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Wednesday, 13 December 2017

KPPC sets the pace

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The US$1.4bn financing for Kuwait Paraxylene Production Company (KPPC) successfully closed on July 5 2007. By Olivier Musset, managing director, energy project finance, Societe Generale; Cem Orekli, vice-president, energy project finance, Société Générale and; Salah Al Kharji, financial co-ordinator, Petrochemical Industries Company KSC.

The facilities comprised a US$1,053m term loan and revolver facility, and US$347m of Islamic facilities. A total of 19 leading international, regional and local commercial and Islamic banks acted as mandated lead arrangers for this landmark financing in Kuwait. The aromatics project is a key pillar in the development of the Kuwaiti petrochemical industry as it enhances integration and creates synergies among the various petrochemicals and refining facilities in Kuwait, including process technology expertise, production cost advantages, marketing expertise and infrastructure and logistical support.

The petrochemical complex, with a design capacity of 781 KTPA of paraxylene and 373 KTPA of benzene, is located in the Shuaiba Industrial Area, adjacent to the existing EQUATE complex, and the Olefins II and Styrene Project currently being developed in the context of the Greater EQUATE expansion programme.

The paraxylene produced by the aromatics project will be exported while the benzene will be supplied to the Kuwait Styrene Company (TKSC) for the production of styrene monomer. The aromatics plant will also produce a host of by-products including light naphtha, LPG, hydrogen and light ends, which will be delivered to the petrochemicals producers and refineries in the vicinity.

Strong and committed Kuwaiti sponsors


KPPC benefits from a strong Kuwaiti sponsor group, including key public and private sector players. Petrochemicals Industries Company KSC (PIC), a wholly owned subsidiary of Kuwait Petroleum Corporation (KPC), has led the development of the petrochemical industry in Kuwait, including its EQUATE and Greater EQUATE ventures with Dow Chemicals.

Kuwait National Petroleum Company (KNPC), also a wholly owned subsidiary of KPC, is responsible primarily for refining and marketing of refined products. PIC and KNPC each own indirectly 40% of KPPC, with the remaining 20% owned by Al-Qurain Petrochemical Industries Company KSC (QPIC), a public shareholding company formed with the aim of investing in petrochemical companies in Kuwait. Shares in QPIC were offered to private Kuwaiti investors in late 2004 through the largest public offering in Kuwait's history.

Commercial structure


Besides the existing infrastructure in the Shuaiba Industrial Area and successful track record of implementation of projects and operations of PIC, KNPC and EQUATE, the project benefited from a strong contractual structure under which the construction and operation of the aromatics complex was undertaken by experienced third parties, namely:

* Bechtel – Programme managing contractor

* Consortium of Tecnimont and SKEC – EPC contractor for aromatics process plant

* UOP – Start-up services

* EQUATE – Operations and maintenance of aromatics plant

* KNPC – Operations and maintenance of off-plot facilities

* PIC – Marketing of paraxylene

* KPC/KNPC –- Supply of feedstocks

Key financing considerations


Some of the key lending considerations associated with the KPPC financing were as follows:

Strengths Challenges

Strategic Importance of the project for Kuwait's downstream developments Lack of O&G project finance precedents in Kuwait without foreign sponsors

Strong and robust contractual structure No determinant competitive advantage to other aromatics plant

Successful operation and marketing track record of PIC, EQUATE and KNPC Integration with numerous third parties

Due diligence and financing execution


Given the contractual and physical links with the Greater EQUATE expansion, the sponsors decided to work with the same advisers and consultants that worked on the Greater EQUATE financing, in order to ensure timely execution and benefit from the lessons learned.

Société Générale Corporate & Investment Banking (SGCIB) was mandated as financial adviser and Linklaters as borrower's counsel for the project at an early stage, and while the Greater EQUATE financing was still being implemented, in order to ensure co-ordination between the two finance teams and maximise benefits to all parties, given PIC's leading involvement in both projects.

SGCIB (on behalf of the prospective lenders) appointed the same technical (Nexant), market (CMAI), insurance (Marsh) and legal (Norton Rose) consultants/advisers that worked on the Greater EQUATE financing, enabling a smooth and fast-track due diligence process.

One of the key achievements of the KPPC financing was its compliance with the revisions to the Equator Principles that were adopted in 2006. For the first time in a project finance transaction in Kuwait, an Environment and Social Action Plan (ESAP) was developed and provided to the MLAs as required.

The sponsors and Bechtel from a very early stage worked together in order to ensure that the project would comply with the intent of the Equator Principles and a satisfactory ESAP could be developed from the various environmental studies that were conducted on the project over the years. This effort resulted in a clear confirmation by the technical consultant that the aromatics project was firmly on track to conform to the intent of the Equator Principles.

The sponsors' decision to launch the financing once the EPC contract was finalised also helped the financing to be launched with a comprehensive due diligence package. This was one of the key factors behind the lack of any comment by the prospective lenders on the term sheet or project documents. It also helped to avoid the burden of possible increased due diligence, legal and finance costs after the selection of the MLA group.

Islamic facilities setting new precedents

The US$347m Islamic facilities included an istisna and forward lease facility to finance the construction of certain identified assets. The commercial and Islamic facilities rank pari passu with each other in all material respects, including with respect to the sharing of the security package. Prior to the launch of the financing to commercial banks, Kuwait Finance House (KFH) was appointed as the Islamic mandated lead arranger to co-ordinate the arranging and documentation of the Islamic facilities.

The request for proposals sent to prospective lenders and banks encouraged them to allocate a portion or all of their commitments to the Islamic facilities. A total of seven out of 18 commercial MLAs opted to allocate a portion of their commitment to the Islamic facilities, enabling the sponsors to achieve their objective of obtaining sizeable Islamic facilities on a fast-track basis and setting a new precedent in Kuwait.

The early involvement of KFH was significant to the success of the documentation phase since prospective MLAs were provided with a proposed financial term sheet that took into account the requirements of Islamic facilities. The exercise demonstrated that, although Islamic financing is often perceived as a threat to the overall financing execution plan given the intercreditor issues, it is possible to achieve a successful Islamic financing on a fast-track basis with a well managed work plan supported by a strong and recognised Islamic bank. The signing of the financing documentation occurred eight weeks after the formation of the MLA group, a record time for a project of this size and complexity.

Strong Interest

Despite the growing perception that international and regional banks are becoming more cautious about their returns on transactions in the GCC, KPPC proved that there is a lot of appetite and a lot of liquidity available for a well structured transaction. The sponsors received many good offers and considerably in excess of the envisioned US$1.4bn, and ended up with 18 commercial MLAs.

It is important to note that several banks committed for underwritten amounts significantly above the US$100m requirement to qualify as an MLA. Several international banks that previously had not participated in the Greater EQUATE financing also entered the transaction as MLAs. The competitive pricing achieved, among the lowest for petrochemical project financings in the GCC, was a testament to the strong interest of financial institutions and inherent strengths of the project and the financing structure. This is a major accomplishment for the sponsors, which had never approached international and regional project finance banks in the past without the involvement of a foreign partner.

Precedent for future financings

PIC drove the aromatics project from its inception, leading the commercial structuring and implementation of the financing on behalf of its Kuwaiti partners. With the success of the KPPC financing, PIC has enhanced its standing in the international finance community and the KPPC financing will almost certainly pave the way for subsequent large-scale financings that will fuel PIC's growth at home and abroad.

Conclusions

The KPPC financing has confirmed that international and regional banks continue to have strong appetite for well structured petrochemical projects in the GCC. The financing execution process for KPPC has also demonstrated the importance of approaching banks with a fully developed and comprehensive package, the benefits of resolving potential intercreditor issues at an early stage, and building on previous successes, as with Greater EQUATE.

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