The deal closed on June 18 2006 with 19 local, regional and international banks participating along with two ECAs and the Public Investment Fund (PIF). Yansab is the fruit of the SABIC's strategic plan to increase its olefins (and polyolefins) profile and take advantage of the favourable market outlook for these products. When Yansab comes into full operation, SABIC will become the largest ethylene glycol producer in the world (currently the second largest).
Yansab is a US$5bn grass root integrated petrochemical complex to be built in Yanbu in the Western Province of Saudi Arabia (Figure 1) and is planned to produce 1,300,000 tonnes per annum of ethylene. The project consists of the units/plants listed in Table 1.
SABIC owns 51% of Yansab, while a further 4% is owned by a subsidiary wholly owned by SABIC, the SABIC Industrial Investments Company. Ten per cent of the equity is owned by 17 private companies, none of which owns more than 2%, and the remaining 35% of the equity is owned by the public, through an initial public offering that was closed in December 2005 (2.8 times over subscribed and with nearly half the 18m population of Saudi Arabia holding shares).
The Yansab financing was a major success in many respects. Some of the relevant highlights are:
Yansab is first true project financing for SABIC, which is the largest public company in Saudi ArabiaYansab is the largest ever greenfield project financing in Saudi ArabiaYansab was the first company to successfully close an initial public offering at inception stage in Saudi ArabiaYansab is the largest financing in the MENA region to close on a sole-bookrunner basisYansab includes the largest ever (globally) Islamic finance tranche in any multi-sourced project financingABN AMRO along with its Saudi affiliate, Saudi Hollandi Bank, advised the project with ABN AMRO fully underwriting the debt. The dual mandates reflect the considerable confidence the sponsor had in ABN AMRO's ability to successfully execute both mandates while also respecting the necessary Chinese Walls and avoiding potential conflicts of interest, and the banks' commitment to the region in general and Saudi Arabia in particular. Integral to this was ABN AMRO's decision to establish a structured loans and advisory team in Dubai to cover such assignments and the increasing demand of project financing generally in the region.
The project benefits from an agreed allocation of gas feedstock from Saudi Aramco, whose competitive pricing is the primary advantage for such projects in Saudi Arabia. The project also benefits from a firm marketing agreement with SABIC for all products, with the project being further enhanced by the use of proven technologies and the appointment of renowned contractors to implement the project (Figure 2).
Project economics
Saudi Aramco will supply Yansab with competitively priced feedstock compared with international pricing. The ethane/fuel gas is sold on a fixed price basis, with the next review due 2015, and the propane is sold on a formula based on a discount to international pricing of naphtha, with the current discount fixed until 2011.
The feedstock supply allocation from Saudi Aramco is subject to certain conditions, including the start up of the project within a certain timeframe. All implementation milestones are within Yansab's proposed construction schedule and the schedule for commencement of commercial operations. Saudi Aramco operates one of the largest ethane supply systems and natural gas liquids (NGLs) supply systems in the World, and has already announced expansion plans.
With respect to the product offtake, Yansab benefits from a marketing agreement with SABIC for all of the production. However, the pricing is net-back of the actual realisation and hence is subject to market fluctuations. The economic assessment of the project was based on a conservative US$40 per barrel crude oil price, considerably below today's prices. Nonetheless, SABIC's experience as a marketer and strong market presence ensures access to most favourable prices.
Financing structure
The project cost is US$5bn. The sponsor and financial adviser sought non-recourse project financing on a 70/30 debt to equity ratio and successfully raised US$3.5bn in debt. The debt comprises the following tranches:
The commercial facilities and the ECA-covered tranches are repaid by semi-annual repayments over 12 years with a 2.5 year grace period. The repayment profile was sculpted to accommodate the ramp-up period.
PIF offered the cheapest financing and longest tenor, hence this facility was maximised. The facility is repaid by equal semi-annual repayments over 13 years with a three-year grace period.
The Islamic facility was structured as a standard forward lease (Ijara fil thimma in Arabic), where the lenders, through a special purpose vehicle, acquire the asset under construction and lease it to the project after completion. Islamic finance receives considerable attention and is favoured in the Saudi market. SABIC sought to maximise the Islamic tranche to contribute to the national interest in promoting Islamic finance. The repayment is the same as in the commercial facilities.
The working capital facility, of US$350m, is another feature of the project and is repayable by a bullet repayment at maturity. The facility was structured with the added flexibility of allowing usage during the construction period to cover cost overruns. At completion, however, any such usage would be absorbed by a contingent facility provided by the sponsor, and the facility thereafter would only be available to fund working capital requirements.
The margins (as shown in Table 3) reflect the strength of the case presented to the lenders and the confidence they have in Yansab and its main sponsor. The step-up reflects the falling away of the sponsor completion support at the commencement of operations.
The financing structure includes a standard debt service reserve account covering six months of debt service. The covenant levels include a debt service coverage ratio (DSCR) of 1.5x as a minimum. Distributions to the sponsors are blocked at 1.3x DSCR while default is triggered by a DSCR of 1.1x or less.
Sponsor's contingent support
The lenders benefit from an uncapped, but limited period of availability, cost overrun and delay in start-up commitments provided by the sponsor. The sponsor and its financial adviser have creatively structured the working capital facility initially to absorb any cost overrun during the construction period, which is then refurbished at completion by the cost overrun commitment – hence maximising the use of the commercial debt facilities and also allowing the use of pre-completion revenues and any possible late cost underruns to optimise the sponsor's capital commitments. The delay in start-up commitment covers debt servicing in case project completion is delayed.
Syndication process
ABN AMRO initially underwrote the entire debt, although this was reduced by the early commitment to participate from the PIF. The syndication was launched on March 28 2006 and closed a month later.
The initially offered sub-underwriting tickets for a mandated lead arranger (MLA) level were US$250m for international banks and US$200m for local and regional banks, with target final hold levels of US$175m and US$125m respectively. The participation fee was determined on the basis of a competitive process, where all the invited MLAs were requested to indicate a minimum fee level required with respect to the amounts committed to the transaction. In the end, the fee level offered to the MLAs was 70bp.
As advised by the sponsor, the initial MLAs decided also to accept three non-compliant commitments received from three local relationship banks of the sponsor. Those investors received senior lead arranger (SLA) titles and a fee of 60bp. The transaction was significantly oversubscribed on a senior level, with the underwriting commitments exceeding the target amount by approximately 48% and the final hold commitments exceeding it by 38%. Nineteen banks were appointed as MLAs and SLAs (Table 4). Since all the syndicate members were allocated what was expected by them under their internal credit approvals, no general syndication has since been undertaken, although this was provided as a possible option.
Success factors
The transaction was a major success in many aspects. The financing package was solid enough to ensure the significant interest it received from the bank market. Following are some of the key highlights - see Table 5.
On the equity side, Yansab was a major success too. It was the first ever project to close an initial public offering at inception stage. The offering was three times oversubscribed and received the Deal of the Year award from The Banker magazine.
Conclusion
Yansab is a natural extension of SABIC's olefins operations considering the favourable market outlook. SABIC and its advisers structured the US$3.5bn debt to attract the highest possible interest from the banking/financial community, and it was a major success. Yansab was able to maximise the Islamic facility as desired by the sponsors. It was also able to optimise the financing cost by maximising the PIF facility, which provided the lowest overall cost of financing.
The strength and experience of the sponsor and careful crafting of the completion support to address the pertinent construction risks contributed to the lenders' satisfaction of the overall credit profile, while limiting the sponsor’s support and not unnecessarily over-committing its financial obligations. The debt structure also allowed smooth debt servicing while still maintaining its acceptability to lenders.