Although competitive pressure is returning to the bank debt market, bond market appetite for the right credit has returned more quickly. In the wake of record take-up of the RasGas 2/3 bond on July 17, the Dolphin gas pipeline refinancing – a combination of bank and bond debt – closed on 27 July beating its sponsor's pricing and take-up expectations.

The $1.25 billion 10-year bond came in at 12.5bp inside price guidance and around 100bp below that of the bank debt pre-arranged in March. On the back of the success of the bond, bank takes were scaled back by 49%.

In May 2008, Royal Bank of Scotland (RBS) was appointed as Dolphin Energy's financial adviser for the refinancing of a $3.45 billion bridge secured in 2005 and expiring on 31 July 2009. The credit market had been suffering for some months, and the freefall that followed the collapse of Lehman Brothers meant that RBS had to work hard to get lenders on board. However, the deal had the advantage of being linked to a fully operational facility, which meant that RBS could structure it as 10-year, fully amortising debt with an average life of just over five years.

In March 2009, RBS took $2.6 billion in commitments from a club of banks, as well as commitments for a $400 million Sace facility, therefore covering the refinancing of the bridge, although not the original $1.4 billion loan from the project's sponsors. Covering the refinancing with committed bank debt and a Sace facility at an early stage meant that testing the bond market could remain optional in the uncertain climate.

Once bank commitments were in place, RBS appointed joint lead managers for the bond, telling banks that those committing a minimum of $100 million on an uncovered basis to the bank debt would qualify. Joint lead managers for the bond were RBS, BNP Paribas, Abu Dhabi Commercial Bank and National Bank of Abu Dhabi, with RBS and BNP Paribas acting as joint bookrunners.

There was a strong market reception for the bond, and orders of around $4.9 billion were taken. The appetite was significantly better than expected at the beginning of the year, with the sponsors – Mubadala (51%), Total (24.5%) and Occidental (24.5%) – initially predicting a bond component of around $750 million. Following the show of appetite, the sponsors decided to increase the bond portion. Consequently, the refinancing package  closed with all 25 banks, including the five on the Sace facility, scaled back by $1.36 billion on a pro rata basis in accordance with their original commitments, despite the fact that some of the banks had expressed a wish not to be scaled back earlier in the process.

At close, the financing broke down into $1.42 billion in bank debt, a $1.25 billion bond and a $218 million Sace facility. The four banks with key roles in the deal took the biggest tickets – RBS as offshore accounts bank, First Gulf Bank as onshore security trustee, Societe Generale as intercreditor agent and National Bank of Abu Dhabi as commercial bank facility agent.

The bank facilities are structured as fully amortizing 10-year debt, with an average tenor of just over five years. Pricing starts at 275bp over Libor until year 3, stepping up to 300bp until year 6, and then 350bp. The Sace facility is priced at 175bp over Libor. Fees were 90bp for the bank debt and 80bp for the Sace facility. The debt-to-equity ratio was just below 70:30, the minimum DSCR was 2.4x, and the LLCR was 2.5x.

Around 50% of the project revenues are based on 25 year take-or-pay gas supply contracts with quasi-governmental offtakers – Oman Oil Company, Abu Dhabi Water & Electricity Authority, Fujairah's Union Water & Electricity Company and Dubai Supply Authority – with a weighted average sale price of $1.6/mmbtu. Given the pipeline links Qatar, Oman and the UAE, the project is also of high strategic inter-governmental importance, particularly in Abu Dhabi.

Border issues played a part in the move to close, which was originally slated for 30 June. Lenders became concerned that a sub-sea part of the pipeline crossed a maritime corridor used by Saudi Arabia, but the sponsors covered off any potential risk to ensure that the deal would get away on time. The deal did close before the 31 July bridge expired, but only just – the bridge was repayed on 30 July.

The $1.25 billion 10-year bond priced on 23 July at par with a coupon of 5.888% and a spread of 337.5bp over US treasuries, giving it an all-in cost of 100bp below the bank piece, a good showing for a bond in this climate by a debut issuer.
On the bond, RBS, BNP Paribas, Abu Dhabi Commercial Bank and National Bank of Abu Dhabi took orders of $4.8 billion from 222 accounts. Take-up was fairly level across the international markets – 37% of notes were purchased in the US, 35% in Europe, 24% in the Middle East and 4% in Asia.

Although the Dolphin bookrunners were able to take advantage of the performance of the RasGas 2/3 bond – the $2.23 billion three-tranche corporate bond also priced under guidance and captured $17.5 billion of orders from 400 accounts, the most for a Gulf issue to date – the low cost of the Dolphin bond surprised the market as much as the sponsors. This strong appetite for Dolphin's debut bond, added to the fact that liquidity in this climate must have its limits, is a sure sign that the project bond is on its way back.

Dolphin Energy
Status: Closed 27 July 2009
Size: $4.113 billion
Location: Qatar
Description: Bond and bank debt refinancing of a gas pipeline
Sponsors: Mubadala (51%), Total (24.5%) and Occidental (24.5%)
Debt: $1.25 billion 10-year bond, $1.42 billion in fully-amortizing 10-year debt with an average life of five years and a $218 million Sace facility.
Financial adviser: Royal Bank of Scotland
Bond joint lead managers: RBS, BNP Paribas, ADCB and NBAD
Bond bookrunners: RBS, BNP Paribas
Bank debt mandated lead arrangers: ADCB, BayernLB, BNP Paribas, Calyon, Export Development Canada, First Gulf Bank, NBAD, Samba Financial Group, SG, SMBC, BTM, RBS, WestLB, Arab Bank, Arab Banking Corporation, CIC, Europe Arab Bank, HSBC, KBC, Lloyds TSB, NAB, Natixis, Standard Chartered, CBQ and Union National Bank
Lender legal adviser: Sullivan & Cromwell
Sponsor legal adviser: Shearman & Sterling
Technical adviser: Shaw Group (formerly Stone & Webster)