The $900 million refinancing for Kuwait's Equate Petrochemical company was signed oversubscribed on 21 November 2001. It was the only big-ticket deal to come to the Kuwaiti market last year at what was a particularly difficult time for the region. Its rarity value ? combined with its timing and the speed with which it was done ? are all factors which sit exceptionally well for bankers and borrowers alike. The overwhelming majority of banks which took a piece of the restructured project debt were regional, a fact which demonstrates the high level of liquidity and solid appetite for Kuwaiti risk in the regional market. The deal replaces a 1997 project finance loan with a corporate loan and is the last stage of a landmark project financing.

Equate is a joint venture between Kuwait's state-owned Petrochemical Industries Company and Dow Chemical (each owns 45%). The remaining 10% is held by Boubyan Petrochemicals, a vehicle created to finance Equate. ?What we've proved is that a significant package can be put together with primarily regional support and this is a milestone achievement for similar deals going forward,? says National Bank of Kuwait's assistant general manager, Graham Parker. National Bank of Kuwait and Citibank lead arranged the conventional debt.

The company had become under-leveraged and was seeking more flexibility. The refinancing aims to ease the more restrictive project finance facility which had been put in place on the original deal by shifting to more corporate terms. ?The covenants are now much more flexible from the sponsor's perspective,? says Sikander Zaman, managing director of Citibank's project finance department in London. ?It has achieved the client's and shareholders' objective of making this a standalone company operating on its own terms.?

The conventional debt divides into two tranches: a five-year $300 million revolving credit facility and a 10-year $400 million term loan. Banks committed to these on a pro-rata basis. Both tranches pay a margin of 80bp over Libor for their duration. This maintains the margin of the previous refinancing, which was completed in late 1997. The original deal itself was signed in 1996.

JP Morgan, which participated in the original deal, did not participate this time. The significance of this has been downplayed and is put down to the bank's new strategies subsequent to its merger with Chase. Some suggest that 80bp for 10-year money was not the most comfortable ticket for international players. But, says Zaman, ?We felt there was no justification for increasing the pricing over 80bp. At the end of last year people were flexing prices on other regional deals but we thought this was ultimately most favourable for the client.?

Participants at the co-arranger level were: Al Ahli Bank of Kuwait; Bank of Bahrain and Kuwait; Burgan Bank; Mizuho Financial Group; Arab Petroleum Investments Corp (Apicorp); Bank of Kuwait and the Middle East; Commercial Bank of Kuwait and Sumitomo Bank. Each is taking allocations of between $50 million and $80 million.

The third tranche is a $200 million 10-year Islamic lease facility, lead arranged by Kuwait Finance House. Several other regional Islamic finance institutions also came on board.

The original deal totalled $1.9 billion and was notable for its hybrid conventional and Islamic financing approach, heavily backed by export credit cover. US Ex-Im, Sace and Hermes all participated on the deal. The loan facility was for $1.2 billion in two tranches. The first was for $500 million, with a tenor of 10.5 years and was priced at 162.5bp pre-completion and 187.5bp after completion. The second tranche, drawing both international and regional support, was for $700 million. It had the same pricing, though its tenor was 8.5 years. Both tranches included a $100 million Islamic financing portion, underwritten and syndicated by Kuwait Finance House. The deal was refinanced for more flexibility in 1997, when the margin was brought down to 80bp for the pre-completion period.

The current deal refinances a significant Islamic portion, which draws attention to the growing relevance of Islamic instruments for regional project deals. Says a source close to the deal, ?There was substantial interest from non-Islamic lenders for this facility as well. A growing number of market participants are showing interest as quality medium-term Islamic assets have been hard to find.?

The project came on stream in 1997. It is one of the only state-backed groups in Kuwait that turns a profit. Indeed, its positive outlook is reflected by the enthusiasm for the refinancing. Equate made record profits of more than $180 million in 2000 although it was hit by the slowdown of the global economy last year. A major factor in its favour is its access to low-cost natural gas feedstock (ethane) and its status as preferred supplier. The plant produces 800,000 tonnes per year of ethylene and 600,000 tonnes per year of polyethylene. The bulk of the output is sold to Asia, with a smaller percentage filtering out to European and Middle Eastern markets.

But challenges do exist. Gas price volatility and concerns about finding sufficient domestic natural gas (ethane) supplies (on which the plant relies) could pose problems for Equate. Another issue for sponsors and lenders to consider is potential regional competition in the future. New petrochemical facilities have been planned or financed in Qatar, Bahrain and Saudi Arabia.

A new greenfield scheme, dubbed Equate II, is now on the drawing board. The estimated $2 billion project will be set up as a joint venture between PIC and a foreign partner. Dow's selection is as yet uncertain as PIC is understood to be in talks with a number of possible competitors. The new olefins plant will have a capacity of 850,000 tonnes per year of ethylene, 450,000 tonnes per year of polypropylene and 430,000 tonnes per year of ethylene glycol.