen high density polyethylene technology.

Basell is also a familiar name to project finance bankers as a sponsor of the Saudi Polyolefins and Polymirae transactions, the last of which was also a Deal of the Year. According to Francesco Svelto, Basell's treasurer, it has frequently used project financings on its joint ventures, partly because of the nature of its technology, but also because of the markets in which it works.

The project company will include the old production facilities, which will ultimately be decommissioned, and were not considered assets against which the banks lent money. Nevertheless, PKN's ethylene cracker will be expanded to 660,000 tonnes per year to supply the new plant.

The two sponsors provide 50% of the equity each, although Basell also contributes its production technology to the plants, which will be built by Edison subsidiary Technimont. While such construction work is no longer considered a core activity for Edison, the engineering, procurement and construction contract carries an Edison guarantee.

The deal also carries, by way of enhancement, a potential Eu75 million contingent equity injection pre-completion, and Eu25 million post-completion. This is believed to be linked to the performance of the Basell technology, although it has been previously commercially tested.

The more significant contribution comes from the supply agreement, from PKN for ethylene, and offtake contract from Basell. Both of these agreements have been crafted to ensure that the plant is supplied with, and produces, 80% of its capacity. Making these match was a challenge for the arrangers, which had to work to ensure that they were financeable.

The key risk that is left to lenders is that of price. This is an area where neither sponsor is able to offer support, since their own operations will not be entirely hedged, and the world price of petroleum products fluctuates. Lenders have to look at the dynamics of the polyolefins market, which resembles that for other commodities, as well as the fundamentals of the industry.

Like most petrochemicals projects, the Plock plant's competitive position will rely on being, as the newest, one of the most competitive in the world.

In size, it will be among the top 10 in Europe. Nevertheless, maintaining a good price will be dependent on a strong demand for plastics. A forecast shortage of ethylene will also have a beneficial effect on prices - while Plock has a dedicated supply.

Prices in eastern Europe are denominated in euros, so lenders are not exposed to exchange rate risk. And the market for PP and PE is liquid enough that lenders could conceivably survive the disappearance of the sponsor/offtaker. The plant has coverages in the two times range.

A final enhancement to the deal comes from the cash sweep mechanism that is built in to the debt package. This means that even under good conditions, 50% of the free cash is retained to pay down debt. This means that banks providing the 12-year debt could see their money back in nine years. The feature has not been used previously on Basell's previous financings, and is designed to enhance lender comfort, both in the polyolefins market, and in lending to Poland.

The financing consists of a Eu320 million term loan and a Eu30 million working capital facility.

The three mandated leads underwrote the debt in December, and it is now attracting commitments in syndication. It benefits from the relationship pull of the two sponsors, including more than one Polish bank. When the allocations are finalised, the arrangers will be able to tally the appetite that exists for Polish risk. The results are likely to show that this accession country can bring in respectable interest, but still has a way to go.

Basell Orlen Polyolefins Sp. z o.o.

Status: closed December 2003

Size: Eu500 million

Location: Plock, Poland

Description: financing of plant with 400,000 tonnes per year of polypropylene and 350,000 tonnes per year of polyethylene capacity

Sponsors: Basell and PKN (both 50%)

Debt: Eu320 million

Lead arrangers: SG, BTM, KBC, EBRD

Tenor: 12 years

Margin: 125-150bp over Euribor

Lawyer to the sponsors: Clifford Chance

Lawyer to the lenders: Allen & Overy

Market consultant: Jacobs

Technical consultant: Nexant Chemsystems

Insurance: Willis