LOAN RANGERS
Oil giant BP financed a major joint venture in China at highly attractive rates using a syndicate of local banks.
By Ian Rowley

In December last year, BP, the US$175 billion petrochemical company based in the UK, announced plans to build a US$2.7 billion chemical works near Shanghai to turn oil into polystyrene and other materials. The joint venture will be called Secco and BP will own 50 percent of it, with China Petrochemical (Sinopec) and its subsidiary Sinopec Shanghai Petrochemical owning the rest. So far, so good.

What makes the deal more impressive, however, is the way in which it was financed. Not only did BP negotiate one of the biggest loans ever arranged by a foreign company in China, but the loan was provided almost entirely by Chinese banks. What's more, those banks were lending in US dollars - traditionally the preserve of foreign banks - and they were doing so at highly competitive rates. "This is a precedent-setting transaction for the People's Republic of China," glows Tony Hayward, group treasurer of BP.

Renminbi Rave

In all, Secco borrowed to the tune of US$1.8 billion - with BP and its partners providing a further US$900 million in equity. The loan breaks down into three tranches. The first is a 20-year term loan of 8.1 billion renminbi (US$979 million) charged at the best current rate provided by the People's Bank of China (PBOC). The second is a US$708 million 12-year term loan charged at an all-in cost of less than 1 percent over Libor. And the third tranche is a 963 million renminbi (US$116 million) working capital facility, again charged at the best current PBOC rate.

From Hayward's perspective, it all adds up to "extremely attractive pricing and terms," thanks to BP being able to "leverage the strong relationships between the Chinese banks and the partners in the joint venture." Hayward is particularly pleased to have been able to borrow the money for such a long timeframe. And with the materials and labor needed to build the chemical plant coming from both inside and outside China, the different currencies of the loan should neatly off-set any foreign exchange risk.

Not that it was easy to put together. For one, it took 18 months to organize, although as Hayward points out, in China that is considered quick. And for another, it involved setting up a joint finance team between BP and its Chinese partners to liase with the eight Chinese banks and two international ones - HSBC and the Industrial Bank of Japan - which took part in the loan, and the four advisory banks that did not.

Observers say that the large Chinese funding of the Secco plant is a wake-up call to foreign banks operating in China. When the country joined the World Trade Organization in December, most analysts viewed it as a sign that Chinese banks would come under increasing pressure from international competitors.

Instead, the Secco deal - not to mention a year of active marketing by Chinese banks - shows how local banks are in a strong position to offer competition in the loan market.

"Everybody was talking about Chinese banks being pushed aside by foreign banks," notes Wei Yen, a vice-president of Moody's Investors Service in Hong Kong, the credit rating agency. "But this view failed to consider exactly what the pitch of the foreign banks would be," he says. Official statistics, for example, show that Chinese banks have dollar reserves to more than match their international counterparts. Last October, the dollar reserves at Chinese banks totalled US$136 billion. By contrast, the 190 foreign banks licensed to operate in China had just US$41 billion of dollar assets in June.

Local Appetite

Wei Yen adds that several other Western companies are believed to be looking into doing copycat deals. And BP's Hayward sees no reason why other companies couldn't follow his lead. "It all depends on the strength of your local sponsors and a continuing international lending appetite for China's key industries," he says.

Nonetheless, consultants question whether firms smaller than BP might struggle to get such favorable terms. "BP is one of the largest companies in the world and a very stable credit," says Anthony Blaiklock, a partner at Deloitte & Touche in London. "It will be interesting to see if smaller companies could get similar terms," he says.

Ian Rowley is a staff writer at CFO Europe, CFO Asia's sister publication in London.