Premcor Refining Group closed on a $1 billion credit facility with Citigroup with an eye toward the acquisition of the company's newest refinery. The facility will primarily be used to provide letters of credit to back crude purchases of Premcor's recently acquired fourth refinery, said Joe Watson, treasurer of Premcor. The new loan replaces a $785 million facility led by Deutsche Bank.
"Having realized that we needed a new banking facility, we solicited proposals from a number of leading banks. Citigroup had the most compelling proposal in terms of structure, capacity, flexibility and pricing," Watson said. Deutsche Bank participated in the bidding process, but Premcor preferred to go with Citi's proposal instead of just increasing the size of its previous revolver, he noted. The new facility comprises an $800 million revolver and a $200 million term loan "B." The revolver is priced at LIBOR plus 2-2 1/2% and the "B" at LIBOR plus 2 1/4%.
Premcor decided to take out a term loan "B" and target both commercial and institutional lenders to ensure the company would obtain the most support and interest in the facility, Watson noted. Bank One, Fleet National Bank, now Bank of America, and SunTrust Bank are documentation agents. Sixty other financial institutions are also involved in the facility.
According to Watson, one of the most interesting aspects of the new facility is the flexibility it offers in allowing the company to borrow up to the full amount of the credit, regardless of whether those borrowings come in the forms of letters of credit. "As an independent refiner, we participate in an extremely volatile business with unpredictable manufacturing margins and cash flows," said Watson. "In 2004 and 2005 in particular, Premcor is facing tremendous capital investments related to EPA-mandated low sulfur fuels. Given our heavy capital budget and the basic volatility of our business, it is extremely compelling to us to have short-term cash borrowing ability under this new facility," Watson explained. A Deutsche Bank spokesman declined comment.