SIBUR, the Russian petrochemical company and SolVin, a part of the Solvay group, signed the financing on 17 June for RusVinyl, which will be Europe’s largest integrated polyvinyl chloride (PVC) plant once constructed. The project will sell the bulk of its production on the domestic market once it enters operations.

The deal is an important milestone for the financing of energy and infrastructure projects in Russia because it is the first time that international banks have been prepared to accept full merchant risk in the Russian market, although they benefit from export credit agency cover.

“This [project] doesn’t have any long-term offtake contracts at all, which is very unusual in the project finance market for petrochemical projects globally,” explains Stephen Bedwood, head of project finance for oil, gas & petrochemicals in Europe at HSBC. “The limited cases where lenders have previously accepted market risk have been in more mature project finance markets like the Middle East. For a project in Russia, that is a very distinctive feature and makes it a first of its kind.”

The ability to accommodate commercial banks, a Russian bank and the European Bank for Reconstruction and Development, all under a single facility agreement that is consistent with Russian law, made the deal a benchmark. “The achievement itself was to bring together under the same project documentation several banks with very different approaches. For example, Sberbank usually lends under Russian law, the EBRD usually lends under the A/B loan structure and it doesn’t lend under the more conventional syndicate structure, as happened in RusVinyl”, explains Pavel Ananienko, director of SIBUR’s treasury department

Russia’s petrochemical sector has lagged behind some of its international competitors ever since the collapse of the Soviet Union, partly because of a lack of investment in technology and infrastructure. As a result, the Russian government gave the project priority status, as part of its wider aim to reduce Russia’s reliance on raw oil and gas exports.

The sponsors closed the deal for RusVinyl, whose total project costs are around Eu1.5 billion, on 17 June. The sponsors eventually settled on a combination of international and Russian bank, and multilateral support. “It was always our intention [to seek commercial bank support] except for a very short period during the time of the financial crisis when we also explored other options not involving international banks. But the combination of tenor and pricing that is usually available under ECA-covered lending is extremely attractive”, says Ananienko.

The financing comprises an 11-year Ruble-denominated loan for the equivalent of Eu150 million from Sberbank, a Ruble- denominated Eu150 million equivalent 11-year loan from the EBRD and Eu450 million in ECA-covered, commercial bank debt, funded by BNP Paribas, HSBC and ING. All four tranches rank pari passu. First drawdown on the debt was 31 October.

The ECA facilities are split between a Eu350 million Coface tranche and a Eu100 million tranche from Belgian export credit agency ONDD. Technip’s role as engineering, procurement and construction management contractor is the reason the coverage from Coface, while Solvay’s participation in the joint venture led to ONDD’s support.

The ECAs are providing banks with 95% political risk insurance and 85% commercial risk. The debt is fully amortising and the average life is 6.7 years post-construction. The reason the ECAs are covering a comparatively low proportion of the commercial risks is because of the absence of any uncovered commercial tranches.

During construction, lenders will have recourse to the sponsors through a debt service undertaking, which will only be released when the project meets both commercial and technical tests. Once operations start, the sponsors are providing a small liquidity facility to protect the project’s cash flows from the cyclical nature of PVC demand.

The financing is rounded off with Eu750 million in equity, leading to a gearing of 50%. This conservative level is a reflection of the deal’s merchant risk. The equity is split 50:50 between the two sponsors. The EBRD co-invests in the joint venture with SolVin and so will provide part of the equity through Solvin’s investment in the project.

Though revenues will predominantly be ruble-denominated, around half of project debt will be made in euros, which places the project at the mercy of currency fluctuations. The sponsors decided against hedging this foreign exchange risk since there is very little arbitrage between PVC markets in Europe and Russia. The sponsors mitigated this risk partly through a mandatory euro acquisition programme, whereby RusVinyl will build up a reserve of euros for servicing debt.

Interest rates are fixed on all four tranches. The EBRD and Sberbank are fixing the rate with reference to previous ruble financings, while the commercial bank tranche uses the CIRR rate offered by Natixis and Finexpo for euro funding as a benchmark.

The plant will be built at Kstovo in the Nizhny Novgorod region of Russia, with construction already under way and commissioning expected in 2013. Production capacity will be 330,000 tonnes of PVC and 235,000 tonnes of caustic soda per year, with the flexibility to further increase capacity up to 500,000 tonnes of PVC per year by 2016. The plant will use Solvay technology to produce a range of PVC that Russia does not currently manufacture.

RusVinyl LLC
STATUS: Financial close 17 June
DESCRIPTION: Construction of Europe’s largest ever PVC plant at Kstovo in the Nizhny Novgorod region, Russia
SIZE: Eu1.5 billion
SPONSORS: SIBUR, SolVin
MLAS: BNP Paribas, HSBC, ING, Sberbank
OTHER LENDERS: European Bank for Reconstruction and Development
ECAS: Coface, ONDD
FINANCIAL ADVISER: HSBC
SPONSORS’ LEGAL ADVISER: White & Case
LENDERS’ LEGAL ADVISER: Linklaters
MARKET ADVISER: Nexant
INSURANCE ADVISER: Marsh
ENVIRONMENT ADVISER: ERM
EPC CONTRACTOR: Technip