General syndication of the debt package backing Oman India Fertiliser Company (Omifco) launched in March, marking the beginning of the end of a deal that has languished in various mutations for the better part of a decade. The final $646 million loan package was put together by mandated lead arrangers ANZ Investment Bank, Arab Banking Corporation and BNP Paribas, and is understood to be heavily oversubscribed.

The combination of relatively short tenors of a maximum of 12.5 years and generous pricing were sufficient to overcome worries about Indian risk, as well as broader concerns over regional stability.

The project has strong governmental support from both Oman and India. According to bankers familiar with the project, the sales process has been helped by its sound rationale: it provides Oman with industrial development, economic diversification, employment opportunities and monetisation of its gas resources. And for India, it provides low cost fertiliser, saving government exchequer subsidies to farmers.

The project's sponsors are Oman Oil Company (50%), Indian Farm Fertilizers Cooperative (Iffco, 25%) and Krishak Bharati Cooperative (Kribhco, 25%).

Despite its clear mutual benefit, the project has taken years to come to fruition. The original memorandum of understanding (MOU) was signed between the Government of India (GOI) and the Government of Oman (GOO) in 1994. But the deal as it originally stood was unbankable, given apparently dubious offtake agreements, together with unpalatable market risk. Lingering uncertainty in the international fertiliser market, in addition to concern over Indian Government credit, forced further delays. Lengthy and largely fruitless negotiations ensued until 1999, when the project was finally restructured.

The mandate was reactivated in March 2001, followed by a renegotiation of the offtake agreement with GOI. The final deal was clinched through an unprecedented direct sovereign obligation from the GOI under the urea offtake agreement. Also critical to its success was the elimination of price and volume risk from the deal ? both urea and ammonia offtake, with GOI and co-sponsor Iffco respectively, are at fixed prices.

Says Laurent Devin, vice president, project finance, at BNP Paribas, ?after restructuring we had a project from which market risk, offtake risk and gas price risk had been removed. It also had fixed revenues and fixed costs. The economics are exceptionally good.?

But even in the absence of the GOI offtake contract, a study by Chemsystems suggests that the plant will still perform in a hypothetical merchant environment as one of the most competitive in the region.

The debt consists of a $321 million, 11.5-year commercial facility, a $210 million, 12.5-year Sace-covered tranche and a $115 million, 12.5-year Coface-covered tranche. The commercial facility is priced at 175bp over Libor pre-completion; from completion the debt pays 200bp up to year 8.5, 225bp to year 11, and 235bp to maturity.

Commenting on the pricing, Devin explains, ?there's no real benchmark for a project like this. It's the first cross border transaction of this nature, and it's the largest joint venture they've ever done.? Ultimately the deal is priced between Indian sovereign risk and pure Omani risk. Says Devin, ?it's priced to sell, and the economics fully support this.?

The $210 million Sace tranche pays 80bp and provides commercial cover before and after completion. The $115 million Coface facility pays 75bp and provides commercial cover following completion only. The margins are 45bp higher pre-completion for both tranches.

The involvement of both Sace and Coface is of particular note, since it is the first time ECAs have participated on a Middle Eastern deal since Oman LNG in 1996. Both agencies, however, were involved with the deal since its original formulation. Sace is taking 95% political risk and 90% commercial risk cover, while Coface assumes 95% political risk cover, as well as 95% commercial cover ? though only post completion (as is the agency's policy). The latter commitment is reduced to 80% for the last three instalments.

To cover debt service, in the event of a construction delay, there is a $28 million standby loan and $28 million in standby equity. In addition there is a $20 million working capital facility in place.

33% of the project's costs ($318 million) are being paid in equity, and full equity is to be contributed before the debt is drawn.

The project's healthy economics are best demonstrated by its robust cover ratios the average debt service coverage ratio is 1.56x.

And the competitive advantages are substantial. GOO is supplying gas under a 20-year GSA, at a fixed price for the first 10 years of $0.77 per million BTU, then indexed for the last 10 years. This compares very favourably with gas prices in India, at around $2.40 per million BTU.

GOI will purchase the urea production under a 15-year agreement on a take-or-pay basis at predetermined prices. Omifco urea will be on average around $140/ tonne over the life of the offtake contract, compared to $230 ? $350/tonne for urea production costs from naptha-based plants in India.

IFFCO will buy the surplus ammonia production under a 10-year agreement on a take-or-pay basis at a fixed price of $100/tonne.

At 19 million tonnes per year, India is the third largest consumer of nitrogenous fertiliser, behind the US and China. It is estimated that it will overtake US consumption in the next few years, given rapid population growth. This is critical if the government is to meet its objective of doubling agricultural production over the next 10 years.

The next fertiliser scheme in the country is planned by Bahwan Trading, which recently announced a urea take-or-pay agreement with Transammonia, a fertiliser trading company. The three contractors bidding for the scheme are Kruipp Uhde, Snamprogetti/Mitsubishi Heavy Industries and Toyo Engineering. HSBC is financial adviser to the scheme.