PFI Comment – Balloons back in the Gulf

* Terms ease on Mid East project financings

* Balloon repayments are back

By Rod Morrison

LONDON (Project Finance International) – The balloon is
back. Other pre-crunch features in the Gulf project finance
market are coming back too…lets hope they are not shot down in
the current capital markets turbulence.

The balloon structure – which allow for delays in principal
loan repayments until the end of a loan’s term – has appeared on
the Ma’aden/Alcoa (AA.N: ) US$7.5bn aluminum smelter and rolling
mill project financing in Saudi Arabia. When it was floated to
bankers in Riyad at the deal launch meeting it caused a little
stir. The tenor on the loan is already 16 years, so a 25%
balloon repayment would take the effective tenor beyond 20
years. The structure will therefore add some complication to the
deal. However, the sponsors point out on the Emal aluminum
smelter deal in the Abu Dhabi there was a 36% balloon – albeit
in early 2008 pre-credit crunch times – and the actual amount of
commercial debt needed to be raised on the Saudi scheme is just
US$1.4bn, which should be do-able. The rest will come from
government agencies and equity. The balloon adds spice to the
financing, which otherwise has been fairly de-risked. The
riskier US$2.5bn rolling mill part of the project has
effectively been taken away from the commercial banks. The
rolling mill will need just US$100m of commercial facilities
with the rest coming from various state backed institutions.
Nevertheless, the rolling mill remains an integral part of the
smelter financing, given that it will take aluminum from the
smelter and turn it into cans.

The Ma’aden deal is not the only aluminum smelter financing
to test new lows post-credit crunch. The US$7bn Emal scheme –
backed by Mubadala and Dubai’s Dubal – is itself still
finalising its funding. While the main part of the bank
financing was transacted in 2008, US$2bn was left on the table.
It was due to be funded through a project bond but this had to
be canned (ho ho) when bond market pricing started to rise in
mid-2008. Now that US$2bn has to be funded. And US$700m already
appears to be in the bag through government-backed export credit
agencies (ECA) covered loans – at ultra cheap pricing.

On ECAs deals, the commercial banks simply provide the funds
and the ECAs take the political and commercial risks on the
loans. On Emal the Coface and Hermes covered tranches, totaling
US$420m, will come in with loan pricing at close to 100bp over
libor, half that of a year ago. Coface and Hermes are backed by
the French and German governments respectively. In addition,
Emal will get a direct loan from US Ex-Im. And it is still
planning to issue its project bond. That part of the financing
will be a new test in the volatile global capital markets. Given
the rush to set new lows, it is a contrast to see the US$3.5bn
Citadel Capital Egyptian Refinery Company (ERC) structuring in
some old fashioned cash sweep mechanisms. The tenor on its
proposed mix of US$2.35bn of commercial bank and ECA covered
loans is 17 and 15 years but these are reduced to 14 and 12
through an early repayment mechanism. This works by allowing the
project to pay back more debt when refining margins are high and
less when refining margins are low.

This is a fairly standard technique on petrochemical
financings but less common on refinery deals. ECA pricing on the
deal is decent too – 200bp for Japan’s Nexi and 300bp for Kexim.
But this is because the scheme is in Egypt and bankers still
cringe at the memory of the costly and nerve-wracking EAgrium
project. Two years ago Canadian firm Agrium (AGU.TO: ) saw its
US$1bn fertiliser plant project cancelled during construction –
although it was offered a stake in a larger scheme by way of
compensation and the international banks funding the scheme were
eventually paid out in full.

All three schemes are current finalising their funding.
Syndication of the Ma’aden and ERC loans has begun. Standard
Chartered (STAN.L: ) and Riyad Bank are advising Ma’aden and
Societe Generale (SOGN.PA: ) is advising ERC. The Emal ECA
tranches been agreed with six funding banks – BNP Paribas
(BNPP.PA: ), Citigroup (C.N: ), Credit Agricole (STAN.L: ), Deutsche
(DBKGn.DE: ), HSBC (HSBA.L: ) and Natixis (CNAT.PA: ) – and the
project company is now looking at finalising the bond.

Investing Analysis

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PFI Comment – Balloons back in the Gulf