Sibur and SolVin's highly innovative joint venture to build a PVC plant in Russia was unusual in many ways, not least because of its lack of an offtake scheme in such a risk-averse environment. However, the four-year wait for the deal to come to fruition is paying off for the many players involved.

Some 400 kilometres east of Moscow lies the town of Kstovo, a small, unassuming district that will shortly house the largest PVC plant not just in Russia but in the whole of Europe. Construction has begun and the site is scheduled to become operational by 2013, thanks to an innovative project finance agreement which has been more than four years in the making.

The brainchild of two leading petrochemical groups, Sibur of Russia and SolVin of Belgium, the plant is being funded via a €750m, 12.5-year facility from a group of banks comprising BNP Paribas, HSBC and ING, as well as the European Bank for Reconstruction and Development (EBRD) and Sberbank of Russia.

Complex deal

“The deal was very complex and there were several considerations behind it. First, Sibur and SolVin are 50:50 partners and the transaction had to be structured so there was complete parity between us,” says Pavel Ananienko, head of treasury at Sibur.

“Also, in most project finance deals, an offtake agreement is put in place, which means there is a guaranteed buyer of the end goods. These arrangements normally involve a third party acting as a trade guarantor but we believe we are best placed to sell the end product ourselves once our plant is completed,” he adds.

The lack of an offtake scheme is not only highly unusual in the world of project finance but it adds an extra layer of risk, at a time when the entire financial world is increasingly risk-averse. Moreover, the plant is targeted at Russia’s domestic market, whereas previous Russian projects involving international banks have been export-oriented.

“To date, project finance deals in Russia have been based on export revenues so this is the first long-term financial transaction from the international market designed to finance large-scale industrial development in Russia. A lot of due diligence was done to show we could accommodate domestic market risk but we will be producing the best types of PVC on the market, demand is growing strongly in Russia and we are confident about prospects for the new plant,” says Mr Ananienko.

Guaranteed loans

Nonetheless, several steps were taken to ensure participating banks felt comfortable with the transaction. First, Sibur and SolVin have guaranteed payment of interest and the loan principal until the project is launched so if it fails to get off the ground, the banks receive their money back. Second, they are offering up to €125m of extra liquidity if the project breaches bank covenants once it is up and running or fails to generate the revenues expected of it. In addition, the export credit agencies of France and Belgium, Coface and ONDD, have guaranteed the loans backing the project, another first in Russia.

“This deal is highly innovative on several levels. It also involved many different stakeholders – the two sponsors, Sibur and SolVin; a range of banks – EBRD, Sberbank and the international banking group; the export credit agencies; and the lawyers. More than 100 people were involved in the transaction so managing the process was extremely challenging,” says Mr Ananienko.

The waiting game

In fact, Sibur and SolVin first attempted to put together the project four years ago, before the onset of the financial crisis.

“The idea goes back to 2007 but it was interrupted in 2008 when the financial crisis [began] and mandated banks pulled out. We relaunched it in 2009 and completed this year. It is a new type of deal so it took a long time to execute. We had to build a lot of know-how to overcome the difficulties around the transaction and to ensure all the parties were comfortable,” says Mr Ananienko.

This deal was a real achievement. Getting the consensus of all the different parties, making sure everyone’s demands were satisfied, ensuring we were all able to co-operate and work together took a lot of time and energy. It is an important milestone in Russia and I am really pleased we did it

Pavel Ananienko

Under the terms of the deal, BNP Paribas, HSBC and ING are providing €450m with the rest of the money coming from EBRD and Sberbank. Each participating bank had a specific role to play in the transaction. BNP Paribas led the due diligence into the PVC market and was the coordinator with the export credit agencies, HSBC focused on insurance and financial advisory, and ING was responsible for communication, technical and environmental advice.

The financing has been provided to RusVinyl, the official name of Sibur and SolVin’s joint-venture partnership. Now the deal has been signed, there are high hopes that it will pave the way for a new era of industrial development in Russia, where local and international parties work together to create project finance transactions focused on the domestic market.

“This deal was a real achievement. Getting the consensus of all the different parties, making sure everyone’s demands were satisfied, ensuring we were all able to co-operate and work together took a lot of time and energy. It is an important milestone in Russia and I am really pleased we did it,” says Mr Ananienko.

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