Cairn India: Migrate and restate

Putting together Cairn Energy's Indian deal was a feat made challenging by its size, a planned initial public offering (IPO) that would carve out Cairn's India interests as a standalone entity, and the integration of International Finance Corporation (IFC) as a creditor alongside commercial banks.

Cairn closed its $1 billion financing in June 2006. The loan was structured as a hybrid facility, split into an $850 million Rajasthan field development tranche and a $150 million corporate tranche. The development tranche had covenants typical for a reserves-based loan, which credits the borrower for the net present value (NPV) for future cash flows from four development fields in the Rajasthan region. One of the fields, Mangala, is the largest discovered in India since 1985.

RBS won a funding competition to secure the mandate, on a best efforts basis, with the IFC. Unusually, rather than utilise the A-B structure that multilaterals frequently employ, IFC spread its commitment of $150 million, with a nine-year tenor, pro rata across both tranches: $127.5 million to the development tranche and $22.5 million to the corporate tranche.

The IFC has been praised for taking a more commercial stance than has been the case with multilaterals in the past. The bank has a healthy relationship with Cairn Energy, since it was a participant in an earlier bilateral bank facility for Cairn's Indian developments. "The IFC brought a lot of expertise to the deal and we welcomed the environmental aspect and the ongoing support and monitoring it will undertake" says Kerry Crawford, deputy finance director at Cairn Energy.

The commercial banks also benefit from the umbrella effect of the IFC's presence, which provides political and environmental assurance to the lenders. The commercial portion had a tenor of five years. Bookrunner RBS brought aboard ABN Amro, Barclays, Citigroup, HSBC, ICICI, Lloyds TSB, Mizuho, NAB, Société Générale, Standard Chartered, Sumitomo and Bank of Scotland.

The June financing took out Cairn's existing $240 million bank debt for its India operations, which had been put together by a group of four banks that included the IFC: ABN Amro, RBS, ANZ and Barclays but negotiated on a bilateral basis with each lender. "Cairn Energy has always followed a relationship model with its banks," says Crawford. "This was the first transaction where we have used a syndicated agreement. It was important to select banks which we felt we could have a good ongoing relationship with to diversify our sources of funding and achieve good value."

In November 2006, the syndicate facility was amended and restated following Cairn's announcement of its intention to float an Indian subsidiary (Cairn India Limited) on the Bombay stock exchange and National Stock Exchange on 9 January 2007. The restated facilities retired the $150 million corporate tranche – it was repaid as part of the conditions precedent after the successful IPO – and removed the Cairn Energy parent guarantees from the $850 million development facility.

The successful IPO of Cairn's Indian subsidiary was a condition of the restated financing. Cairn Energy retains a 69% interest in Cairn India Limited. On 27 February, Cairn announced that about £481 million ($932 million) of the proceeds from the flotation of its Indian business, Cairn India, would be distributed to shareholders.

Three of the arranging banks left the facility following the restatement – Lloyds TSB, NAB and HSBC. This was largely a reflection of the logistics of monitoring the debt from London offices following the withdrawal of the parental guarantee, rather than the banks' discomfort with the borrower's risk profile. IFC and RBS retained the same commitments, with the slack left by the three departing banks taken up by the remaining nine banks.

The debt is being used to fund Cairn India's medium-term expenditure programme, and bring several recent oil discoveries in the Rajasthan region to production. Cairn's exploration efforts are primarily focused on Block RJ-ON-90/1 onshore Rajasthan and it has interests in a further 14 blocks in India. In early 2004, exploration activity moved to prospects in the northern third of the block and has resulted in number of major oil discoveries. Cairn India currently has several drilling rigs operating in Rajasthan and is conducting fast-track exploration, appraisal and development activities in parallel across the block.

Following the January flotation of Cairn India, the Indian entity now operates the group's interests in Eastern and Western India, while Cairn Energy's subsidiaries continue to operate the group's interests in Bangladesh and Nepal. Both Cairn Energy and Cairn India have an equity interest in the group's acreage in Northern India.

In all, Cairn Energy's syndicated facility incorporated asset development risk in a relatively new market, and the migration of facilities away from a parent and a flotation. That the debt facility was migrated so quickly to a standalone Indian entity illustrates the quality of the underlying assets. The deal is testament to the bank market's flexibility in the face of the changing demands of a quality sponsor.

Cairn India Holdings Limited

Status: Original syndicate facility signed June 2006, restated facility signed 22 November 2006, and conditions precedents for drawdown fulfilled 31 January 2007
Description: A $1 billion corporate facility that was migrated from Cairn Energy PLC to Cairn India Holdings Limited and reduced to $850 million development facility.
Borrowers: Cairn Energy; Cairn India Holdings Limited
Mandated lead arrangers (initial syndicated facility): IFC, RBS (bookrunner, ABN Amro, Barclays, Citigroup, HSBC, ICICI, Lloyds, Mizuho, NAB, SG, Standard Chartered, Sumitomo, Bank of Scotland.
Mandated lead arrangers (restated facility): IFC, RBS, ABN Amro, Barclays, Citigroup, ICICI, Mizuho, SG, Standard Chartered, Sumitomo, Bank of Scotland
Legal counsel to lenders: Herbert Smith
Legal counsel to borrowers: McGrigors