Fujian Refining and Ethylene is the second multi-billion dollar petrochemicals project financing to close in China in the past six months, following April's US$2.8 billion refinancing of Shell and CNOOC's Nanhai complex. The US$6 billion Fujian complex will be the first fully integrated refinery and petrochemicals project involving a Sino-foreign joint venture

Like the Nanhai refi, Fujian was done exclusively with Chinese lenders - showing how Chinese banks both public and private have the will and ability to trump foreign banks on pricing at the moment.

This has been causing quite a bit of consternation among the international institutions as they look to crack the booming Chinese market and is resulting in a scramble to form joint ventures with local banks.

The project

The context of this US$4 billion/RMB 30 billion yuan deal hardly needs retelling. China's startling economic growth requires increasing amounts of energy to fuel it, and rising demand for petrochemical by-products too.

To meet this demand Saudi Aramco, ExxonMobil, Chinese giant Sinopec and the Fujian provincial government originally proposed an integrated refining and petrochemicals project in 2004, when they submitted a joint feasibility study to the Chinese government's National Development and Reform Commission (NDRC).

After receiving all necessary individual licences, the Ministry of Commerce issued a final licence in March 2007, allowing the joint venture agreement to be executed and kick-starting the financing process.

The project - called the Fujian Refining and Ethylene Joint Venture Project - involves the expansion of an existing refinery at Quanzhou in Fujian Province from 80,000 to 240,000 barrels a day and the construction of a neighbouring 2.7 million ton per year petrochemicals complex.

The latter facilities will include an 800,000 ton per year ethylene steam cracker, an 800,000 ton per year polyethylene unit, two polypropylene units of 120,000 and 400,000 tons per year respectively, and an aromatics complex to produce 700,000 tons a year of paraxylene. Support facilities including a 300,000 ton crude oil tanker berth and power cogeneration. The EPC contracts are divided between several companies and consortia. Completion is due in early 2009.

The project company is called the Fujian Refining & Petrochemical Company Limited (FREP) and has the following equity stakes:

• Fujian Petrochemical Company Limited - 50 per cent
• ExxonMobil China Petroleum and Petrochemical Company Limited - 25 per cent
• Saudi Aramco Sino Company Limited - 25 per cent

The Fujian Petrochemical Company Limited (FPCL) is in turn 50 per cent-owned by Sinopec (short for China Petroleum and Chemical Corporation) and the other half held by the Fujian Government.

Aramco has a long-term contract with the joint venture to supply Arabian crude to the project, while fuels offtake will be handled by a Fujian Fuels Marketing Joint Venture, formally registered as 'Sinopec SenMei (Fujian) Petroleum Company Limited'. Sinopec SenMei will manage and operate around 750 service stations and a network of terminals in Fujian Province, and has the following shareholdings:

• Sinopec - 55 per cent
• ExxonMobil - 22.5 per cent
• Saudi Aramco - 22.5 per cent

Petrochemicals from the project will be sold into the unregulated part of the market on a pro-rata basis by the sponsors or by the project company itself.

The financing - another all-China lending group

The financing package for Fujian counts as the largest project financing to date for a Sino-foreign joint venture, worth a total of RMB 30 billion yuan/US$4 billion - denominated in a mixture of the two currencies.

Interest from both Chinese and international banks was strong and the financing was many times over-subscribed, giving the sponsors substantial clout on pricing which led to them appointing a 12-strong, all-China bank group with no international tranche.

Chinese lending is regulated so that commercial banks cannot offer a rate for RMB loans which is less than 90 per cent of the People's Bank of China (PBOC) rate (currently at 7.56 per cent for loans of more than five years). Because of this, banks on Chinese project financings compete by aggressively pricing dollar components as was done here.

In this case the dollar component (which consists of less than half of the total US$4 billion debt amount in the deal) was set at LIBOR +25bp for the 15-year duration. The debt/equity ratio was 67:33, so total project cost is close to US$6 billion. The yuan-denominated loan portion has a 20-year term. 

Some of the facilities are dual-currency to give sponsors flexibility. There is a substantial working capital facility included, but the amount has not been released.

The reasons for the strength of the package are pretty straightforward given that the sponsor group consists of the largest national and international oil companies in Aramco and ExxonMobil plus China's biggest refiner Sinopec (state-owned), and the provincial government. Add to that Chinese economic growth, demand for fuels (albeit price-controlled) and petrochemical derivatives and you have a robust package.

There is also a major geopolitical element, as one of the international bidders says: 'The Saudis and Chinese have a strong relationship. The Chinese need energy to fund their economic growth and the Saudis are very keen on China as a new market. So the deal has a lot of strategic significance.'

The sponsors leveraged on these Saudi-Chinese strategic issues in getting banks on board. And they were happy to choose an all-China banking group based on best bids with no international bank tranche.

There were 12 banks involved in the deal, five of them as lead arrangers (with higher loan amounts than the others), as follows:

• China Construction Bank Corporation (public-listed): lead arranger, security agent
• Industrial and Commercial Bank of China (public-listed): account bank, lead arranger, facility agent
• Agricultural Bank of China (state-owned): lead arranger
• Bank of China (public-listed): account bank, lead arranger
• China Development Bank (state owned): lead arranger
• Industrial Bank (public-listed): arranger
• Bank of Communications (public-listed): arranger
• China CITIC Bank Corporation (public-listed): arranger
• China Everbright Bank (state majority-owned): arranger
• China Merchants Bank (public-listed): arranger
• China Minsheng Banking Corporation (public-listed): arranger
• Sinopec Finance (a member of Sinopec Group): arranger

The sponsors have provided completion guarantees on a several basis, configured proportionally to each company's equity stake. Fifty per cent of these guarantees are released when physical completion is attained, with the other 50 per cent to follow after certain financial ratios have been met.

He adds: 'The sponsors were going to work with banks irrespective of bank nationality, so there was no tranche reserved especially for foreign banks. It was a clean competition.'

Some observers have noted that the Chinese banks better understood a project that sells a substantial part of its product into the regulated [price-controlled] fuels market in China - so that gave them an advantage. International banks did bid aggressively, but were priced out of the deal.

For the Marketing Joint Venture an RMB 1.8 billion term loan and RMB 500 million working capital financing was signed on 5 September with China Construction Bank and Industrial and Commercial Bank of China.

The adviser group

Despite only involving Chinese lenders, the financing documentation was done to international standards, and all the advisers were international firms.

HSBC was financial adviser to the sponsors on the deal.

Latham & Watkins, led by Hong Kong managing partner Joseph Bevash and Sabrina Maguire, provided legal advice and prepared loan documentation to the sponsors.

Shearman & Sterling advised the lending group, with partner Andrew Ruff in the lead role. White & Case, led by partner Hallam Chow, advised Saudi Aramco and Saudi Aramco Sino Company Limited (SASCO).

Conclusions

The main conclusion to draw from the Fujian project is the willingness and ability of Chinese banks to finance large-scale domestic infrastructure projects against competition from international banks.

But there is also the fact that major international sponsors like Exxon and Aramco are comfortable sourcing all their debt financing from Chinese banks.

This was also evident in the Nanhai petrochemicals refinancing, in which six Chinese banks bought out a previous deal for Shell and CNOOC from international sources.

As Latham & Watkins' Bevash says: 'The trends you can see are quite obvious. There is no ECA involvement, it is all Chinese commercial banks playing a role and showing their willingness to finance major Chinese infrastructure projects, especially involving Sino-foreign joint ventures.'

The project at a glance