A group of seven of the world's leading banks have teamed up to forward the oil and gas refinery conglomerate Slovnaft the largest non-government backed syndicate loan in Slovakia's history. Arranged by Citibank, the $250 million (7.5 billion Sk) loan will be used by Slovnaft to introduce a project that will convert crude oil residue into petrol and kerosene. Before, the company would take crude oil waste and turn it into low value-added products such as oil for electrical generators or be forced to burn it off altogether.
Slovnaft will match the syndicate loan with its own funds, bringing the total allocated to the project to $500 million (15 billion Sk). All of the financial institutions participating in the syndicate loan are banking that the project, formally called "Heavy Petroleum Residue Upgrade" (HPRG), will establish Slovnaft as an even more dominant force on the Slovak fuel market as well as turn it into a tiger in other countries' oil and gas domains.
"We believe [with this loan and project] Slovnaft will become a very modern refinery competitive with Western refineries ," said Jaroslav Vitek, the director of the Slovak corporations unit at ING Bank, a Dutch bank in the loan consortium.
"Slovnaft has comparative advantages such as its imports of crude oil from Russia and its quite significantly lower labor costs, which should enable it to take a significant market share in Slovakia, Poland, Hungary and Austria. Slovnaft in effect will be producing the same quality products as [the Dutch petrol company] Shell or [the Austrian petrol company] ÖMV at lower costs."
The participants
Other officials representing those banks involved in the loan - Citibank, Creditanstalt, Československá Obchodná Banka (ČSOB), The Dai-Ichi Kangyo Bank, ING Barings London, The Sanwa Bank and Union Bank of Switzerland - concurred.
"The financing is only because the project has certain features that will improve Slovnaft and its competitive advantages," said Igor Tham, the director of Citibank's operations in Slovakia. How much each bank is contributing to the $250 million total "is still being finalized," Vitek said, but he predicted that it will be roughly the same amount, $36 million (1.08 billion Sk) for each, though Citibank as the organizer may kick in a little more.
Big risk with private concerns
Regardless, bank representatives are cognizant that the loan, the largest tranche Slovnaft has ever received for the biggest project in its 100-year history, is risky and are privately concerned that they may not get it back. As is normal procedure with loans carrying hefty price tags, the syndicate will sell down to other financial institutions, thus allowing individual banks to lower their margins and decrease their risk.
Peter Brown, a Citibank representative in London who headed up the loan project, said the general syndication sell-down would take place as early as September. According to Vitek, another 20-30 banks will join the syndicate, while the original partners will retain some share, perhaps equal to 10 million Sk each.
It was only last year that the Slovnaft tanker sprung a major leak. In August 1995, Slovnaft initiated a heavily-advertised global stock offer worth $112 million (3.3 billion Sk). One of the buyers was the European Bank for Reconstruction and Development (EBRD), a long-time company supporter, which bought $59 million of the shares. However, three months later, EBRD almost pulled out of the purchase after learning that the state-run National Property Fund had blessed a holding company made up of Slovnaft executives to buy a sizeable portion of what the state owned in Slovnaft.
Though the EBRD never sold off, one of its representatives was quoted as saying in November 1995, "If we knew about the conditions of the sale to the managers of Slovnaft, we would probably not have undertaken this investment."
Banks forget Slovnaft's past, greet its future
Any lingering doubts regarding the past have apparently been forgotten. The banks would not have fronted so much money if they had any substantive lingering doubts. Ľubomír Žitňan, Slovnaft's press department director, illustrated why the banks were looking to the company's future. Slovnaft succeeded in acquiring the loan, Žitňan said, because it tangibly showed how much it was willing to finance the project itself.
"We worked in the framework of economics and our offer to finance 50 percent of the loan ourselves," Žitňan said. "We raised 3.3 billion Sk through selling shares on the capital market to finance this project."
Žitňan also mentioned a second syndicate loan being arranged by ING Bank for 75 million DM to help finance a second project to increase Slovnaft's crude oil refining efficiency. Combined with the HPRG sister project, the Continual Catalytic Reformer (CCR) is the second major undertaking that Slovnaft is taking on for the next two to three years.
Vitek said the CCR syndicate loan is expected to close in July. These two projects embody Slovnaft's future. If all goes well, bank officials involved with both loans will breathe easier, because their analysis will prove correct. That analysis can be boiled down to this: These projects will increase Slovnaft's refinery efficiency, thus increasing its productivity, which will pay dividends when the expected boom in demand for fuel products is realized.
"We expect a significant increase in demand for fuel because it's expected that the number of cars and business vehicles [in Slovakia] will increase dramatically," ING Bank's Vitek said. "All of this creates extra demand for fuel that Slovnaft will be able to provide."
