The arrangers of the Dampier-to-Bunbury Natural Gas Pipeline (DBNGP) acquisition financing are currently mulling over the final stage of the funding package, likely to be a bond to replace the A$500 million senior bridge facility provided by Barclays Capital and Citigroup.

At present, the financing includes the bridge facility, an A$880 million ($670 million) syndicated term facility, a A$350 million syndicated capital expenditure facility, and a A$25 million working capital facility provided by Westpac and Citigroup. The syndicated term facility is made up of a 3-year tranche of A$380 million, and a 5-year tranche of A$500 million. Additionally there is A$150 million of subordinated debt, a Western Australia State Government Loan of A$88 million and an equity bridge facility from Macquarie, AMP Life and AMP Capital Investors to Diversified Utility and Energy Trusts (DUET) worth A$364 million.

Westpac, Barclays and Citigroup were lead arrangers for the syndicated facilities. DUET (itself owned by AMP and Macquarie Bank) has a 60% share in the consortium which purchased the asset out of receivership. Alinta and Alcoa hold the remaining 40%. DUET will fund its equity commitment using a non, fully underwritten A$390 million entitlement offer to its stapled unit holders and a A$155 million loan from the POWERS Trust, a sub trust of DUET, which will be on lent to the DBNGP operating vehicle. These offerings, once complete, will retire the equity bridge.

Genevieve Gregor, vice president, global loans, at Citigroup, says a decision on the bond is likely in the first quarter of 2005 (the bridge is for 6 months). "All options are currently available if we do opt for a bond. It could be either onshore or offshore, wrapped or unwrapped. The decision will mainly depend on what offers the best price at the time," says Gregor. The arrangers are considering the capital markets issue to further diversify funding, and provide additional tenor and staggered maturities to the funding package.

Given the poor financial history surrounding the pipeline, the key challenge was to re-commercialize the asset, says Robert Dunlop, executive director at Macquarie (amongst other roles Macquarie was financial adviser to the winning consortium).

When the previous owner, Epic Energy bought the asset in 1998 it paid A$2.4 billion market, far more than other bidders were prepared to stump up. "Competing bidders offered closer to A$1.8 billion," notes Dunlop. Epic clearly overestimated the revenue stream of the pipeline. DBNGP's revenue contracts were unable to support outstanding debt and the substantial expansion required by the gas shippers.

In late 2003, UBS was mandated to sell DBNGP but was unable to reach an agreement with DBNGP's customers, the gas shippers, to conclude the re-commercialisation. The 28 banks who financed the original acquisition and who were collectively owed A$1.85 billion, rolled over the loan facilities several times while the sale process dragged on. In April 2004, they ran out of patience and DBNGP went into receivership.

Several months later, Macquarie succeeded where UBS failed and put in place a new, standard shipping contract, which replaced all previous contracts. The process was made that much easier as two of the winning consortium's shareholders, Alcoa and Alinta, are among the pipeline's major shippers.

Dunlop says that, until 2016, the shippers have agreed to pay a higher tariffs than they paid in their original contracts, putting DBNGP on a firmer financial footing. "In 2016 the tariff will revert back to the regulated rate, whatever that may be at the time," says Dunlop. "From the shippers' perspective, the main selling point was that the new funding structure would give DBNGP sufficient funding for a much needed expansion of capacity" says Mark Aldous, director, project and structured debt at Westpac.

Steve Zuckerman, director, global loans, at Barclays comments: "DBNGP was always a good asset but it now has a much improved capital structure, with substantially lower debt and gearing." In the new deal, the amount of debt drawn at financial close was A$1.23 billion compared with the A$1.85 billion of debt which previously encumbered the pipeline. Gearing was 68.4% at financial close, says Zuckerman. The new owners have been able to repay all the existing bank debt, in full.

To make the fundraising more palatable to a wary bank market, Zuckerman says that the arrangers took the step of seeking a rating for the transaction from S&P. "The senior facilities were eventually rated BBB (stable)," says the banker. Lenders could also get comfortable with the new ownership structure, adds Aldous, given the quality of the sponsor group, and fact that the gas supply is essential to the business of both Alcoa and Alinta.

There is no sponsor support or recourse to sponsors embedded in the financing, says Aldous. However, Zuckerman notes that there is also no market risk in the deal. "For instance, the capex facility can only be drawn in there is a contract in place for expansion," the banker says.

Sub underwriters all committed at the top level, says Zuckerman and there was no need for a general syndication. However, commentators indicate that the syndicated facilities are still priced at a slight premium to the typical BBB facility. The syndicated facilities carry margins, at the current BBB level, of 80bp for 3 years and 90bp for 5 years.

In terms of fees, sub-underwriting of A$175 million with a A$125 million final target hold, paid 75bp flat. Had banks committed at the lower A$100 million threshold, fees would have been 70bp flat.

According to Aldous, both the size of the capital expenditure and the syndication of that facility were unusual features of the deal. Capex needs are substantial because the asset has been neglected for several years. "Over the next three years, the winning consortium is required to expand the capacity of the pipeline to 614 terajoules per day from the current level of 514 terajoules per day," says Dunlop. "Sponsors needed to have a high degree of certainty regarding the drawdown of the capex facility and this is achieved through careful structuring of the conditions precedent," says Aldous.

It is understood that the WA loan is provided in connection with the stamp duty on the acquisition.

Dampier-to-Bunbury Natural Gas Pipeline
Status: Loan facilities closed, bond pending
Size: $2.357 billion
Location: Australia
Description: Financing for the acquisition of Western Australia state's largest natural gas pipeline
Sponsors: DUET, Alcoa, Alinta
Lead arrangers: Barclays Capital, Citigroup, Westpac
Legal counsel to sponsors: Allens Arthur Robinson
Legal counsel to lenders: Freehills