Grupo R's IPC subsidiary has closed the $584 million debt financing for the La Muralla III rig financing. The deal, for which BBVA and WestLB were the mandated lead arrangers, is the first for a deepwater rig in Mexico. It demonstrates that the rig financing structures that have been common in Brazil can be adapted to the commercial and political environment in Mexico.

Mexico's oil and gas sector has been characterised by intense political involvement in production and declining reserves. The state oil company, Petroleos de Mexico (Pemex), has a constitutionally-guaranteed monopoly over oil production, and private companies' involvement in production is severely limited. Critics of the protection suggest that it has retarded investment in new production capacity, particularly in the deeper parts of the Gulf of Mexico.

La Muralla III, named after two older IPC vessels, is an attempt to rectify this historic underinvestment by providing Pemex with a drilling rig that can undertake exploration activity in deep waters. To date, Pemex' procurement efforts have focused on jack-up rigs in much shallower waters, roughly 300m to 500m. Exploiting deeper reserves involves more complex, and expensive, equipment.

In early 2007, Pemex went out to market looking for bids on a deepwater rig that could operate at depths of up to 2,400m. The winning bid came from IPC, Grupo R's drilling specialist, which has been providing services and building equipment under engineering, procurement and construction contracts for Pemex for over 40 years.

The contract runs for five years with an option to extend, and for the first two years of this contract sets a charter rate of $530,000 per day for the use of the drilling rig. After that the day rate is indexed to prevalent market charter rates, meaning that Grupo R and its lenders would need to be confident that global demand for such rigs would stay strong into the middle of the next decade.

The contract, therefore, offers one immediate departure from the contracts under which Petrobras has hired exploration drilling rigs. Petrobras has typically offered longer-term contracts at fixed, but slightly below market, rates, which has typically suited operators and their lenders well.

Since the contract covers only exploration, the contract effectively escapes Mexico's constitutional ban on private involvement in energy exploration. Moreover, the borrower is incorporated in an unnamed offshore European jurisdiction, which allows lenders to perfect a security interest more easily than if the borrower was incorporated onshore Mexico.

The risk transfer in the contract reaps the benefits of what Petrobras has persuaded its rig suppliers and their lenders to accept. IPC's bears most of the risk of operating the rig, with the exception of environmental and extreme weather risk. Its penalty regime does not include the sliding point regime of the Petrobras contracts, but simply allows Pemex to withhold payments for gross underperformance. Grupo R, which is privately-held, but has substantial resources, is understood to have provided limited guarantees to lenders that it will make good on any payments docked for this reason.

The sponsor went out to banks in June 2007 for financing commitments, and selected BBVA (as administrative agent), a relationship lender through subsidiary Bancomer, and WestLB, which has arranged several Brazilian rig financings, as mandated lead arrangers. The two mandated lead arrangers and bookrunners provided a $150 million bridge loan, which funded a downpayment to the rig's builder, Korea's Daewoo, nine days after the Pemex contract was awarded on 25 July.

The sponsor's confidence in the project is reflected in its decision to provide all of the equity to the project alone. The value of the EPC contract for the rig is $684 million, and with soft costs, fees and capitalised interest included the total project cost is roughly $800 million. Grupo R must maintain a minimum 25% equity commitment, but shunned the opportunity to raise equity from the funds, many of them German-domiciled, that specialise in rig investments.
The high equity commitment and a solid EPC contract, which benefits from a Kexim-provided letter of credit, were good for lender confidence.

evertheless, the financing had to be structured around a charter contract that had not been tested in debt markets before, and took roughly 10 months to complete. As Claus Hertel, executive director in WestLB's energy capital markets group, puts it, "the deal was structured around contracts that were already in place, and could not be modified, when banks were mandated." In particular, the leads had to marshal evidence that charter rates would hold up in the event that the rig were not used by Pemex for any reason. The Pemex credit, on the other hand, is well-understood, and well-liked, at project and trade finance banks.

The 7.5-year, single-tranche, $584 million debt launched to market at a 6 June bank meeting. The pricing held firm at 175bp over Libor (both pre- and post-completion) during structuring, but the debt sold solidly. The financing brought in co-arranger commitments from Banamex, HSH-Nordbank, Unicredit/HVB and Nord/LB, while participants were Dexia, Natixis, Alliance & Leicester and Standard Chartered. Beyond the $150 million of the debt that refinances the bridge loan, the rest of the debt will not be drawn until the rig is delivered in 2010.

The interest reflects lender sentiment that even with commodity prices easing up, deepwater exploration activity by national oil companies, in Latin America and elsewhere, will continue to be robust. While Petrobras will continue to be the leader, Mexico will offer some opportunities, with or without a loosening of rules on private activity in the oil industry, which the country's congress is currently debating.

La Muralla III
Status: Closed 11 August 2008
Size: $800 million
Location: Offshore Mexico
Description: Deepwater semi-submersible rig to be chartered to Pemex
Sponsor: IPC/Grupo R
Debt: $584 million
Lead arrangers: BBVA and WestLB
Maturity: 7.5 years
Margin: 175bp over Libor
Market consultant: ODS
Independent engineer: Noble Denton
Insurance adviser: Aon
Environmental consultant: Walsh
Lender legal: Clifford Chance
Sponsor legal: In-house