In May 2009 Indian Oil Corporation (IOCL) closed a Rs149 billion ($3.3 billion) 14-year term loan via mandated lead arranger and financial adviser SBI Capital for its Paradip refinery project – IOCL's first project financing and even more notable for its size, tenor and the success of the pre-syndication.

Loan documents were signed by a consortium of 21 lenders led by State Bank of India. The deal entailed arranging $3.3 billion of rupee debt with a tenor of 14 years, with the debt balance of $812.16 million to be tied up by IOCL mainly through foreign currency loans as the project progresses. Paradip has an estimated project cost of Rs335 billion and is funded on a debt equity ratio of 60:40.

The syndication exercise, launched in turbulent times, was successfully completed with an over-subscription of around $201 million – mainly on account of SBI's ability to sanction an $803 million participation in the project.

Bank takes by rupee amounts were SBI Rs46.25 billion; Canara Bank Rs14.5 billion; Bank of Baroda, Central Bank of India, Housing and Urban Development Corp, Life Insurance Corp of India and Union Bank of India Rs9.5 billion each; Indian Overseas Bank Rs6.5 billion; Indian Bank, State Bank of Hyderabad, UCO Bank and United Bank of India Rs4.5 billion; Syndicate Bank pledged Rs3.5 billion; Corporation Bank, Dena Bank and Oriental Bank of Commerce Rs2.75 billion; State Bank of Mysore and State Bank of Travancore Rs1.75 billion each; and Jammu & Kashmir Bank pledged Rs1 billion.

The deal is on the balance sheet of IOCL, however other IOCL assets are ringfenced and lenders only have recourse to the assets of the Paradip project. Certain units of the project can also be segregated and implemented on a BOO/BOOT basis based on IOCL demonstrating the cost benefit analysis to the lenders.

The borrower has flexibility to reduce the un-availed rupee loan by up to 30% and replace these funds through other sources. Furthermore, there is an in-built option to prepay the rupee term loan (RTL) without any penalty by providing a notice to the lenders, and the flexibility to alter the disbursement schedule for the project.

Typical of all Indian projects, interest on the loan is floating rate and comes with reset options. The pricing of the loan is structured such that the borrower benefits from any softening of interest rates but is also shielded from any exceptional movement in interest rates during any year.

A problem for the arranger was the high short-term debt on IOCL's balance sheet at that time. SBI Capital advised the sponsor to make a representation to the Reserve Bank of India (RBI) to exempt the lender limits sanctioned for Paradip Refinery from single borrower norms until the time of actual disbursement. RBI complied.

The refinery is located across the eastern coast of India at Paradip, Orissa on a total land area of 3344 acres. The project includes construction of a 15 mmtpa plant and the associated infrastructure including facilities like township, approach roads, water supply system, crude receipt and storage facilities. The construction work for the refinery project has already commenced and the commercial production is expected to start from August 2012.

IOCL has configured the refinery at a Nelson Complexity Index of 11.18 allowing it to process heavy and sour crude. Paradip refinery would be able to process heavy crude like Kuwait, Maya, Arab Heavy etc. to take advantages of the price differentials between heavy-sour and light-sweet crude.
The refinery will sell products into the domestic and export markets. The project will produce distillates, namely, LPG, naphtha, MS, jet/kerosene, diesel and other products in the eastern and southern part of the country, besides generating intermediate petrochemicals feedstock (Propylene), and enabling synergies in the petroleum value chain for IOCL.

The products will be sold by IOCL through its existing and future marketing network. Being located on the eastern coast and adjacent to the Paradip port, the refinery is in a good position to cater to southern and eastern parts of India, as well as for exports to South-East Asia. The export markets and non-petroleum products are particularly attractive to the sponsors as government regulation of fuel prices has frequently led to financial losses by refiners who are unable to alter their prices to reflect the cost of crude feedstock. This has discouraged foreign companies from becoming involved, part of the reason why all major refiners in the country are India-based.

IOCL is now rumoured to be in talks with Kuwaiti oil companies for an equity partner on the Paradip project – a natural synergy given feedstock supply and IOCL's need for more funding to finish the project.

Paradip Refinery
Status: Financial close 14 May 2009
Description: $6.72 billion 15 MMTPA grassroots refinery and associated infrastructure project including facilities like township, approach roads, water supply system, crude receipt and storage facilities.
Sponsor: Indian Oil Corporation
Lead arranger and financial adviser: SBI Capital
Participants: State Bank of India, Canara Bank, Union Bank of India, LIC, HUDCO, Central Bank of India, Bank of Baroda, IOB, United Bank of India, UCO Bank, State Bank of Hyderabad, Indian Bank, Syndicate Bank, State Bank of Patiala, State Bank of Bikaner & Jaipur, Oriental Bank of Commerce, Dena Bank, Corporation Bank, State Bank of Travancore, State Bank of Mysore, J & K Bank Ltd
Sponsor legal counsel: Koura & Company Advocates & Barristers
Lender legal counsel: Amarchand & Mangaldas & Suresh A Shroff & Co
Technical consultancy: Foster Wheeler Energy Limited