Financial close for the $2.4 billion Jurong Aromatics Corporation greenfield petro­chemical project took place in May 2011. The financing faced several challenges, and was originally scheduled to close in the midst of the global financial crisis. But the sponsors and other stakeholders showed commitment and confidence in the project, by supporting a restructuring that better reflected the new market conditions, and led to the successful close. Jurong is a complicated project and its progress could never have been rushed, so the staying power of the stakeholders was critical to keeping the financing on track.

The Jurong Aromatics project involves the development of a 4.5 million tonnes per year condensate splitter and aromatics faci­li­ty to be built on Jurong Island, Singapore. Singapore is strategically located at a cross­roads between buyers in the Asian markets and feedstock suppliers in the Middle East and Australia, making it an ideal hub for the petroleum and petrochemical industries. Jurong Island has a concentration of other petrochemical facilities, ensuring the avail­ability of an experienced and skilled work­force as well as reliable centralised utilities. Few alternative locations offer the synergies required for such an integrated project. The project will produce 1.5 million tonnes per year of aromatics and 2.5 million tonnes per year of transport fuels.

Whilst petroleum products make up a large proportion of the total production, the aromatics production is the key driver for the project economics. Notably, all of the feedstock requirements and practically all of the output are contracted under long-term evergreen agreements.

The financing is significant in many respects:

• There is no recourse to the sponsors beyond their initial equity commitments and as such is very different to the majority of large-scale petrochemical projects in the Asia region that rely significantly on spon­sor support and/ or guarantees.

• There are no completion guarantees, with lenders relying on true lump-sum turnkey engineering, procurement and construction contracts that have virtually disappeared from the market over the last 10 years as EPC costs soared, and the premium for lump-sum contracts followed.

• Lenders take on full price risk, mitigated by a flexible repayment scheme and the first quartile position of the project in terms of cost of production.

ING Bank was both financial adviser and coordinating mandated lead arranger.

Project background

Key project features:

• Worldscale standalone aromatics complex

• Upstream condensate splitter ensures feed­stock supply security

• Products configured to maximise margins

• Products are essential daily commodities with demand tied to GDP growth and are basic chemical building blocks for wide applications

• Optimal regional location to minimise supply chain costs

• Infrastructure set-up optimised based on the third party services and facilities avail­able on Jurong Island

• State of the art/proven technology, reput­able EPC contractors and operator are important success factors

• Production volume fully contracted, lower­ing costs and enhancing cash flow maxi­misation

Typically the major international oil/ petro­chemical companies have developed such large-scale petrochemical projects, with only one or two other parties, often national oil companies. Chemone, a joint venture between Vijay Goradia and Hadiran Sridjaja, is the project developer and created the opportunity for some non-traditional participants to gain exposure to the sector. This equity participation also helped to align the interests of the different parties involved in the project with the EPC contractors, suppliers and offtakers all taking a stake. JAC’s sponsors, with their respectively shareholdings are:

• SK International Investment Singapore (30%), an entity controlled by SK Engi­neering & Construction Jurong Investment, SK Global Chemical and SK Gas International;

• Sanhai International Development (25%), an entity fully owned by Jiangsu Sanfang­xiang Group of China, the largest poly­ester producer in China;

• Arovin (10.5%), a company owned by Vijay Goradia, the founder, chairman and majority shareholder of the Vinmar Group, involved in the global trading, distribution and marketing of chemicals and polymers;

• Glencore International (10%), one of the world’s largest commodity trading com­panies, through wholly owned entity Singfuel Investment;

• Shefford Investments (9.5%), a company owned by the Sridjaja family, including Hadiran Sridjaja, who has extensive ex­perience in the petrochemical business and has been involved in the development and expansion of both greenfield and brown­field petrochemical plants in South East Asia;

• UVM Investment Corporation (5.1%), an investment entity owned by the share­holders of Thai KK of Thailand, a joint venture of Thai Eternal Group and Taiwan Eternal Group, involved in the manufacturing of label, tape, melamine and urea moulding compounds;

• The investment arm of the Economic De­velopment Board of Singapore (5%); and

• Essar Projects (India) (4.9%), through its wholly owned subsidiary Kadmos Hold­ings, a subsidiary of the Essar Group.

The SK Group has a significant interest in the project, not just as an equity investor but also in its role as EPC contractor for the inside battery limits works, which comprise the condensate splitter and aromatics facilities, as operations & maintence services provider, as a supplier and as an offtaker.

Whilst BP is not an equity holder, it is a provider of subordinated debt to the project, thus taking on some quasi-equity exposure and aligning its interests with the other suppliers and offtakers that do hold equity.

The project was always meant to be funded on a non-recourse basis, which is reflected in the commercial and contractual framework. The two EPC contracts have been awarded to SK Engineering & Con­struction and Essar Projects, both of which have significant experience relevant to their scope of work, and are on a lump-sum turnkey basis with liquidated damages to cover delays or construction flaws. In addi­tion, there is a fully funded $200 mil­lion contingency available for cost over­runs plus a $75 million standby letter of credit from the sponsors resulting in a total contingency of $275 million or 17.2% of project costs subject to escalation. The project com­pany has also procured delay-in-startup insur­ance to cover delays not attributable to the EPC contractors.

UOP is the technology provider for both the condensate splitter and aromatics plant and has licensed the majority of similar facilities that are in operation globally. Worley Parsons has been contracted to provide project management services, and SK Energy’s role as the operations and maintenance services provider commences with the start of construction to ensure a practical implementation of the design and a swift transition to operations at completion of construction.

Flexible repayment schedule

Margins in the petrochemical sector are notoriously cyclical. There is little that the project can do to manage this, but Nexant (the lenders’ technical and market consultant) confirmed that “Given its proposed positioning as a modern world scale pro­ducer, Nexant fully expects JAC to be among the top quartile of producers both in Asia and the Mid-East in terms of cost” and added that “In the event of an industry downturn Nexant considers that there are a limited number of relatively disadvantaged facilities (~20-30% of regional capacity) which would most likely be impacted first, and hence reduce operating rates, owing to feedstock position, scale or old technology. Given, JAC’s stronger competitive position and sales being secured on long-term off-take agreements, it is likely to continue to operate at relatively high utilisation levels”. Operating at high utilisation rates is important operationally to ensure high efficiency, but also supports the cashflows required to meet debt service obligations.

In addition to these competitive advan­tages, the financing has been structured to allow flexibility in repayments to accommodate the fluctuations in cashflows associated with volatile petrochemical margins. With a traditional fixed repayment schedule, deferrals of principal repayment have to be made to accommodate weak cashflows, which means lenders rely on a future recovery in margins to catch-up on re­payments. JAC has a flexible repayment scheme whereby under most scenarios a cash sweep operates such that repayments follow a more aggressive cumulative target repayment schedule. This allows the lend­ers to capture some of the benefit of periods of good margins and in return requires that in periods of weak margins the borrower only meets a cumulative Man­datory Repay­ment Schedule. Effectively, to the extent that prepayments have been made during periods of good margins, the project can enjoy a grace period during periods of weak margins. This approach found favour with the lenders and when tested using historical margins would have allowed the project to meet all debt service obligations through the Asian economic crisis of 1998-2002 and global financial crisis of 2008/9.

Financing structure

The base case project costs are $2.2 billion, which is first funded from equity, then subordinated debt and only then drawings on the senior debt, which includes contingent funding of $200 million, while an additional $75 million standby letter of credit from the sponsors is available to meet cost overruns and to fund the debt service reserve account if not used. In addition to the paid-in capital, the project will also be funded with $161 million of subordinated debt, which will be provided by BP and two financial institutions.

At financial completion, the debt service reserve will be funded with $75 million as part of the project costs, with the sponsors making available an additional $75 million in the form of the standby letter of credit mentioned above (to the extent it is not used to meet cost overruns). This initial funding of the reserve of up to $150 million will provide a substantial buffer to cover debt service during the initial period of operation when projects typically come under most stress.

In the base case this results in a debt-to-equity ratio (including the subordinated debt) of 60:40 at financial completion. If all of the contingent funding is fully utilised, the debt-to-equity ratio would be 64:36.

Door-to-door tenors are inclusive of an approximately 3.5-year construction period. Banks were invited to participate pro rata in the facilities, but could choose how they split their participation between tranche A and tranche B of the commercial facilities.

The strong support received from the Korean export credit agencies is notable. Kexim had been involved in the project from the very early days, offering a direct loan as well as a guarantee (in a 55/45 ratio). K-Sure joined the project when the financing was being restructured in the midst of the global financial crisis, attracting some much need­ed liquidity. Both agencies provided 100% comprehensive cover.

The senior debt is secured by a pledge of shares (excluding the 5% that Singapore’s Economic Development Board holds) in the project company, mortgage over fixed assets, and assignment of project accounts, project agreements and insurance proceeds. Project revenues will flow through controll­ed accounts charged to lenders according to a typical project financing cash waterfall. Interest rate hedging counterparties are secured pari passu with the senior lenders.

The strong competitive position of the project and the flexible refinancing scheme results in a robust debt servicing capacity, as illustrated below. The banking case assumes a cost overrun of $100 million.

Banking case financial projection results

Equity (incl. subordinated debt and sponsors’ SBLC),  $884,670,000

Senior debt , $1,452,464,000

Debt-to-equity ratio - 62:38

Initial loan life coverage ratio - 2.07x

Minimum debt service coverage ratio based on required mandatory repayment schedule payments - 1.85x

Syndication process

Making use of its natural resources finance group, separate to its dedicated natural resources advisory business, ING Bank ad­di­tionally acted as coordinating mandated lead arranger with Royal Bank of Scotland to syndicate the facilities on a book building/club deal basis. The syndi­cation closed over­subscribed, with 11 banks joining the financing.

Conclusion

The JAC financing is a return to classical project financing, truly non-recourse, moving away from the quasi-corporate or guaranteed deals that marked recent years and is likely to open the door for sponsors outside of the big multinationals to perhaps develop similar large-scale projects in the sector. Whilst the timing of the initial launch of the project could not have been worse in the midst of the global financial crisis, with some clever restructuring the project was still able to reach a financial close and incorporate some novel features such as the completion risk mitigation package, an innovative approach to reducing the working capital funding requirements, flexible repayment scheme and use of subordinated debt (unique for a greenfield project in this sector).

Ultimately the success can be largely attri­b­u­ted to a combination of the following factors:

• Strong sponsor group with on-going stra­t­egic and economic interests in the project

• Strong support from Korean government, 74% of bank funded debt covered by Kexim and K-Sure

• Strong EPC contracting framework with experienced parties and a high level of project contingency

• Fully contracted supply and offtake

• Comprehensive security package

• Conservative debt/equity ratio and flexible repayment scheme to mitigate market risk

• Robust economics and strong competitive position ¦