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«SIBUR» LLC is the managing organization of PJSC «SIBUR Holding».
117218, Moscow, Krzhizhanovsky st., 16/1
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The financing of RusVinyl, a €1.5bn greenfield PVC production plant project in Russia, was signed at the St Petersburg World Economic Forum on June 17 2011. The initial conditions precedent were met on October 21 and first drawdown was to be made on October 31.
Construction has already started on the petrochemical plant, which has a design capacity of 330,000 metric tonnes of PVC and 225,000 metric tonnes of caustic soda per annum, and its associated facilities.
This is a landmark transaction in the market –a real limited-recourse financing of a Russian project company, using Russian law governed project documents, by a lending group comprising both Russian and international banks and credit institutions.
Russia’s refining and petrochemicals sectors have suffered from under-investment in recent decades following the collapse of domestic demand in the post-Soviet Union period and later due to the Russian crisis. The overall quality of refining capacity in Russia is currently lagging behind the highest international standards, while the petrochemical industry lacks modern technology and capacity to meet demand for new products. As a result, the conditions are favourable for the development of high quality refining and petrochemicals production capacity in Russia, incorporating cutting-edge Western technology.
The project was awarded priority status by the Russian government, being clearly aligned with wider policy aims of modernisation and moving up the hydrocarbon value chain (thereby reducing Russia’s dependence on pure exports of crude oil and natural gas).
RusVinyl will meet strong forecast PVC demand growth in the domestic market, and is expected to replace imports of high quality PVC.
The risk profile of the project differs markedly from the petrochemical projects of the Middle East, where the model is mostly export-driven and targets mostly China. Here, the sponsors and lenders are primarily focused on revenue potential from the fast growing Russian market, thanks in particular to the strength of the construction sector and the growing packaging industry.
RusVinyl project structure
The borrower, RusVinyl LLC, a Russian limited liability company, is owned by sponsors SIBUR (50%) and SolVin (50%), the latter through Dutch holding company SolVin Holding Nederland BV, in which the European Bank for Reconstruction and Development (EBRD) also took an equity stake. It was established as a joint venture for the construction and operation of a modern petrochemicals plant to meet growing domestic demand for PVC.
SIBUR is the leading associated petroleum gas processor and the largest petrochemical producer in the Russian Federation. SolVin is a joint venture group of companies between Solvay SA (75%) and BASF (25%), both international chemical companies headquartered in Belgium and Germany respectively.
Figure 1 gives a simplified overview of the ownership of RusVinyl and project documents entered into by RusVinyl.
The joint venture agreement between the sponsors is built on a very strict 50:50 principle. At the most basic level, SIBUR provides ethylene feedstock and offers to the partnership its knowledge and penetration of the Russian market, and SolVin and Solvay provide the licences to their PVC and electrolysis technologies and the benefit of their experience in developing large-scale projects internationally.
Significant parts of the project documents are governed by Russian law, including the feedstock supply contracts. The key Russian law project document (at least during the operating period) is the ethylene supply agreement, under which SIBUR provides ethylene, used in the PVC production process, to RusVinyl from its ethylene cracker adjacent to the project site. As some upgrade works are required to the cracker (a process managed and funded solely by SIBUR) there is an element of project-on-project exposure that required a separate work stream of lender due diligence.
The ethylene supply agreement was the subject of a highly bespoke direct agreement with the lenders, which, as well as providing for the usual step-in rights, also provided for English law contractual remedies to mitigate the potential impact of certain mandatory provisions of the Russian civil code.
RusVinyl benefits from English law licence agreements from Solvay and SolVin, allowing it to use the group’s electrolysis and vinyls technology and trademarks. It also benefits from an ongoing knowhow agreement, which allows RusVinyl to share and implement the technical improvements from other Solvay and SolVin plants.
The plant will be built by Russian contractors (including the main general contractor Globalstroy) and the main inside the fence works will be co-ordinated by Technip under two EPCm contracts (in respect of services provided inside and outside the Russian Federation). The EPCm contracts with Technip contain mechanisms that seek to incentivise Technip in terms of time and cost. The debt service undertakings given by the sponsors prior to project completion mitigate for the absence of full turn-key construction arrangements.
Financing structure
The project is financed through limited-recourse project finance facilities provided in parallel by the EBRD, Sberbank (on an uncovered basis) and a club of commercial banks comprising ING , BNP Paribas /Fortis, and HSBC , with political and commercial risk insurance provided by French export credit agency Coface and Belgian Export Credit Agency Office National Du Ducroire Nationale Delcrederedienst (ONDD). The percentage of commercial cover is lower than in standard petrochemical project financings and demonstrated the banks’ interests in assuming domestic market risk for a project in Russia, which is a first for the country.
Figure 2 provides an overview of the multisourced financing structure of the project and the interfaces between the different lenders and export credit agencies. Technip’s role as EPCm contractor was key to obtaining coverage from Coface for a ?350m commercial lender facility. Due to the participation of Solvay, as a licensor and as the majority shareholder in SolVin, the project was able to attract further insurance coverage from ONDD for a ?100m commercial lender facility.
The ECA-covered portion of the financing is based on a 12-year tenor, with 11 years for the EBRD and Sberbank tranches. This is the longest tenor achieved to-date for a Russian oil and gas project focused on the domestic market.
The credit terms for all lenders in the financing were documented using a single “multi-facility agreement”. This novel solution was used to include a Russian lender in a multi-sourced project financing structure and allow the remaining lenders to benefit from Sberbank’s expertise in the Russian lending market. The financing includes both rouble and euro denominated tranches.
A highly bespoke intercreditor agreement governs the voting and enforcement rights and procedures between the Lenders, who rank pari passu in all respects in terms of recoveries.
Security
Given that RusVinyl’s assets are located in Russia, most of the project security is governed by Russian law. As in many civil law jurisdictions where security is accessory to debt and where the concept of a trust is not recognised, the sharing of security in Russia presents some legal structuring difficulties. The lenders ultimately chose a “multiple pledgee” structure for the sharing of the Russian security for RusVinyl – basically, all lenders are direct parties to the pledge documents themselves. It is a robust structure from a Russian law perspective.
Due to currency control constraints, and to promote RusVinyl’s operational flexibility, the majority of the project accounts are held with Sberbank in Russia. As quasi-security over these accounts, the lenders benefit from Russian law governed direct debit rights in their favour. Given the Russian legal restrictions on the ability to pledge bank accounts, direct debit rights, while not a perfect solution, are the best available protection for the lenders currently available in Russia. The wider security package also included Swiss law pledges of offshore accounts held in Geneva, and English law security over certain contractual rights and reinsurance receivables.
Risk mitigation
A debt service undertaking is in place during the construction phase of the project, giving the lenders recourse to the sponsors (on a pro rata and several basis) for repayment of the loans. The debt service undertaking will be released upon satisfaction of a series of tests at project completion, including tests of technical and commercial performance and legal compliance.
During the operational phase, a unique feature of the project is its exposure to the Russian market for PVC and caustic soda as well as acceptance by the lenders of a market-oriented structure, with no long-term offtake contracts or other volume or pricing guarantees. Instead, the sponsors will provide a limited “liquidity support undertaking”, which affords the project a synthetic mitigant to address the cyclicality of domestic demand for PVC.
Currency movements are another key risk. While the project revenues are predominantly in roubles, more than half of the debt service is to be made in euros. The lenders’ market consultant’s analysis concluded that PVC prices in Russia will continue to be set by the prices of the European PVC producers, as Russia is likely to continue importing significant volumes of PVC from Europe.
While the price of PVC in European Russia is therefore a euro-based price, there is still a residual risk of mismatches due to sudden rouble devaluations for which the PVC prices may take time to adjust. This risk was mitigated through a mandatory euro acquisition programme, requiring RusVinyl to build incrementally a reserve of euros for each interest and principal payment date.
Floating interest rate risk, meanwhile, was addressed through fixed interest provisions in all four facilities. The EBRD and Sberbank rate fixing mechanics are based on standard provisions used by the institutions in other rouble financings, while the rates for the ECA-covered facilities are based on the CIRR rate offered by Natixis and Finexpo for Euro funding.
Conclusion
The closing of the RusVinyl project marks a real landmark in the development of the Russian petrochemicals sector and the energy and infrastructure finance market in Russia generally. For SIBUR, it marks a natural progression from the VEB on-lending structure used in the Tobolsk transaction to a “true” international project financing.
Its success seems likely to influence the choice of structure for other similar projects coming to the market soon. It also marks a much wider trend of economic and industrial modernisation in Russia, and a growing confidence in the future strength of Russian’s domestic commodities markets.
The growing domestic demand for petrochemical products is expected to sustain significant further capex investment in this sector in Russia. At the same time we are also beginning to see the development of more export-oriented refining and petrochemicals projects in Russia’s far eastern regions, close to the major Asian markets.
