Middle East Ventures Get Positive Financing Response With Good Lending Rates.

Financing for downstream projects in the Middle East remains large, in most cases competitive, and the prospects ahead are positive. This is despite the fall in world oil prices and the financial crises in Asia, Russia and Latin America. Rich in liquidity, local and regional banks are playing a bigger role in energy finance together with international banks.

Saudi Arabia this year has seen a number of ventures financed at fairly low lending rates. They have included three large petrochemical projects for which financing has totalled almost $1.5 bn. The best deal among these, a five-year loan of $350m, was secured at 35 basis points above Libor by Chase Manhattan Bank, Riyad Bank and Sumitomo Bank for the Saudi Aramco Mobil Refinery Company under an agreement signed in June 1998.

The lowest lending rate for any project in the Middle East this year went to Dubai Aluminium Co. (Dubal). Under a deal signed in July and arranged by Barclays Capital, Dubal got a package of $270m at 25 basis points above Libor to finance expansions at its aluminium smelter.

Abu Dhabi Polymers Co. (Borouge), owned 60% by Abu Dhabi National Oil Co.

(ADNOC) and 40% by the plastics giant Borealis of Copenhagen, wants to raise an international loan at a competitive rate to finance its complex in Ruwais.

The contract for the 600,000 t/y ethylene plant based on ethane was won on Nov. 10 by a partnership of Linde of Germany and Bechtel of the US. A contract for the two 225,000 t/y polyethylene units will be awarded by mid-1999, with the whole complex to be on stream in 2001.

Borealis, Europe's biggest producer of raw materials for the plastics industry, is owned 50% by Statoil of Norway, 25% by Abu Dhabi's International Petroleum Investment Co. (IPIC) and 25% by OeMV. IPIC has 19.6% stake in OeMV, the biggest company in Austria.

Despite the impeccable credit ratings of its owners, however, Borouge is not likely to get as low a lending rate as the one secured for Dubal.

Lending rates for Middle East project finance have risen in recent months. But they remain fairly low relative to other parts of the world, in view of a general rise in lending rates, the financial crises in Asia, Russia and Latin America and the fall in oil prices.

Another test case is the proposed $450m loan for the Qatar Vinyl Co. (QVC), a joint venture between Qatar Petrochemical Co. (31.9%), state-owned Qatar General Petroleum Corp. (25.5%), Norsk Hydro of Norway (29.7%) and Elf Atochem of France (12.9%). QPC is to have a complex at Umm Said to produce 340,000 t/y of ethylene dichloride, 200,000 t/y of vinyl chloride monomer (VCM) and 260,000 t/y of caustic soda.

Last week, the QVC partners were trying to get the lending rate to be less than the proposed 90 basis points (bp) above Libor, pointing to the rate of less than 65 bp applied in the $500m-plus loan secured for Qatar's state-owned National Oil Distribution Co. under a deal signed on Nov. 17.

The banks approached for the QVC loan asked for 90 bp. The lead arranger for QVC is Banque Paribas. QVC's loan is to be for eight-and-a-half years and will involve multiple arrangers.

Projects in Qatar awaiting the outcome of the QVC financing effort include the Qatar Chemical Complex (Q-Chem), which is having a 500,000 t/y ethylene cracker, a 467,000 t/y HDPE and LLDPE plant and a 50,000 t/y hexene-1 unit built at Umm Said (as a JV of QGPC and Phillips Petroleum of the US); and Qatar Hot Briquetted Iron Co. (Qabico), to have a 2m t/y HBI plant at Umm Said (as a JV of Qatar Steel Co., Duferco, Kuwait's National Industries Co., Gulf Investment Corp, Qatar Industrial Manufacturing Co., and Qatar Shipping Co.).

Other project financing plans in the Gulf awaiting the outcome of this are those of Saudi Arabia, Abu Dhabi, Oman and Kuwait.

(The investment climate in Qatar is improving further with a new corporate law, to be approved by end-1998, allowing foreign companies to own more than 50% share in any Qatari firm or project. Similar legislation is expected in Kuwait and other Arab Gulf states).

To satisfy their own shareholders, most international banks now apply higher yield criteria to their loan approvals and no longer regard the borrowers' strong net income base as the determining factor. This means lending rates for projects in the Gulf Co-operation Council (GCC) region have more than doubled from the 1997 average of 40 bp above Libor.

Local and regional banks are also demanding higher lending rates. The Arab Petroleum Investments Corp. (Apicorp), a major oil and petrochemical project finance company owned by ten OAPEC member-states, says low oil prices have compelled it to demand higher yields on new loans to which it will be subscribing from now on.

Apicorp recently announced a 35% drop in net profit during the first half of 1998 because of low oil prices. Unaudited results show a net profit of $18m, from $28m in the first half of 1997. The fall in oil prices was reflected in the company's provisions for loan losses. In the first half of 1998, provisions increased to $12m from $2.5m in the first half of 1997. The entire provision for 1997 was $5m. An increase in loans of just over 4% to $620m supported a $58m rise in assets to $1.513 bn. In the whole of 1997, Apicorp had made a net profit of $44.7m.

Rates at 80-90 bp for GCC ventures now are still lower than lending rates for projects in other parts of the world. The average lending rate for projects in Egypt, for example, is above 100 bp, and in Latin America it is much higher.

In Asia the lending rates have become prohibitive, in relative terms compared to the rates in the US, Europe and the GCC. There are hardly any lenders for projects in Russia, hit by a deep financial crisis since August 1998.

Lending rates had begun to fall since late 1996, when huge funds chased potential borrowers. One case in point was the Rasgas LNG project of Mobil in Qatar. At record speed in December 1996, a group of banks led by Goldman Sachs and CS First Boston secured about $2.55 bn in a package of competitive bonds, low-priced commercial loans and soft credits - although Rasgas by then only had a letter of intent from South Korea's Kogas to buy half of the LNG plant's capacity.

The deal came as a bombshell. Simon Eyers, who led the bond deal for Goldman Sachs and then joined CS First Boston at a fantastic price, said later the deal "shook up people's complacency". Banks were offering terms and a speed of execution "dramatically better" than they used to be. In less than 48 hours, the size of the bond issue for Rasgas was tripled from an original $400m. The banks were shocked because they had expected the bulk of the package to be provided by them and by the export credit agencies.

In Kuwait, the $2 bn petrochemical JV Equate in mid-1997 decided to re- negotiate a $1.2 bn financing package signed with banks in September 1996. The 1996 syndication, led by National Bank of Kuwait and oversubscribed by Arab and international banks, had been priced at 162.5 bp above Libor for the period before the project's start up and at 187.5 bp for two years thereafter.

Eventually, Equate managed to bring the price considerably below the 80 bp which it said in early October 1997 would be fair.

The Equate complex at Shuaiba, which went on stream in November 1997, has a capacity to produce 650,000 t/y of ethylene, 450,000 t/y of polyethylene and 350,000 t/y of ethylene glycol. Equate is owned 45% by each of KPC's PIC and Union Carbide and 10% by the private Kuwaiti entity Bubyan Petrochemical Co.