Octal Petrochemicals closed a $562 million dual-currency project financing with local and regional banks on 22 November 2010. Despite the difficult lending environment, the deal placed full market risk with banks for a privately sponsored project and incorporated Oman’s first subordinated tranche for a project financing.

Octal started commercial operations in January 2009 with a production capacity of 292,000 tons per year (tpy) of PET resin and PET sheets in Salalah (Sultanate of Oman). The total project cost for phase 1 was $350 million, partly met with a 10-year $166.5 million debt package arranged by Bank­Muscat in 2007.

The company is now expanding its existing facilities with additional capacity of 527,000 tpy for a total project cost of $212 million. After the phase 2 expansion and de-bottlenecking of existing operations, the installed capa­city will increase to 877,000 tpy. At present, Octal is the largest manufacturer of PET sheets in the world with an installed capacity of 230,000 tpy or about 15% of the world demand. After the phase 2 expansion, it will become the world’s largest PET resin manufacturer from a single location. Octal’s sheet plant is the only plant in the world which uses a new technology called DTS (Direct-to-Sheet). The technology leads to significant savings in the capital as well as operating costs for Octal.

The recently-raised $562 million project financing comprises senior debt facilities of $296 million, a $15 million subordinated tranche and equity of $251 million. Counting the sub-debt as equity the deal was structured with a debt-equity ratio of 55.4:44.6.

“The subordinated market is nearly non-existent in Oman and this is the first time that investors have taken subordinated exposure in a project finance deal,” says Lovekesh Raj, head of corporate finance at BankMuscat. “This is also the second ever instance of a non financial institution tapping subordinated financing. Consequently the transaction had its share of challenges, where we convinced the investors to take a market risk and put their money in a non financial institution.”

The debt pricing and DSCR metrics were not disclosed by Octal, but the financing has covenants that restrict the debt-equity ratio to 2:1. Unusually, the rial tranche pays a fixed rate during the two-year construction period to ensure no financing-related cost escalation during the construction period. Typically Omani lenders provide one-year fixed rate for rial lending and reset the same on an annual basis.

The subordinated lenders include large institutional and high net-worth investors. The DSCR for this was lower than the senior facilities while the maximum debt to equity ratio was higher.

The proceeds of the new financing will refinance the existing debt ($168 million) while the balance, $128 million, will fund the phase 2 expansion which will take the project’s nameplate capacity from 292,000 tpy to 877,000 tpy.

The senior debt is dual currency with around 60% of the financing denominated in US dollars and around 40% in rials. Octal preferred dollar financing over Omani rials primarily due to the depressed Libor rate and the ability to achieve a fixed rate in dollars, since long-term fixed rate pricing is not available in rials. The local lenders, however, were not willing to provide a long-term dollar financing because they cannot borrow dollars long-term at a competitive rate.

Therefore, the senior debt financing was structured to include a 2-year dollar tranche (in addition to a full term 8-year tranche) which could remain in dollars or be converted into rials at maturity at the discretion of the lenders. The solution helped the lenders to address the asset liability mismatch and Octal secured the dollar financing.

“The FX risk on the lenders’ option to convert the two-year dollar tranche is being borne by Octal,” adds Raj. “However con­sidering the fact that the rial to dollar rate is fixed since 1986 and has not changed enabled Octal to take this risk.” The project costs are payable in euros but were fully hedged into dollars at close.

The feedstock used in the process is mono­ethylene glycol and purified terephtalic acid. Both are available, and will be sourced, with­in the region but will not be bought under long-term supply contracts. Similarly the PET resin output is also subject to market risk and there are no offtake contracts. The lenders became comfortable with these because of the large industry size (14 million tons globally) and the fact that Octal would be the lowest-cost producer of PET in the world. Octal’s short but successful operating performance was also a comfort. In the year 2009 and half-year 2010 it demon­strated its ability to source raw materials at competitive prices and sell effectively despite tough market conditions.

To help lenders accept market risk, Octal and its advisers set up an online data room with Merrillcorp to ensure transparency of information sharing with all parties involved. The industry operates on the basis of the melt margin for which the advisers made the last 20 years’ of data available.

Construction is expected to be finished in 2012, with Uhde supplying equipment. The deal comes with no completion guarantees but the lenders have the comfort of access to cash­flows from the existing plant.

“This deal shows that a company with strong attributes and not working in a sector related to the government can raise a large amount of money,” says Nicholas Barakat, managing director at Octal Holding. “It also shows that, when needed, local banks can collaborate to structure efficiently the required financing.” 

Octal Petrochemicals
Status: Financial close 22 November 2010
Size: $562 million
Location: Salalah, Oman
Description: Proceeds of the $311 million dual currency debt package will be used to refinance existing debt and expand production of PET resin and PET sheets to a capacity of 877,000 tpy
Sponsors: Pound Capital, Chemlink Capital, Chemstar Fund, Rockwise Investors
Lead arranger: BankMuscat
Participants: Bank Dhofar, National Bank of Oman, Bank Sohar, Qatar National Bank, Ahli Bank
Financial adviser: BankMuscat
Legal counsel to Octal: Al Busaidi Mansoor Jamal & Co.
Legal counsel to lenders: SNR Denton, Al Alawi & Co
Market adviser to lenders: Townsend Polymer Services & Information
Technical adviser to Octal: Faithful+Gould
Technical adviser to lenders: Mott MacDonald
Insurance adviser to Octal: Aon Majan
Insurance adviser to lenders: Marsh Oman
EPC contractor: Uhde Inventa-Fischer (ThyssenKrupp Group)