The $1.4 million borrowing base facility for Sonangol Sinopec International's (SSI) stake in the Block 18 oilfield development project signed on 12 May, achieving unexpectedly low margins for a deal involving Angolan risk.

Sinopec and Sonangol teamed up to buy Shell's 50% stake in the project in December 2004. BP operates the block and holds the other 50% of the project. The construction period is expected to take 15 to 20 months, with the first oil flowing from the Plutonio development, one of six finds in the block.

The borrowing base facility will refinance previous debt taken out by SSI for the acquisition of Shell's stake, as well as well as further expansion of the project. Calyon and Standard Chartered provided SSI with a $1 billion bridge loan for the venture, while Sinopec also took out a $1.1 billion corporate facility last year, part of which went towards Block 18. Sonangol also raised a $3 billion structured commodity finance loan arranged by Calyon last December.

The latest deal is symptomatic of low margins in the GCC and lenders looking to Africa with growing enthusiasm as they seek to trade off some political certainty in exchange for basis points. But SSI, a joint venture between Chinese state-owned oil and petrochemicals company Sinopec and its Angolan counterpart Sonangol, ended up in a strong negotiating position when Royal Bank of Scotland responded to its request for commitments with an offer breathtakingly priced at 125bp.

SSI's financial advisers, Standard Chartered and Calyon, requested responses from banks in January, and all the banks bar RBS are said to have bid between 175bp and 200bp. But RBS's offer changed the playing field and was enough to ensure the seven-year debt ended up pricing at 140bp for the first three years of operation, stepping up to 150bp thereafter. During the construction period, the loan is guaranteed by Sinopec and so pays just 40bp. The front-end fee is 100bp and repayments are semi-annual, while a two-year grace period is in place and can be extended to up to five years.

Having helped to drive down the margins on the loan, RBS ironically ended up outside the club of 13 banks financing the deal. Its offer was conditional upon getting the job of technical bank, a role that was always going to go to either RBS or BNP Paribas. When it became clear that BNP would be selected and that RBS would instead be offered the role of facility agent, RBS asked to be joint technical bank but BNP refused. RBS decided to stay out of the deal, despite margins that were 15bp higher than what it was prepared to lend at. Some bankers claim that by then Sinopec had gotten peeved and that RBS was no longer as welcome on the deal as it had been.

Speculation is that RBS's low bid was motivated by a desire to establish a relationship with Sinopec as China expands its pursuit of African resources. But the net effect was to show that in the current liquid lending market, a bit of country risk is no guarantee of fat margins. Even the 175bp-200bp that most banks offered seemed too low in some eyes. Yet that was in line with Nigeria's Satellite oilfields project, which priced under 200bp last December despite involving more risk.

Half the debt is provided by five Chinese banks, unusual – despite the presence of Sinopec in the deal – given the Asian superpower's lack of presence in the international syndications market. China Development Bank is lending $205 million; China Exim Bank, $200 million; China Construction Bank, $144 million; while Agriculture Bank of China is lending $76 million and Bank of China provides $75 million.

Of the remaining $700 million, technical bank BNP Paribas and facility agent ING will both lend $115 million, while security agent Natexis will provide $91 million. BayernLB, Calyon, KBC and Standard Chartered will each lend $76 million, and SG CIB is providing $75 million.

The mix of Chinese and international lenders threw up a few challenges – notably the voting rights between the creditors. SSI and the banks considered the option of creating separate tranches for the Chinese and the international lenders. However, they decided instead to mix all the lenders together in one tranche, thus making the loan easier to manage. A series of direct and indirect agreements make the legal structure slightly more complex than on most project finance deals.

No further syndication of the loan is planned, though banks are allowed to sell down part of their takes.
Angola is Africa's second largest oil producer after Nigeria, and the Block 18 financing is part of a concerted Chinese campaign to secure a greater share of the continent's oil to aid its own economic expansion. SSI's acquisition of Shell's stake was eased by China's extension of a $2 billion credit line to the Angolan government.

Of China's three state-owned oil companies, Sinopec is actually the one with the least foreign operations and the one most heavily focused on downstream assets rather than upstream ones like Block 18. Its joint venture with Sonangol is making a renewed push to get Angola's long-running Lobito refinery project, known as Sonaref, back on track. Taylor DeJongh is thought to have taken over from Dresdner Kleinwort Wasserstein as financial adviser for the $3 billion project.

SSI earlier this year also made a record $2.2 billion bid for the licenses to the relinquished areas of Block 17 and Block 18. The bids, $1.1 billion for each, eclipse the previous highest offer of $902 million by Eni for Block 15. SSI failed to get the maximum 50% stakes in the projects, but in May was awarded 27.5% of Block 17 and 40% of Block 18.

SSI Block 18
Status: Closed 12 May
Size: $1.4 billion
Location: Off Angolan coast
Description: Borrowing facility for 50% stake in the development of Block 18 oilfield
Sponsor: Sonangol Sinopec International
Financial advisers: Standard Chartered, Calyon
Borrower legal: Jones Day
Lender legal: Norton Rose