The second of China's ultra-large petrochemical project financings has been signed, a limited recourse facility to fund BASF and Sinopec's steam cracker joint venture and the construction of nine integrated petrochemical facilities in Nanjing.

The financing for the $2.9 billion so-called ?BASF-YPC? development, arranged by coordinating lead banks, Citigroup and Industrial and Commercial Bank of China (ICBC), comprises: a $460 million term loan, a RMB5.5 billion term loan, a $120 ECA (Hermes) tranche, a VAT facility of RMB734 million, and two working capital facilities of $44.5 million and RMB369 million ($44.5 million equivalent). Agricultural Bank of China is lead arranger of the uncovered US Dollar tranche, with Bank of China, Bank of Communications and ICBC acting co-leads.

Citibank, Bank of China, China Construction Bank and the ICBC have been acting as financial advisors to the project's sponsors since 1997. HypoVereinsbank, initially co-arranger with Citibank on the Hermes tranche, did not join signing. The bank is still negotiating changes made to the documentation but claims to have every intention of joining ? either with Citibank or through a separate tranche. It appears likely Hypo will come in once Hermes has also formalised its commitment.

Pricing, fees and commitments were not revealed, but according to a source in BASF's finance department, four PRC banks participated in the US Dollar tranche and five local banks committed to the RMB tranche. Foreign banks only participated in the ECA loan.

The total debt volume was $1.4 billion and the debt to equity split 50:50, ?a sound and adequate capital structure for a chemical project in China,? comments a finance department source at BASF. The financing is not just a milestone for the sponsors, but for mainland Chinese banks also. With local banks now the principal providers of capital for projects in China (over 90% of funds in the case of BASF-YPC), they are increasingly able to dictate financing terms and conditions. According to Robert Caldwell at Clifford Chance, this is the first syndicated Chinese petrochemical deal where domestic and foreign currency loans and export credit were arranged on a pari passu basis.

Market sources also note the deal is quite different to the previous large-scale Chinese petrochemical deal, for Shanghai Ethylene Cracker Complex (SECCO), which closed a year ago.

Although Sinopec was sponsor for both deals, BASF, the foreign firm behind the BASF-YPC venture, pushed for a limited recourse transaction. BP, partnering with Sinopec in SECCO, opted for a mostly guaranteed deal.

In doing so, BP was able to move very quickly to financial close. In contrast, the signing of the BASF-YPC facility comes more than six years after bankers first met in Mannheim to discuss the development. The BASF-YPC project finance deal itself was not six years in the making. Najeeb Haider, director in Citigroup's Project Finance department, notes it took less than a year to actually arrange the transaction, despite the limited recourse emphasis. The BASF source adds that the sponsors decided to first finance the project with equity, ?in order optimize the cost of capital?.

SG, financial adviser for SECCO, argues that the emphasis on guarantees allowed BP to get first mover advantage at a time when worries existed about whether the bank market could absorb all the Chinese petrochemical projects in the pipeline, valued at a total of $11 billion.

That analysis, though quite understandable at the time, proved incorrect. Liquidity (at least Chinese bank liquidity) has been more than sufficient. Local bank appetite for the BASF-YPC project, and similar mega-projects, has indeed been such that pricing has reduced markedly since the SECCO transaction. In the BASF deal pricing on the US Dollar tranche, wholly provided by Chinese institutions, was 5 to 7bps lower than pricing for SECCO's guaranteed foreign currency loan. The improved pricing was also a reflection of risk perception. Haider notes that BASF-YPC provided a very detailed, 800-page market study for the project and more substantial covenants were built in.

Deal participants are eager to point out that this is the largest-ever limited recourse financing in China's petrochemical sector (but that crown will soon pass to the even larger, Shell Nanhai project destined to close in a few months).

Although Shell Nanhai (an ethylene venture sponsored by Shell and CNOOC) is also a limited recourse deal, one notable distinction between it and BASF-YPC lies in the triggers for removal of completion guarantees. There is greater emphasis on financial completion testing in the more conservative Shell financing. Drop-away for the BASF-YPC completion guarantees, says Caldwell, hinges more on a blend of physical performance, capacity utilisation and financial testing.

Part of the difference results from the difference in leverage between the two financings, says one financier (the Shell project, he says, is financed 60:40, debt to equity). ?One also has to bear in mind that the BASF project involves integration with existing facilities, whereas the Shell Nanhai scheme is a wholly greenfield development.?

According to Clifford Chance another important aspect of the BASF-YPC deal was the interfacing of captive and out-sourced facilities (CCGT, Syngas, air separation and waste water treatment facilities) and related services within the combined financing of the project. Inter-creditor solutions were developed to accommodate both domestic and foreign currency lender issues, as well as German (Hermes) ECA requirements.

The BASF-YPC site is expected to begin commercial operations in 2005 and will produce about 1.7 million metric tons of chemicals and polymers per year to serve the domestic market.

BASF-YPC

Status: closed

Debt: $1.4 billion

Location: China

Description: Import substitution project producing approximately 1.7 million tpa of ethylene and propylene derivatives.

Sponsors: BASF, China Petroleum & Chemical Corp (Sinopec)

Arrangers: Citigroup, ICBC

Lawyers: Clifford Chance (advisers to the coordinating lead arrangers); Zheng, Liu, Yuan & Zhou (PRC counsel for the lenders); Shearman & Sterling (international counsel for the project company): Jingtian Gongcheng (PRC legal counsel)