Qatar's petrochemicals deal pipeline was not assumed to be too healthy until now, when a banking group of five was selected for the $300 million, 8.5-year refinancing of the Qafac MTBE project. For many this has further highlighted the ongoing raft of projects in Qatar over the past few years. Projects were infrequent until the mid-90s, and since then activity has steadily increased. Currently, roughly two deals a year are closed. This refinancing comes on the back of projects such as Qatar Gas, Ras Laffan LNG, Qatar Chemicals, QVC and the Qafco expansion.

The Qafac refinancing's arrangers are National Bank of Dubai ($40 million) and Qatar National Bank ($50 million) and its underwriters are GIB, Credit Lyonnais and Standard Chartered, all taking $70 million each at a margin of 75bp on a final take basis. This achieved a much lower margin than the original financing for $350 million in 1997, marking a significant saving. SG was appointed financial advisers back in February this year.

The plant produces MTBE, plus excess methanol ? which will be used for other purposes. Construction was completed in 2000, so the overlap means that repayment has already started and debt has been reduced by $50 million since then, hence the new figure of $300 million. No grace period was agreed, meaning debt began being serviced straight away.

Sources close to the deal say there were two main reasons for setting up a refinancing for the Qafac project. The first was to get a better pricing on the loan and the second was to extend the maturity. Total refinancing cost stands at $650 million, meaning equity to the tune of $300 million is being put in by the four shareholders. Qatar Petroleum (QP) put in 50%, Chinese Petroleum Corporation (CPC) 20%, and Lee Chan Yung Investment Corporation (LCY Investment Corp) and International Octance Ltd (IOL) 15% each. Three of these are offtakers ? CPC, LCY Corp, and IOL. The first two are Chinese. Offtake is guaranteed on production of MTBE from the plant, plus any excess methanol which will be used by the offtakers themselves to make other compounds such as alkalite.

The offtakers are strong, which could be a factor in lender confidence. QP is owned by the government, and LCY Investment Corp is a subsidiary of Lee Chan Yung (LCY). In addition, IOL is owned by a subsidiary of a strong Dubai transport company.

It is expected that 830,000 tonnes of methanol will be produced, 610,000 tonnes of which will make MTBE (Methyl Tertiary Butane Ether) and 220,000 tonnes of which will be excess methanol, owned by the offtakers who will transport it to China and make use of it there.

MTBE is a compound used as a lead replacement in fuel for cars. Technically, it is an octane enhancer which also adds an extra kick to the petrol tank. It has been called a ?greener fuel'.

In 1997 the financing was structured into four tranches. Tranche A was a $50 million facility over 12 years arranged solely by the Canadian ECA, EDC. Tranche B was for $90 million pure debt over 12 years and was commercial, although solely arranged by Sumitomo. Tranches C and D were also both commercial. C was for $190 million over 10 years and D was $20 million working capital with the same maturity. The banking group which arranged this was Bankers' Trust International (now part of Deutsche Bank), BNP Paribas, GIB, Bank of Taiwan, Chinatrust Commercial Bank and First Commercial Bank. The last three banks are Taiwanese.

It is understood that lenders to this project were slightly wary at first at investing in an MTBE plant. Market observers were divided over its position in the market when California banned it from the state 18 months ago after a reported incident that tanks storing MTBE leaked into the water supply. This has been the main concern so far and the ?what if?? on many banker's lips. The amount was inconsequential, but it made US officials jumpy nevertheless and it was almost instantly banned.

This greatly reduces demand for MTBE in the US, which makes up a fourth of the world's consumption of MTBE. Although it has not yet been prohibited in the remaining 49 states, policy is under debate and a decision is expected in four years' time. However, for the immediate future, demand seems safe ? and guaranteed ? and this is what makes banks feel secure enough to lend. One banker familiar with the deal said: ?If it was banned in the whole USA, that would be the major concern. But demand is still good in Europe, which has built storage tanks with California in mind.?

There are a handful of petrochemical projects coming up, and recently completed, in the region. The Qafco Four fertilizer (ammonia and urea) expansion already has three units functioning and is currently progressing steadily. Fees and the margin on Qafco are thought to mirror the Qafac refinancing. Like Qafac, SG is advising on Qafco. The recent RasGas project transporting LNG between Qatar and India has been a big confidence booster, with strong regional and international presence. The much-anticipated Jubail United greenfield project, promoted by Sabic, was expected to close as Project Finance went to press. The invitation to banks is being sent this month for the Gas to Liquid (GtL) project between QP and Safol (the South Africa oil company). It is understood that RBS are advising. The MTBE plant is based in the industrial city of Qatar, Mesaieed.

Qafac Refinancing

Status: Arrangers mandated

Size: $650 million

Location: Mesaieed, Qatar

Description: MTBE and methanol production plant

Sponsors: Qatar Petroleum, Chinese Petroleum Corporation, Lee Chan Yung Investment Corporation, International Octane Ltd

Debt: $350 million between a banking group of five

Financial adviser: SG

Arrangers: GIB, National Bank of Dubai, Qatar National Bank, Credit Lyonnais, Standard Chartered

Lawyers to the borrower: Clifford Chance

Lawyers to the lenders: Latham & Watkins

Technical consultant: Stone & Webster

Market Consultant: CMAI