The consortium behind the Jurong Aromatics project in Singapore signed off on US$1.557 billion in debt commitments this year, putting two years of delays behind it to seal a project finance package in support of the total US$2.5 billion cost.

The project SPV Jurong Aromatics Corp (JAC) was forced to delay the development in 2009 due to the difficultly in raising debt finance in the international market. However, the sponsors remained committed to the aromatics development despite the cancellation of various other oil focused schemes in Singapore as the net closed on the loan market during the financial crash.

Supermajors ExxonMobil and Royal Dutch Shell already own stakes in petrochemical projects on the major industrial site of Jurong Island, home to a collection of downstream refining terminals processing 1,300,000 barrels of crude oil per day.

The Project

The JAC scheme involves the development of a condensate splitter and aromatics facility producing 1.5 million tonnes of aromatics per year and 2.5 million tonnes of transport fuels per year. The plant will be onstream by 2014 with construction starting earlier this year [Projects Database].

The major sponsors of the project are the SK Group of Korea, the Jiangsu Sanfangxiang Group of China and Glencore. In addition to being both a supplier and offtaker, BP is also providing a subordinated debt facility to the project. SK Group is the project's largest shareholder, as well as being a major EPC contractor, supplier and offtaker and providing O&M services.

Singapore's government also holds 5 per cent equity in the scheme through the Economic Development Board's investment body illustrating the strategic value of the project to local authorities.

Usually petrochemical projects of this kind are sponsored by major international developers and often by a joint venture between just two international companies. This project gives a direct interest in the scheme to both state-owned and smaller medium cap companies.

At present, the global aromatics markets is particularly attractive because producers in the Middle East do not have the same feedstock pricing advantages that they do in the polyolefins markets, which has been further aided by switches in cracker feedstock in the US from oil to the much cheaper gas reducing the amount of heavier feedstock (suitable for aromatics production) coming to the market.

The Finance

The major challenge facing the financing was the collapse of the markets in 2008 and 2009. Bruce Macfarlane, who led ING Bank's advisory arm on the project, comments, “The most significant challenge was timing – when the deal was first launched it was just as the world was being thrown into the financial crisis and liquidity was disappearing almost as quickly as risk appetite.”

This led to the project timeline being amended and the eventual incorporation of more Korean export credit agency (ECA) support in addition to the direct lending already assured. “As liquidity returned more quickly than risk appetite, a Ksure covered facility was introduced alongside the Kexim facilities that had always been there, greatly reducing the amount of project risk that the banks had to take”, Macfarlane adds.

A total of 11 banks committed to deal:

• ING Bank
• RBS
• ANZ
• BNP Paribas
• DnB
• DZ
• KDB
• KfW
• Intesa
• Natixis
• Standard Chartered

The debt is broken down into the following tranches:

• US$618 million K-Sure Covered Facility priced at 215bps and maturing over a 10 year tenor
• US$278 million K-Exim Guaranteed Facility priced at 215bps and maturing over a 15.5 year tenor
• US$156 million Commercial Facility A priced at 325bps and maturing over a 10 year tenor
• US$50 million Commercial Facility B priced at 425bps and maturing over a 15.5 year tenor
• US$115 million Working Capital Credit Facility priced at 270bps and maturing over a 5 year tenor
• US$340 million K-Exim Direct Funding Facility funded by K-Exim and maturing over a 15.5 year tenor

The K-Sure Covered Facility and the K-Exim Guaranteed Facility will each benefit from 100 per cent comprehensive cover by both K-Sure and K-Exim respectively.

Macfarlane notes, “When the syndication was launched liquidity was returning but risk appetite was limited as evidenced by the majority of banks opting for the 10 year uncovered tranche over the 15.5 year uncovered tranche. A targeted approach was taken, which paid off with half the banks joining the deal at the top level and resulting in an oversubscription of 1-2 banks.”

Unlike other petrochemical projects to have closed over the last decade, JAC has no completion guarantee incorporated into the financing with the sponsors opting to avoid such conditions given the added pressure it would put on construction risk factors.

The lenders also benefit from a cash sweep mechanism, up to a cumulative target repayment schedule, when margins are good but the borrower is only required to meet a cumulative Mandatory Repayment Schedule when margins and cashflows are weaker, according to Macfarlane.

“This gives the lenders the benefit of capturing some upside in margins accelerating loan repayments to provide a cushion against periods of low margins, rather than the more traditional approach of deferring principal which relies on future margins improving to catch-up on debt repayments,” he adds.

RBS and ING acted as joint co-ordinating banks, with the latter acting as financial adviser on the deal.The borrower’s legal counsel was Latham & Watkins and the lenders legal counsel was Milbank, Tweed, Hadley & McCloy.

The Future

JAC as a deal could see the reawakening of the petrochemicals project finance market in Singapore. The success of structuring such a targeted deal will no doubt give heart to other smaller companies seeking debt to back downstream projects in the region.

"The success of JAC with respect to avoiding sponsor completion guarantees and structuring a deal where lenders accepted some petrochemical sector risk will open the market for many other players to develop projects and not just limit the sector to those major oil companies with very large balance sheets," Macfarlane concludes.