DUBAI, (Bloomberg) — Saudi Arabian Oil and Sumitomo Chemical may have to pay more for loans as Persian Gulf infrastructure development spurs demand for funding and the premium over U.S. borrowing costs rises to an eight-month high.
The partners in Rabigh Refining and Petrochemical initially aimed to start raising funds this quarter for their $6 billion plan to boost capacity at a petrochemical plant in the Red Sea town of Rabigh. PetroRabigh has since missed a target to finalize investment plans by the end of 2011, putting off the fundraising plans. When it is ready to approach banks, the company may have to compete with Gulf companies refinancing debts and projects in Saudi Arabia and Qatar seeking funds for petrochemical plants valued at $30 billion.
“The risk I see is that there will be clusters of issuance,” Jarmo Kotilaine, chief economist at National Commercial Bank in Jeddah, Saudi Arabia, said by phone on Wednesday. The more companies seeking loans, the higher the pricing will be, he said.
Bank borrowing costs are climbing in the Gulf as lending picks up after a slowdown triggered by the 2008 global credit crisis and a buildup of bad loans. The three-month Saudi interbank offered rate, or Saibor, climbed one basis point to 0.854 percent Tuesday, matching Wednesday’s level which was the highest since May 2009. The rise in Saibor has driven the extra yield over the three-month London Interbank Offered Rate to the highest since July. The premium gained 18 basis points, or 0.18 percentage point, this year to 38 basis points Tuesday, data compiled by Bloomberg show.
Saudi Arabia and other Gulf Cooperation Council nations are building industries, including petrochemicals, to help create jobs and diversify their economies from relying on crude oil, which accounts for more than 90 percent of government revenue in Saudi Arabia and Kuwait. Boosting petrochemicals output allows Aramco to make more valuable products from the nation’s crude.
Aramco is working on two fronts to build capacity. With Sumitomo it wants to raise PetroRabigh production capacity to 3.7 million tons of petrochemicals a year. The company would seek a mix of bank and export credit agency lending and share sales to fund the refinery expansion, Chief Executive Officer Ziad al-Labban said in October.
PetroRabigh, which was due to start seeking financing early this year, is still deciding on the project’s structure, the partners said this year. The project may be delayed by about six months, Joerg Fabri, a director with corporate restructuring adviser Alix Partners in Dusseldorf, Germany, said Wednesday.
Saudi Aramco and Dow Chemical are also pursuing the $20 billion Sadara Chemical joint venture, which will tap debt markets to finance construction, Saudi Aramco Chief Executive Officer Khalid Al-Falih said in October. Saudi Arabia’s Public Investment Fund will provide a loan to Sadara, al-Eqtisadiah reported last month, citing fund Secretary General Mansour al-Maiman.
“They don’t want to be in the market at the same time because they are both big projects and banks have a finite amount of money,” said Abishek Badkul, director of project and export finance for the Middle East and Africa, at Standard Chartered. He expects the Sadara to seek financing in the second or third quarter.
The cost of credit in the kingdom has been rising at a faster pace than other Gulf countries, gaining seven basis points this year to 0.854 percent Tuesday, compared with a rise of less than two basis points in the three-month Emirates Interbank Offered Rate to 1.536 percent and no change in Kuwait’s rate at 0.813 percent.
Saudi bank lending to the private sector jumped 11.7 percent in January, the fastest annual growth in almost three years, central bank data shows. In Qatar, the world’s biggest exporter of liquefied natural gas, loan growth surpassed 20 percent year on year in October and November.
Qatar is ramping up spending as the nation of 1.8 million prepares to host the 2022 World Cup. State-run Qatar Petroleum, which will seek funding for two petrochemical projects, costing as much as $13.5 billion, in the first half of 2013, Abdulrahman Al-Shaibi, the company’s finance director, said last month.
While loan costs climb, the extra yield investors demand to own Saudi corporate bonds instead of U.S. Treasuries narrowed 53 basis points this year to 170 on Monday, JPMorgan Chase & Co.’s Corporate EMBI Saudi Arabia Blended Spread index shows. The spread on Middle East bonds over similar-maturity Treasuries narrowed six basis points this year to 443 yesterday, according to JPMorgan.
Saudi Arabian corporate bond sales are poised to set a record in 2012 as a surge in state spending encourages private businesses to invest more in expansion projects.
The state-run General Authority of Civil Aviation sold 15 billion riyals ($4 billion) of Islamic bonds in January which got three times more bids than sought and was the biggest bond sold in the Gulf Arab region this year. Islamic debt pays asset returns to comply with the religion’s ban on interest.
Saudi Arabia’s Islamic bond sale pushed issuance in the Gulf to $9.3 billion so far this year, the best start to the year on record, according to data compiled by Bloomberg.