MOSAGAS: follow the sponsor

Sasol's 12-year $1.2 billion equivalent Mosagas pipeline and gas field financing is an elegant, if complicated, hybrid corporate structure that comfortably exceeded the terms upon which lead sponsor Sasol can normally borrow.

The deal featured two borrowers (Sasol and ENH), ECA, multilateral, development bank, and commercial tranches, and potentially two governments as sponsors. It also developed a novel political risk insurance structure to take care of Sasol's most important worries.

The project consists of three elements ? the development of the Pande and Temane gas fields in Mozambique, the construction of a central processing facility in Mozambique and the 865km pipeline to transport the gas to Sasol's Secunda plant in Mpumalanga, South Africa. The gas can be used to supply domestic and industrial customers, but can then also be piped to Sasol's Sasolburg petrochemical facilities.

The project has been a possibility since the 1960s, when gas was first found in Mozambique, but it has been the return to stability and good relations of the two countries that has given the project a key impetus. The governments also had to agree on the price that the venture would pay for the gas. Andre Coetsee, Managing Director of Sasol Financing, says that his team has been working on the deal for well over two years.

Since the pipeline is a key part of South Africa's plans to diversify its energy sources, and Sasol's plans to find new sources of gas, the sponsor was more than happy to accept commercial risks on balance sheet. According to Coetsee, ?if we'd have opted for a full non-recourse financing, we might still have been working on the deal today.?

Moreover, the pipeline is already complete and pumping gas, so there was no need for Sasol or its lenders to look at mitigating construction risk. But despite the absence of some obstacles, taking the varied multilateral lenders through the financing structure was extremely time-consuming. ?We needed to take them through issues such as step in rights and security interests, traditional lender concerns,? says Coetsee.

The Development Bank of Southern Africa took charge of the negotiations with multilateral and development lenders, while Standard Bank worked with the ECAs on their coverage of the commercial bank facilities. Coordinating these efforts was Dresdner Kleinwort Wasserstein, the financial advisor to the sponsors.

The eventual debt package was split between the Republic of Mozambique Pipeline Investment Company (ROMPCO), and Sasol Petroleum Temane (SPT), the borrower for the upstream production and processing assets. ROMPCO borrowed R1.6 billion and Eu100 million, while SPT borrowed R1.060 billion and Eu30 million.

The ROMPCO debt breaks down into an EIB tranche of Eu100 million, R200 million from the African Development Bank, and R350 million from Development Bank of South Africa, with the last two priced at 300bp. Of its commercial debt package, R350 million has ECIC coverage, priced at 160bp over Jibor with a 108bp premium, R70 million has coverage from the International Bank for Reconstruction and Development, priced at 160bp with a 200bp premium, and R320 million features coverage from MIGA, priced at 168.5bp with a 127bp estimated and upfront premium.

The MIGA exposure has been sold down to Sace and EFIC, each of which took R155 million. It has 95% political risk cover, while the other two providers offer 100% coverage.

The SPT financing is almost as elaborate ? the DBSA provides R300 million, the ADB provides R350 million, and DEG, FMO and Proparco provide Eu30 million between them. Of the commercial debt, ECIC covers R80 million and IBRD covers R140 million, on the same terms as above, and MIGA covers R190 million, priced at 168.5bp and with a 138bp premium.

Nevertheless, the two deals are cross-collateralised and feature cross default provisions, since one cannot really function without the other. However, the Mozambique government owns 30% of SPT through ENH, and the two governments, Mozambique and South Africa, each have an option to buy 25% of the pipeline company.

Nevertheless, Sasol has taken out political risk insurance on its equity participation, and it will not guarantee the debt in the event of a major political risk event. According to Coetsee, structuring this element took a little longer than usual, but he adds ?both ourselves and our commercial lenders are familiar with the risks of operating in this part of the continent.?

The project is sufficiently contractually robust, with a guaranteed construction contract, operations and management agreement, gas sales agreement, and the above insurance, that banks roughly doubled the tenor they were prepared to offer Sasol. The 12-year deal compares with 5-7 on Sasol corporate debt, and does feature some restrictions that resemble project finance covenants. But the guarantee means the debt is probably at least 150bp cheaper than a fully non-recourse deal.

Completing the financing was an arduous process, and the guarantee means that the debt is fully present on the sponsor's balance sheet. But better capitalized oil companies operating in core markets might do well to look at the structure, which while likely more expensive than self-lending, avoids some of the costs of a full project deal.

Mozambique-South Africa Gas Pipeline (MOSAGAS)
Status: closed 15 March 2004
Size: $1.2 billion equivalent
Description: financing for upstream and downstream extraction and pipeline project.
Sponsors: Upstream ? Sasol (70%)and ENH (30%); downstream ? Sasol (100%) governments of South Africa and Mozambique (25% options)
Mandated lead arrangers: Standard Corporate and Merchant Bank; Development Bank of Southern Africa
Lenders: Proparco; DEG; FMO; ADB; DBSA; Standard Bank; EIB
PRI: MIGA; ECICSA; IBRD; Sace; EFIC
Financial adviser to sponsors: Dresdner Kleinwort Wasserstein
Lender legal: Cadwalader Wickersham & Taft (international); Webber Wentzel Bowens (South Africa), Alexandra Carvalho (Mozambican)
Sponsor legal: Allen & Overy (international) Hofmeyr, Herbstein and Gihwala (South Africa) and MGA ? Advogados & Consultores, Lda (Mozambican)
Government legal: Denton Wilde Sapte