A joint venture between Saudi Aramco and Dow Chemical reached financial close on the $19.3 billion Sadara petrochemicals project on 28 June 2013. The financing for the Saudi complex breaks down into $2.2 billion of uncovered commercial bank debt, a $2 billion sukuk bond issue, a $1.3 billion loan from Saudi Arabia’s Public Investment Fund and $7 billion in contributions from export credit agencies (ECAs).

The plant, once complete, will produce over 60 different products using 26 separate commercial units. Standard & Poor’s estimates that the project will produce revenues of $10 billion a year, with a 2x loan life coverage ratio. For US-based Dow the deal helps it cement its place in the Middle Eastern petrochemicals market, while supplying it with abundant feedstock for its global operations. For state-controlled Saudi Aramco, the project’s ability to close a bond issue demonstrates the growing depth of the Saudi Arabian debt capital markets.

The Sadara bond was launched in March 2013, after the sponsors had received debt commitments from both ECAs and banks, but before any debt had signed. It was the second-ever project finance sukuk to launch in Saudi Arabia, after the $1 billion Satorp issue from 2011. Deutsche Bank, Riyad Bank, Alinma Bank and Bank Al Bilad were mandated lead arrangers on the Sadara sukuk, which was priced at 95bp over six-month SAIBOR and has a tenor of 15.75 years. The sponsors had planned on raising $1.4 billion from the issue, but the bonds were 2.6x oversubscribed. They subsequently increased the size of the bond component to $2 billion.

With the bond tranche increased, the sponsors were able to fix the size of the debt allocations for the ECAs and banks, and their commitments were over 2x oversubscribed. Saudi Aramco has a reputation for conducting deals in its own way, because it is flush with oil revenues and central to the Saudi economy. On Sadara, it imposed a high level of secrecy on each of the participants, wanting to maintain its competitive advantage. None of the commercial lenders were entirely sure who else was on the deal until the signing of the commercial tranche, and Aramdo did not inform lenders of the exact size of the debt allocations until a few weeks before close.

The participation of ECAs broadly followed the amount of content that the sponsors procured from their respective countries, but the sponsors were able to reduce each of their initial commitments. In the final breakdown, US Ex-Im was the largest direct lender, providing $4.7 billion to the project. This is the largest ever loan from US Ex-Im and underlines how important the US government thinks the deal is for Dow. Sadara has also brought FIEM, the Spanish ECA, into the project finance market for the very first time. It has lent $225 million directly, to support the involvement of Tecnicas Reunidas, which holds one of the numerous engineering, procurement and construction contracts connected to the site.

Kexim of Korea was the other ECA to lend directly, with a $320 million contribution. It also has provided $80 million in cover for a bank-funded piece. The four other ECAs participating have also covered bank-funded loans: UK Export Finance (formerly ECGD, $700 million), Euler Hermes of Germany ($425 million, Coface of France ($70 million), and K-Sure of Korea ($500 million). These guarantees are generally linked to lenders of the same country, although the K-Sure piece covers Saudi banks. This helped keep the pricing down on its piece, as its covered debt often carries a higher margin than other ECAs. On top of the ECA piece, Saudi Arabia’s Public Investment Fund has lent $1.3 billion.

The $2.2 billion bank facility was split equally between Islamic and commercial debt. A bulging bank group of 31 provided the loans. The only Saudi Bank with a history of project finance lending missing from the club is Al Rajhi, with Riyad Bank (also a financial adviser to the sponsors), Bank Al Bilad, Alinma Bank, Banque Saudi Fransi, Samba, Arab National Bank, Saudi Hollandi, Al Jazira Bank and National Commercial Bank all present. Other banks from Gulf Cooperation Council states in the deal include Qatar National Bank and National Bank of Abu Dhabi.

Some of the international lenders involved were Deutsche Bank, RBS (also financial adviser to the sponsors), Standard Chartered, SMBC, BTMU, HSBC, Export Development Canada and Korea Finance Corporation. The involvement of Dow as a sponsor meant that US banks came into into the deal, among them JP Morgan, which participates extremely sparingly in project financings.

The strength of the sponsors, the implicit support from the Saudi Arabian state in the event of default, and the huge revenues predicted from the facility have pushed the debt pricing well below current market levels. The international bank component will have a pre-completion margin of 125bp over Libor before increasing to 185bp over the life of the loan, while the local Islamic component will be priced at the equivalent of 75bp before stepping up to 135bp before maturity. The international tranche was denominated in dollars, while the local piece was in Saudi riyals.

Sadara is the world’s largest petrochemical complex to be built in one phase and there are a huge number of contractors needed to meet the supply, construction and operation requirements of the plant. Saudi Aramco will be providing the feedstock, Saudi Electric Company is providing power, and fuel in the form of gas will be supplied by the Saudi state, but many of the EPC contracts have been won by foreign firms. Fluor, through its UK operations, will manage the utilities and off-site facilities; Jacobs Engineering of the US won the chemicals 1 envelope contract and the contract for three polyethylene trains; ABB of Switzerland is the main automation contractor; Foster Wheeler is constructing the site’s propylene oxide unit and packaging centre; Germany’s Linde is building a HyCO facility and an ammonia unit; Tecnicas Reunidas is constructing a unit for six chemical products, and Maire Tecnimont of Italy will build a manufacturing unit at the complex.

The Sadara complex is located in Jubail Industrial City in Al Sharqiya, Saudi Arabia, is expected to begin operations during the second half of 2015 and be fully complete by 2016. The plant will produce polyurethanes, propylene oxide, propylene glycol, elastomers, linear low density polyethylene, low density polyethylene, glycol ethers and amines. Korea’s Daelim is the engineering, procurement and construction contractor for the plant’s main mixed-feed cracker, which on its own will produce 1.5 million tonnes per year (tpy) of ethylene and 400,000 tpy of propylene. The complex will have its own 178,000 cubic metre desalination plant, which Veolia will manage.

The sponsors have provided completion guarantees, and the sponsors are obligated to repay bondholders in full if the plant is not complete by 31 December 2020. The sponsors will launch an initial public offering for the plant, with 30% of the equity set to be sold down to Saudi public investors. The project documents require Dow and Saudi Aramco to remain in possession of 51% collectively, or at least 20% each, of the project’s equity before construction is complete. 

Sadara Chemical Company

STATUS

Financial close 28 June 2013

SIZE

$19.3 billion

DESCRIPTION

Construction of 26 chemical manufacturing units in Jubail City in Al Sharqiya, Saudi Arabia, which will produce ethylene, propylene and a variety of chemicals.

SPONSORS

Saudi Aramco (65%),

Dow Chemical (35%)

DEBT

$2 billion sukuk, $2.2 billion uncovered commercial bank debt, $1.3 billion PIF piece and $7 billion in export credit funding.

ECAs

US Ex-Im, Kexim, UK Export Finance, Euler-Hermes, Coface, K-Sure

BOND ARRANGERS

Deutsche Bank, Riyad Bank,

Bank Al Bilad

COMMERCIAL LENDERS

A 31-strong club that includes Deutsche Bank, Riyad Bank,

Bank Al Bilad, RBS, Alinma,

Banque Saudi Fransi, Samba, ANB, Saudi Hollandi, Al Jazira, NCB, QNB, NBAD, Standard Chartered,

J P Morgan, SMBC, BTMU, HSBC, Export Bank of Canada,

Korea Finance Corporation.

SPONSORS’ INTERNATIONAL FINANCIAL ADVISER

RBS

SPONSORS’ LOCAL FINANCIAL ADVISER

Riyad Bank

SPONSORS’ LEGAL COUNSEL

Shearman & Sterling, White & Case

LENDERS’ LEGAL COUNSEL

Milbank, Tweed, Hadley & McCloy

EPC CONTRACTORS

Daelim, Fluor, Jacobs Engineering, ABB, Foster Wheeler, Linde, Tecnicas Reunidas, Maire Tecnimont

Sadara's contractual structure