Coogee Resources: As good as it gets?

The $270 million, 6-year project financing for Coogee Resources' development of the Montara field and associated assets in the Timor Sea broke reserve-based borrowing benchmarks, even compared with a mature market such as the North Sea.

The deal is notable for providing a sizeable sum for development financing the Asia-Pacific region. Borrowing-base facilities in the region in excess of $100 million are few and far between. The development assets, principally the Montara field, also provide very challenging conditions for extraction, with a thin oil column that requires directional drilling and relies heavily on the technical expertise of the sponsor.

Despite the drilling challenges and the rarity of a financing of this size in the region, the financing features a junior debt tranche that is being used to complete the project – the first time this has been done in reserve-based lending.

NabCapital, HVB and Royal bank of Scotland were appointed by Coogee Resources as mandated lead arrangers to structure a borrowing base facility to provide development funding to bring new assets to production.

The Company's largest producing asset is Jabiru, which first came to production in 1986 and uses a floating production, storage and offloading vessel (FPSO). The field is in late stages of decline and has around 4 million barrels of 2P reserves remaining). The other producing asset is Challis, which was first in production in 1989, uses an FPSO, and is also in late stages of decline with around 2 million barrels 2P remaining. The development assets are principally located at the Montara field, and will also be accessed via FPSO. All assets are located offshore in shallow water in the Timor Sea.

While the financing is largely based on standard borrowing base position, the deal contained several tweaks to the typical structure. Most notably, a junior facility is be fully drawn, along with the senior debt, in order to fund project costs; and the deal features a cost overrun letter of credit (L/C) included in the borrowing base calculation, recognising equity support from Babcock & Brown in the project. Coogee Resources signed an agreement with Babcock & Brown for the latter to arrange a $180 million equity investment in the company and a $52 million letter of credit facility.

In addition, the borrowing base amount is sized only according to a loan life cover ratio (LLCR) rather than a project life cover ratio, which is usually the case. The LLCR is 1.4x, rather than the usual 1.3x, to make cashflows more robust in the face of the innovations in other parts of the structuring.
As well as the technical challenges and the structural innovations, lenders also had to get to grips with no engineering, procurement and contribution contract, a relatively rapid decline in production profiles; and the FPSO leased with the lessor holding first ranking charge over the vessel.

Most of these risks are mitigated by the contingencies in the financing package, particularly the letter of credit facility provided by Babcock & Brown. Lenders also drew comfort from the detailed reserves and drilling reports and the fact that the long-lead assets have already been ordered, so there is a tight grip on costs.

With regards to commodity price risk, RBS provided a heavily structured package of swaps and ratio collars executed to protect against downside and ensure benefit from upside oil price was not lost to increases in Australian Petroleum Resource Rent Tax.

Syndication of half of the $270 million debt was oversubscribed and closed in November 2007. The remaining half of the debt will be retained by lead arrangers NabCapital, HVB and Royal Bank of Scotland. The six-year senior debt is priced at 135bp over Libor pre-completion and 125bp over Libor post-construction.

Participating banks were offered upfront fees of 105bp for the senior piece and 200bp for the junior piece on a blended ticket. Despite syndication signing after the first flush of the subprime crisis, the deal finished slightly oversubscribed. GE, Bank of Ireland, SMBC and KBC came in on the deal.

The Coogee Resources financing is likely to be a high tide marker for future reserves-based lending. Though the concurrence of relatively cheap debt pricing and such structuring innovation is unlikely to be seen in the foreseeable future, it is likely that some structural features – such as the bundling of junior debt with the senior facilities to bring a development asset online – will be followed in the not-too-distant future.

Coogee Resources Limited
Status: Financial close 6 July 2007, syndication closed in November
Description: $270 million borrowing base facility for development of oil assets in the Timor Sea
Sponsors: Coogee Resources; Babcock & Brown
Mandated lead arrangers:
NabCapital; HVB; Royal Bank of Scotland
Legal advisers to sponsors: Freehills
Legal advisers to banks: Mallesons
Lessor of the FPSO: Cassie Navigation
FPSO conversion manager: Tanker Pacific in Singapore.