Post on 25-Aug-2020
p. 1
24th November 2014
Project Bonds
Myth Or The New Reality?
Martin McAspurn-Lohmann, Head of Oil & Gas
Alejandro Ciruelos, Head of Project Finance
Santander Global Banking & Markets
p. 2
Searching for
Illiquidity
Premium
Long Term
AppetitePortfolio
DiversificationSpecialisation
Project Bonds – A Rising Funding Alternative?
Deleverage Tenor
Restrictions
Capital
Requirements
Despite their appetite for assets,
banks are facing some limitations
Capital markets are
becoming more prepared and
show high level of liquidity
Banks’ appetite for assets mean they may be ready to offer longer tenors, but capital markets are gradually
becoming a compelling alternative
p. 3
Indicators show strong level of liquidity in the market, although IG spreads are tight
Current Market Conditions – Investment Grade
EUR Senior IG Corporate – Total Maturities 2009 – 2018
iBoxx Non-Financials (benchmark/MS spread in bps)
Source: Bloomberg, EFAMA, www.efama.org.Monthly Industry Facts, published on 15 October 2014
(1) Undertakings for Collective Investment in Transferable Securities (UCITS) in the sense of publicly offered open-ended funds; non-UCITS include other nationally regulated funds
(2) Long-term UCITS Funds include Bonds, Equity, Balanced and other UCITS Funds
(3) Excluding Ireland due to lack of breakdown per type for this country
0
50
100
150
200
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EU
Rb
n
USD Senior IG Corporate – Total Maturities 2009 – 2018
0
100
200
300
400
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
US
Db
n-30
-20
-10
0
10
20
30
40
Jan
-12
Feb
-12
Mar-
12
Ap
r-1
2M
ay
-12
Jun
-12
Jul-
12
Aug
-12
Sep
-12
Oct-
12
Nov
-12
Dec
-12
Jan
-13
Feb
-13
Mar-
13
Ap
r-1
3M
ay
-13
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
Nov
-13
Dec
-13
Jan
-14
Feb
-14
Mar-
14
Ap
r-1
4M
ay
-14
Jun
-14
Jul-
14
Aug
-14
Net Inflows to Long-term Bond UCITS Funds(1) (3)(EUR bn)
-
200
400
06-May-10 06-May-11 06-May-12 06-May-13 06-May-14
$ Non-Financials vs UST
-
200
400
17-Jun-10 17-Jun-11 17-Jun-12 17-Jun-13 17-Jun-14
€ Non-Financials vs MS
p. 4
The Search For Yield is Also Evident in Riskier Asset Classes
Current Market Conditions – High Yield
Oil & Gas High Yield deals: Europe vs North America
European O&G High Yield Deals – 2014YTD(1)Bloomberg High Yield Corporate Bond Index (spread in bps)
Investors who need to lock-in long term fixed interest rates may find value in the illiquidity premium of IG
structured bonds such as project bonds
Source: Bloomberg
Company Deal Value (USDm) Tenor Coupon
North Atlantic Drilling 600.0 5 6.25
SeaDrill 232.8 5 3-mth Other +325bp
DOF 113.9 4 3-mth Other +475bp
EnQuest 650.0 8 7
Tullow Oil 650.0 8 6.25
Gulf Keystone Petroleum 343.0 3 13
CGG 555.4 6 5.875
CGG 500.0 8 6.875
Hellenic Petroleum Finance 400.0 2 4.625
Motor Oil Finance 481.6 5 5.125
Global Rig Company 120.0 5 9
St1 Nordic 136.3 5 4.125
Genel Energy Finance 500.0 5 7.5
Prospector Finance II 100.0 5 7.75
Norshore Atlantic 150.0 4 12
Veritas Petroleum Services 70.0 5 7
Hellenic Petroleum Finance 442.1 5 5.25
Solstad Offshore 167.9 5 3-mth Other +350bp
Xcite Energy 135.0 2 12
Polarcus 57.3 5 3-mth Other +725bp
Prosafe 113.3 5 3-mth Other +310bp
600
233
114
650
650
343
555
500
400
482
120
136
500
100
150
70
442
168
135
57
113
-
100
200
300
400
500
600
700
800
900
Jan-10Jul-10 Jan-11Jul-11 Jan-12 Jul-12 Jan-13Jul-13 Jan-14Jul-14
-
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
-
10
20
30
40
50
60
70
2011 2012 2013 2014E
US
Dm
Europe North America European Deals - Oil & Gas %
p. 5
Crude tankers, natural
gas pipelines and above
ground storage
Older vessels, LNG
tankers, subsurface
storage, liquids pipelines
LNG regasification, gas
processing
Refineries, complex
petrochemical plants,
LNG liquefaction, drill
ships
Tanks Storage
Standard oil and natural
gas pipelines
Underground storage,
LNG regasification, gas
processing, oil tankers,
and complex pipelines
LNG liquefaction, simple
oil refineries, and drill
ships
Complex refineries and
petrochemical plants
Infrastructure Projects – Key Rating Considerations
Rating agencies use different approaches to assess the risk of infrastructure projects
Risks are typically assessed by looking at the following fundamental factors: commercial viability, stability of cash flows, exposure to event risk and naturally
financial metrics
A number of additional aspects specific to project structures are also considered; these usually include liquidity, project financing features, refinancing risk and loss
given default
Some rating agencies look specifically at risks associated to infrastructure projects in the O&G sector – in this case, the construction and operations phases of the
projects are separately assessed
Construction Phase Operations Phase
Technology/Design
RiskConstruction Risk Project Management Financial Risk Performance Risk Market Risk
Technology risk entails
two components:
Track record in similar
application
Suitability for the
project's contract
requirements
Usually expected to be
assessed positive since
designs must in the
course of business be
reviewed to assure
compliance
EPC mitigates
construction cost and
risk of delays to the
project
However, project may
retain some risk linked
to force majeure,
delays in receiving
permits, or change
orders
Agencies typically
make provisions for the
above risks
Typically divided into:
Market exposure:
generally high for
refining and drill ships,
moderate for
LNG/processing plants
and pipelines, low to
moderate for storage
and vessels
Competitive position:
aspects such as
customer mix, location,
scale and demand
outlook
Lower
Ris
k
Higher
p. 6
Where Are The Infrastructure Opportunities In The O&G Sector?
E&P PIPELINES TANKERS
STORAGE LNG PLANTS/
GAS PROCESSING
REFINING/
PETROCHEMICALS
OIL FIELD SERVICES GAS
STATIONS
UPSTREAM MIDSTREAM DOWNSTREAM
Drill ships
Offshore/onshore rigs
Offshore platforms
Extended Well Test (EWT)
facilities
Gas pipelines
Oil / liquid pipelines
Crude tankers
LNG tankers
Product tankers
Storage tanks
Subsurface storage
Liquefaction / regasification
plants
Gas processing plants
GTL plants
Gas to chemicals plants
Refineries
p. 7
Outlook for the European Project Bond Market
Lessons From Experience
• Confirmed• Most of interest from insurance companies
and pension fundsInvestors
• Target A- for insurance companies • BBB/BBB+ can workRatings
• Benchmark bonds below 10 years. There is
a space for long term assets in EUR though• ConfirmedMaturity
• Uncertainty on the capacity to digest big
transactions• Up to EUR 1.4 Billion proven in SpainSize
• Confirmed• Not common in Europe. Would it be
acceptable?Amortizing
• This has changed - peripherals may
become more relevant• Focus on core countiesCountry Risk
• Confirmed• Although many investors still demand
liquidity, some love the illiquidity premiumLiquidity
• Depends on the Jurisdiction. Might require
structural protection• Major concernRegulatory Risk
• Improving, but still selective acceptance
• Delayed draw structures• Major concernConstruction
Past Present
p. 8
Closing Thoughts
Markets are flooded with liquidity and are increasingly becoming a funding alternative for sponsors
Banks have strong appetite for infrastructure finance despite some limitations, but may have to retreat
back to long term funding to become more competitive
This tension may create a favourable situation for Oil & Gas infrastructure financing, at a time when
Oil & Gas companies are facing greater oil price volatility and higher focus on shareholders‟ returns
and capital discipline
The O&G sector offers plenty of opportunities for infrastructure financing and we would expect that the
demand for this type of projects will continue to remain strong
p. 9
US$1,500 MM 5.625% notes due 2021
Case Study #1 - Sabine Pass Liquefaction
1 At Issuance
SPL was seeking to upsize existing US$3.6bn construction / term loan to finance
the development and construction of 4 liquefaction trains in Louisiana. SPL
completed bank financing for trains 1 & 2 on „12 and has completed 18% of
construction by Dec „12 with 1st cargo expected in „15
SPL will receive US$2.3bn per year in fixed, take-or-pay style fees for 4 LNG sale
and purchase agreements
Santander acted as a joint lead manager for a US$1.5bn 6.625% secured notes
due 2021 from Sabine Pass Liquefaction, LLC
The project consists of two liquefaction trains, Trains 1 and 2, which together will
provide approx. 9.0 million metric tons per annum (“mmtpa”) of liquefaction
production capacity
The project has two 20-year LNG Sale and Purchase Agreements (“SPA”) with BG
Group plc and Gas Natural SDG contracted to sell approx. 7.0 mmtpa (3.5 Mmtpa /
train) of the 9.0 mmtpa of total capacity of liquefied natural gas on a free-on-board
(FOB) basis
The incremental production above the contracted volumes will be sold on either a
merchant or short term basis. The base case bank model will not include any
incremental volumes
Project background and main characteristics
Issuer Sabine Pass Liquiefaction, LLC
Amount US$1.5bn Senior Secured Notes
Type of bonds Bullet / Amortizing
Expected Rating Ba3 (Moody‟s) / BB+ (S&P)
Pricing Date 1st February, 2013
Maturity 1st February, 2021
WAL 8yrs
Coupon 5.625%
Spread to
TreasuryUST 3 ⅝ + 406 bps
Issue Price 100%
Market Issued 144A / Reg-S Senior Secured Notes
Docs Standalone / €100k+€1k / Luxembourg
Terms & Conditions
Asset Manager
55%
Fund Manager
34%
Hedge Fund4%
Bank3%
Insurance1%
Other1%
Pension Fund
1%
Private Bank1%
USA95%
LatAm2%
Europe3%
Demand Breakdown (by Region & Investor Type)
p. 10
US$ 580 million of 6.625% Notes due October 2022
Case Study #2 - Odebrecht Offshore Drilling
Demand Breakdown (by Region & Investor Type)
USA56%
Europe32%
Asia7%
LatAm5%
Fund Manager
47%
Private Bank25%
Hedge Fund12%
Bank7%
Insurance5%
Pension Fund3%
Other1%
On Feb „14, Odebrehct Offshore Drilling Finance Limited (OOG), a subsidiary of
Odebrehct Group, priced a US$580MM series of senior secured bond due Oct ‟22
(following US$1,690MM original series in „13 and US$1,500MM Norbe VIII/IX in ‟10
both managed by SAN)
The notes are guaranteed by the direct parent companies of the issuer, ODN I GmbH
(ODN I), Odebrecht Drilling Norbe Six GmbH (Norbe VI) and ODN Tay IV GmbH (ODN
Tay IV) and secured by all of the assets and revenues of ODN I, Norbe VI and ODN
Tay IV, which comprise two deepwater drillships (in the case of ODN I) and two
deepwater semisubmersible drilling platforms (in the case of each of Norbe VI and
ODN Tay IV)
The drillships and drilling platforms are chartered to Petrobras
Perfectly timed transaction as took advantage of scare competing O&G LatAm supply
beginning 2014. Roadshow was announced on Feb 12 in Houston, NYC, Boston and
London. Initial price thoughts was launched on 20th Feb and within 5 hours, books
were already in excess of US$800MM
Participation of real money accounts let syndicates reduce pricing to below guidance
and to launch the transaction at 6.625%. Books closed at US5.1bn, an
oversubscription by 8 folds and more than 330 accounts
Transaction was officially priced at 6.625%, at a lower coupon than the original series,
implying a new issue premium of approximately 8bps over original series
Project background and main characteristics
Issuer Odebrecht Offshore Drilling Finance Limited
Amount US$580MM
Type of bonds Secured Secured, 144A / Reg S
Expected Rating Baaa3 (Moody‟s) / BBB (S&P) / BBB (Fitch)
Pricing Date 25-Feb-2014
Maturity 1-Oct-2022
WAL 8yrs
Coupon 6.625%
Project
companies
ODN Tay IV GmbH, ODN GmbH and Odebrecht
Drilling Norbe Six GmbH
Issue Price 99.99%
Use of proceedsPrimarily to release ODN Tay IV GmbH from its
existing project finance obligations
Listing Luxembourg / Euro MTF
Terms & Conditions
p. 11
Alejandro CiruelosHead of Project Finance
2 Triton Square, Regent’s Place, London NW1 3AN
Tel: +44 (0) 20 7756 6335 Mobile: +44 (0) 7765 250528Email: alejandro.ciruelos@santandergbm.com
Santander‟s Contact Details
Martin McAspurn-LohmannHead of Oil & Gas
2 Triton Square, Regent’s Place, London NW1 3ANTel: +44 (0) 20 7756 4865 Mobile: +44 (0) 7418 708791Email: martin.mcaspurn-lohmann@santandergbm.com
p. 12
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