Middle Eastern Petrochemicals

Deal of the Year 2013

Sadara:

Big and bilateral

Project financings of over $2 billion usually require multiple tranches, access to multiple financial markets, and multilateral or export credit agency (ECA) support. They also require strong political impetus. The $12.5 billion debt financing for the Sadara petrochemicals project, located in Jubail City, in Al Sharqiya, Saudi Arabia involved seven ECAs and a project bond that launched before commercial bank commitments signed.

Sadara Chemical Company

STATUS

Financial close 28 June 2013

SIZE

$19.3 billion

DESCRIPTION

Construction of at least 24 chemical manufacturing units in Jubail City in Al Sharqiya, Saudi Arabia

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, UK Export Finance, Euler-Hermes, FIEM, Coface, K-Sure, Kexim

BOND ARRANGERS

Deutsche Bank, Riyad Bank, Bank Al Bilad

COMMERCIAL LENDERS

31 banks, including Deutsche Bank, Riyad Bank,

Bank Al Bilad, RBS, Alinma, Banque Saudi Fransi, Samba, ANB, Saudi Hollandi, Al Jazira, NCB, QNB, NBAD, Standard Chartered, JP Morgan, SMBC, BTMU, HSBC, Export Bank of Canada, Korea Finance Corporation

SPONSORS’ INTERNATIONAL FINANCIAL ADVISER

RBS

SPONSORS’ LOCAL FINANCIAL ADVISER

Riyad Bank

SPONSORS’ LEGAL ADVISERS

Shearman & Sterling, and Hatem Abbas Ghazzawi (Dow); White & Case,

and the Law Offices of Waleed N Al-Nuwaiser (Aramco)

BOND ARRANGERS’ LEGAL ADVISERS

Allen & Overy, and Zeyad S Khoshaim Law Firm

TECHNICAL AND ENVIRONMENTAL CONSULTANT

Nexant

LENDERS’ LEGAL ADVISERS

Milbank Tweed Hadley & McCloy, and the Law of Abdulaziz H Al Fahad

EPC CONTRACTORS

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

The Sadara debt package features just the second Middle Eastern sukuk bond – the largest such issue, and the first to precede the signing of commercial bank commitments – and the largest ever direct loan from US Ex-Im, at $4.7 billion. Sadara also persuaded FIEM, the Spanish ECA, to participate in its first-ever project financing.

An enormous bank group – 31 lenders – participated. All but one Saudi bank with project finance expertise joined the financing. Experienced banks played finance banks played key roles, including SMBC, BTMU and HSBC. Some US banks that have generally shunned project finance lending, including JP Morgan, came into Sadara.

The Sadara sponsors Saudi Aramco (65%) and Dow Chemical (35%) managed to keep the structure, including lender identities, commitment sizes, and even final allocations under wraps until just before financial close. State-controlled Aramco imposed this discipline to preserve its competitive edge in negotiations, and dealt with potential lenders – many long-standing relationships – on a bilateral basis. RBS and Riyad Bank were financial advisers to the sponsors.

The Sadara financing is comprised of $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 ECAs. Aramco had planned to issue $1.4 billion in bond debt, but the sukuk proved popular – it was 2.6x oversubscribed – so the sponsor increased that component.

Most ECAs provided cover for bank loans, including UK Export Finance ($700 million), Euler Hermes of Germany ($425 million), Coface of France ($70 million) and K-Sure of Korea ($500 million). ECAs UK Export Finance, Euler Hermes of Germany, Coface of France and K-Sure of Korea provided cover for bank loans. Korea’s Kexim was the only ECA besides US Ex-Im to provide a direct loan, with a $320 million facility.

Aramco and Dow extracted tight and below market pricing on the tranches, benefiting from their size, as well as the implicit support of the Saudi government, and the prospect of bumper revenues. The international US-dollar bank tranche has a pre-completion margin of 125bp over Libor, and then rises to 185bp over the remaining of the loan. The Islamic piece, denominated in Saudi riyals, is priced at the equivalent of 75bp, and then steps to 135bp before maturity.

The sukuk was priced at 95bp over six-month SAIBOR, and has a tenor of 15.75 years. Deutsche Bank, Riyad Bank, Alinma Bank and Bank Al Bilad were mandated lead arrangers on the sukuk. About 60% of the sukuk buyers were banks – a smaller proportion than is typical in Saudi Arabia, giving the bonds a more diverse investor base than normal. The increased sukuk issue also allowed Aramco to reduce individual lender commitments, from as much as $300 million before launch to, in some cases, $50 million at close.

Aramco and Dow developed and refined the design of the $19.3 billion Sadara complex for at least nine years. Along the way, they relocated Sadara to improve its access to existing distribution networks, which delayed the launch of the project’s financing.

Standard & Poor’s has estimated that the project, in its final form, will produce $10 billion in annual revenues. Sadara is poised to feature at least 24 units, including those for the production of ethylene and propylene.