Nord Stream has received 38 responses from banks to its request for proposals for the Eu3.9 billion ($5.69 billion) financing for its Russia-Germany pipeline project. The sponsor – jointly advised by Commerzbank, SG and RBS – is expected to appoint lenders on, or around, 23 October.

The project is also garnering more equity and offtake interest. GDF Suez is expected to take a 9% stake – 4.5% each from E.ON and BASF/Wintershall – by the end of the year and is using the same shareholding purchase documentation as when Gasunie joined the deal, which should speed up the process. Furthermore, DONG Energy has signed a second offtake agreement with Gazprom that doubles its 20 year 1 bcm/y preliminary agreement signed in 2006: The new additional contract, under which Gazprom will deliver an additional 1 bcm/y of gas for 18 years, is linked to the finalisation of the second phase of Nord Stream.

Symptomatic of strong bank appetite for the project, so far, no wholesale changes have been requested to the model term sheet. The potential sticking point for most international banks is their internal limits to Russian exposure, however since a market sounding exercise in February the capital position of many lenders has improved.

Although liquidity could have been improved by escrowing the project debt outside of Russia, after an extensive legal due diligence the sponsors decided that this would not be viable – an offshore structure runs the risk of being deemed illegal under Russian tax repatriation laws. Financial obligations are an exception to the repatriation rules, but Nord Stream is an operating obligation.

Following the market sounding earlier in the year, the planned uncovered tenor of 14-years was reduced to 10-years and the sweet/sour ratio, between covered and uncovered debt, set at 80/20. The Eu3.9 billion financing under the model comprises an Eu800 million 10-year uncovered tranche with a model price in the high 300bps; a Eu1 billion German government UFK untied loan facility; a Hermes facility of around Eu1.6 billion and a Eu500 million Sace facility.

The UFK, Hermes and Sace facilities offer commercial and political risk insurance of 90%, 95% and 100% respectively. The banks are being offered a margin of around 175bp for funding these covered facilities. All facilities are fully amortizing.
The debt is secured against a 22-year transportation agreement with the shipper, Gazprom Export, supported by a Gazprom performance guarantee. The transportation fee is calculated to give a specified IRR to the sponsors. The agreement is for 100% of the 27.5bcm annual capacity on a ship-or-pay basis, so banks are taking no volume or market risk.

Lenders benefit from full and complete completion guarantees from shareholders and a minimum debt service cover ratio (MDSCR) provision – if the debt cover falls below a trigger of 1.275x the tariff under the transport agreement is increased so that the DSCR is preserved at 1.275x.

Permitting from Finland, which initially opposed the project, is progressing but there are still permits outstanding from Denmark and Sweden (the pipeline traverses their economic zones in the Baltic Sea). The Danish permit is expected to be granted soon, followed by Sweden by the end of the year. Germany and Russia have still to grant their permits although this is expected to be a formality. Award of the permits is not a condition precedent to the financing given the sponsor guarantees in construction.

Banks are being offered four ticket sizes from Eu100 million to Eu300 million, and while there is preference for the banks to fund the covered facilities pro-rata 20:80, there is no obligation to do so. Banks that enter fully compliant bids however, will have preferential treatment in the awarding of bank roles and priority when deciding hedging banks. Nord Stream plans to hedge the interest rate of at least 50% of the debt with an aim of 80%.

Bank responses were due on Friday 9 October. The selection of the club is expected on 23 October, with financial close due by the end of November. Clifford Chance is providing legal advice to Hermes and Sace, and White & Case is advising Nord Stream. ERM is the project's environmental consultant.

Given their parlous capital positions, Russian banks are not expected to participate in the deal, particularly given the tenor and their cost of Euro funding. The German banks are likely to take a sizeable portion of the financing given the geo-political importance of the project and also their ability to cheaply securitize their commitments to the Hermes and UFK covered facilities using a pfandbriefe. This should improve liquidity for the project and potentially lower debt pricing.

Unicredit/Hypovereinsbank has been mandated to advise on the UFK tranche and as a corollary is alerting potential arranging banks about the possibility of securitisation via a pfandbriefe. The UFK instrument is part of a programme from the German government to help secure strategic raw material supplies – it is administered by PwC.

The project, a 1,220km-long gas pipeline linking Russia and Germany via the Baltic Sea, is 51% held by Gazprom, while Germany's BASF/Wintershall and E.On Ruhrgas hold 20% each and Nederlandse Gasunie has 9%. Construction is scheduled to begin when the Baltic Sea is ice-free in April 2010 and will be complete in 2011.

The Eu3.9 billion debt is the first of a two-part fundraising effort for Nord Stream. Phase 2, also with a 27.5bcm per year capacity, will be launched when the second round of construction nears in 2010. By then, Nord Stream estimates there will be Eu2.6 billion left to finance.