Black Gold Drilling: Local hero

The $800 million non-recourse debt package backing Schahin's Black Gold Drilling project offshore Brazil reached financial close on 26 October. The transaction, arranged by four bookrunners, Mizuho, Standard Chartered, Unicredit/ HVB and WestLB, was one of the largest project financings in the region's oil and gas sector in 2007 and represents a new asset class in the Latin American project finance market. The deal also gives the sponsor Schahin a much higher profile in debt markets, and could mark the beginning of its entry into other sectors.

Schahin's priorities in arranging the financing centred on most cost-effective provision of two new semi-submersible drilling platforms, which operate in water depths of 2,000m and 2,400m, and the financial structuring needed to realise its aim. The two semi-submersible rigs – Schahin I and Schahin III – are built to a Friede & Goldman ExD design. Schahin I, whose charter runs to seven years from 2010, will operate at 2,000m. Schahin III, with a five-year charter, runs to depths of 2,400m.

Fernando Schahin, managing director at the sponsor, says: "There first challenge in the deal was winning the bids. Petrobras ran a programme to encourage Brazilian drilling partners so that they had less reliance on international players. The thinking is that a Brazilian company would be less likely to exit the country and offering contracts to domestic companies gives them an opportunity to grow with Petrobras. We won the 2,000m tender in a Brazilian-only bid, but we also posted the best price for the 2,400m tender against international competition."

Underpinning the project, Schahin signed charter agreements with Petrobras for the delivery and chartering of the platforms that will perform drilling operations under the PROMINP program, a national Brazilian program to develop offshore reserves. Schahin simultaneously signed operation services agreements with Petrobras for the operation of each of the respective platforms. Under these tenders, the sponsor will be responsible for the construction and operation of the platforms.

The total cost of the two platforms, including some equipment to be contributed by the sponsor, is $732 million. The platforms will be constructed under two construction contracts totaling $508 million with Yantai Raffles Shipyard Ltd. The two can both drill 7,500m below the seabed, and will be used in the Campos field, where most of Brazil's producing oil and gas assets are located. Schahin Engenharia, another Schahin subsidiary, will operate the rigs.

Yantai Raffles is headquartered in Singapore, and listed on the Oslo over-the-counter stock exchange, but builds its ships in Shandong province, China, and has been in business since 1994. It has a lower profile than its Korean and Japanese competitors, but like them has benefited hugely from global demand for offshore oil production equipment.

Schahin adds: "The second big challenge was getting delivery of a custom-made project in a market dominated by sellers. The established shipyards do not take custom-made projects and will only undertake their own shelf projects. It was also important that the timetable set down for first delivery by Petrobras was met."

Whilst the project was in the last few weeks of reaching financial close, Yantai finished construction of a giant gantry crane – Tai Sun – the largest in the world and capable of lifting 20,000 tonnes. It will use the crane to halve the time it would otherwise take to construct the large semi-submersible rigs.

And while Yantai had no proven track record at delivering this type of semi-submersible rigs, lenders were assured by the fact that Schahin engineers would be working on the build and that Yantai has three rigs in its pipeline preceding the Schahin rigs.

The financing consists of a 3.5-year construction phase and a 5-7 year operating phase (depending on the contract term for each rig), during which the facility will amortize to a balloon payment of around 22.5%.

The debt has a margin of 237.5bp over Libor pre-completion, which falls to 200bp post-completion, then falls depending on the project's performance during this operational period. If the rigs are operating at above 95% in three consecutive months the margin drops to 175bp, if they operate at above 97.5% the margin drops to 162.5bp.

Key to the financing was mitigation of completion risk. Schahin's long and successful track record as an operator of offshore rigs helped the mid-size sponsor secure a project financing without a full turnkey engineering, procurement and construction contract from a shipyard new to platforms of this type.

During construction, Yantai will provide a performance guarantee issued by Sinosure equal to 10% of the shipyard contracts, as well as liquidated damages equal to 5% of the shipyard contract amounts. These enhancements, together with an $80 million letter of credit and a comfort letter from Schahin, cover around 45% of the completion risk. The total project costs are estimated at around $1 billion, including all EPC costs and contingencies, financing fees, interest during construction, and other typical items.

"The third big challenge was leveraging the deal," says Schahin. "The deal was very well received by the market and we were very satisfied by the oversubscription. The banks were focused on the construction risk, since the counterparty risk of Petrobras is negligible and operation risk is mitigated by our solid track record of drilling operations. We explained during the roadshows that Schahin engineers would be intimately involved in the build and the banks became comfortable with the planned drilling package, the pricing and the qualifications."

The four leads brought in the IFC as a participant, in the form of a $50 million A loan. China Development Bank has by far the largest hold among the banks, with a $150 million allocation. CDB's involvement indicates that Chinese banks have lost none of their enthusiasm for overseas oil and gas credits.

Following syndication, the four bookrunners, senior lead arranger Dexia, and arrangers KfW and HSH-Nordbank all retained $57.86 million. BBVA and SP IMI were co-arrangers for $50 million, co-arrangers Shinhan and Itau BBA took $40 million and $30 million, respectively, while Caterpillar, with $15 million, and Nordkap, with $10 million, were participants.

In the wake of the deal, Schahin's plans could extend outside of Brazil. "The deal takes the company to a totally new level," says Schahin. "This could lead it to other countries and be the first step in becoming an international player."

Black Gold Drilling
Status: Closed 26 October, funded 5 November
Size: $1.013 billion
Location: Offshore Brazil
Description: Financing for two semi-submersible rigs to be chartered to Petrobras
Sponsor: Grupo Schahin
Debt: $800 million
Mandated lead arrangers:
Mizuho; Standard Chartered; Unicredit/HvB; WestLB
Lender legal adviser: Milbank Tweed Hadley & McCloy
Sponsor legal adviser: Linklaters
Independent engineer: Noble Denton
Insurance: Moore-McNeil                                                                                                                                                         Trustee: Bank of New York