Northville Industries, the government of Panama and Castor Petroleum have closed a $480 million refinancing and expansion financing for the Petroterminal de Panama oil pipeline and storage project. The deal refinances an interim financing from November 2008, and increases the storage capacity of the project.

The debt component of the financing is a $375 million 8.5-year loan led by financial adviser HSBC, EDC, Banco General, BNP Paribas and Banco Nacional de Chile. The deal was sold down to several tiers in a process that almost resembled a syndication. It demonstrates two things: that Panamanian and Central American banks are again open to project risk, and BP has an unrivalled ability to help close project financings even when it is not a sponsor.

Petroterminal de Panama owns a 131km oil pipeline running across the Panamanian isthmus, connecting the Atlantic and Pacific Oceans. Running north-south across the west of the country, it terminates at Puerto Armuelles on the Atlantic and Chiriqui Grande on the Pacific. It was built in 1979 to carry crude oil from Alaska to markets in the northeastern US, because pipeline capacity across the US was not adequate, and still is not today, and very large crude carriers could not use the Panama Canal.

The pipeline, first proposed by Northville's founders, Harold and Raymond Bernstein, was operational in 1979, two years after Panama's government approved it. Northville was at the time primarily known as a Long Island-based oil distributor and terminal operator. The pipeline operated until 1996, when the US lifted restrictions on the export of Alaska oil, the pipeline was mothballed, and the Bernsteins focused on oil trading rather than owning infrastructure.

In 2003, Northville returned to the oil distribution business, and noticed that while the Pacific Coast of the US might no longer be a source of oil supply, it could be a source of demand for oil from the Pacific Basin. It approached Tesoro Corporation, the largest refiner in California, Castor Petroleum, an oil trader with offices in Geneva and New York, and BP to take capacity on the pipeline.

BP's presence is most crucial to the project's success, because Tesoro, while asset rich, operates in a cyclical corner of the oil and gas market and is rated below investment grade (Ba1/BB+, Moody's/S&P), while Castor, which controls some crude carriers under time charters, is smaller and owns few physical assets beyond its stake in PTP. Banks are prepared to stretch themselves for BP, as they recently did on a very different asset – BP and Dominion's Fowler Ridge wind farm.

The Panamanian government consented to a new ten-year concession running from 2008 to 2018, under which PTP would rehabilitate and reverse the flow of the pipeline. The Panamanian government, instead of a cash fee, took an additional 15% equity, in installments. It took 6% at the end of April 2008, when construction on the refurbishment started, will receive another 4% at the start of 2016, and a final 5% at the start of 2026.

The sponsors, wanting to start construction as quickly as possible, mandated HSBC to raise as much debt as it could. HSBC closed on a $175 million seven-year deal, priced at 425bp, in November 2008, and kept $91.5 million of that debt on its books. Banco Nacional de Panama, with $25 million, Corporacion Interamericana para el Financiamiento de Infraestructura (CIFI), Banesco and Towerbank, with $10 million, Multibank, with $7.5 million, Grupo Financiero Produccion, with $6 million, and Banco Panama, Metrobank, and Global Bank, with $5 million, also participated.

The size of HSBC's hold, together with the sponsors' need for additional financing to build out storage upgrades, made a larger refinancing inevitable. The expansion, for which Chicago Bridge & Iron is the lead contractor, involves bringing PTP's storage capacity, located at both ends of the pipeline, from 5.7 million barrels to 14.6 million.

The new deal is larger, at $375 million, slightly longer, at 8.5 years, but has the same pricing, at 425bp over Libor with a Libor floor of 2.5%. The floor is designed to attract Panamanian lenders, which have to offer their depositors a premium over offshore banks because Panama is a dollarised economy. The financing ended up much more widely distributed to Panamanian, regional and international lenders.

Of the lead arrangers, HSBC and Banco Nacional held $55 million, BNP Paribas and Banco General $50 million, and EDC held $40 million. Arrangers were La Caixa and Scotia with $20 million, Banesco with $17 million, Bancolombia, CIFI, and Global Bank and Towerbank with $10 million. Participants were Metrobank with $7 million, BAC International and Produbanco with $6 million, Banco Panama with $5 million and Multibank with $4 million.

The financing, reflecting PTP's long presence in the country, and a diverse base of assets that stretches to power plant operation, is structured a little like a corporate deal, though lenders benefit from the ship-or-pay agreements and offshore account structure. The sponsors have not contributed cash equity, only the existing asset, though this is roughly estimated at $105 million. The annual debt service coverage ratio is 1.75x, though this measure is a little misleading because the shipping contracts are staggered and some revenue is front-ended. The loan life coverage ratio is 1.39x.

The pipeline's long-term prospects are a matter of debate. The short-term prospects for the pipeline increased as the price of crude slumped, and owners of crude cast about desperately for new storage. But long-term, the pipeline's prospects will rely on global oil flows and the comparative attraction of the Canal, which is undergoing a well-publicised expansion.

Another infrastructure project designed to exploit the Canal's bottlenecks, the Panama Canal Railway, has struggled in recent months from the slowdown in global trade. Moody's recently put its $100 million in bonds on review for downgrade. Panama has demonstrated economic resilience, and a newly-energised bank market, but few economies are as dependent on the vagaries of world trade.

Petroterminal de Panama
Status: Signed 29 September
Size: $480 million
Location: Panama
Description: Refinancing and storage expansion for pipeline and storage operator
Sponsors: Government of Panama (50%), NIC Holding (33.17%) and Castor Petroleum (16.83%)
Equity: $105 million
Debt: $375 million
Tenor: 8.5 years
Margin: 425bp over Libor
Financial adviser: HSBC
Mandated lead arrangers:
HSBC, EDC, Banco General, BNP Paribas and Banco Nacional de Chile
Sponsor legal advisers: Fulbright & Jaworski (international); Galindo, Arias y Lopez (local)
Lender legal adviser: Baker Botts