What will probably be the biggest African project of 2004 - the $1.2 billion Mozambique-South Africa Gas Pipeline (MOSAGAS) lead sponsored by Sasol - reached financial close on its 12-year R3.38 billion ($532 million) debt package on 15 March.

But more significant than its size, the deal is a hybrid - in effect a corporate loan with separate political risk provisions that turn the deal 'non-recourse' in the event of political risk-driven default. It is a structure that could be applied by many oil and gas sponsors to lower development finance costs whilst retaining protection from political risk in the sub-Saharan region.

The benefits of the structuring for Sasol are tangible - 320bp-330bp over Jibor all-in commercial debt pricing (cheaper than traditional project finance) and the necessary insulation from Mozambique political risk that will keep Sasol's shareholders comfortable.

The brainchild of Sasol's financial advisor Dresdner Kleinwort Wasserstein (DrKW), and lead arranged by Standard Bank and Development Bank of South Africa (DBSA), the deal has been four years in the making and taken a number of proposed forms on its way to financing.

The project is an important one for Mozambique, South Africa and Sasol. Both governments have taken minority 25% stakes and Sasol has already built the pipeline on-balance sheet, with help in the form of a R550 million bridging loan from DBSA. Sasol took first delivery of gas on February 21.

The project comprises 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 pipeline both ups and diversifies Sasol's feedstock and, when it reaches full capacity (120 million gigajoules of natural gas a year by 2008) will boost the proportion of natural gas as South Africa's primary energy supply from 1.5% to 4.3% in line with government policy.

The debt for the project can be broken down in two ways - by tranche and by funds from those tranches ascribed to upstream and downstream elements of the project.

There are three tranches to the deal: R1.46 billion in commercial debt underwritten by Standard Bank; R450 million from the EIB; and R1.47 billion in multilateral/development fund debt lead arranged by DBSA. Those funds are apportioned as a total of R1.33 billion towards the upstream project vehicle - Sasol Petroleum Temane (SPT) - and R2.5 billion toward the downstream cross-border pipeline operating company - Republic of Mozambique Pipeline Investment Company (ROMPCO).

The total upstream debt breaks down into R410 in commercial bank debt and R920 million in multilateral and DFI funding. The downstream debt comprises R1.05 billion in commercial debt, R450 million from the EIB, and R1 billion in multilateral/development funds.

The R1.46 billion Tranche 1 commercial debt, lead arranged by Standard Bank, constitutes the corporate-style part of the deal. The tranche is full recourse to Sasol with lender step-in rights and covenants diluted compared with a traditional project financing.

However, the tranche also features heavy political risk insurance (PRI) from ECAs and multilaterals that isolates Sasol from a PRI event in almost the same way as a non-recourse borrower - the one difference being that the PRI is seamless and if a PRI provider does not pay, Sasol covers the shortfall. Furthermore there is also a provision for the loan to be extended by up to two years to allow any hurdle that hits the project to work itself out.

The PRI provision on Tranche 1 is largely provided by World Bank political risk insurer MIGA, which is putting up R190 million of upstream cover and R630 million of downstream. Of that R630 million commitment, R310 million is reinsured evenly at R155 million a piece with Italian ECA Sace and Australia's EFIC. South African ECA ECICSA is also guaranteeing R350 million of downstream and R80 million of upstream debt. And the IBRD's PRG unit - another arm of the World Bank - is covering R140 million of the upstream and R70 million of the downstream risk.

Overall pricing on the tranche is 320-330bp over Jibor, dependent on the sum of the fee to each PRI provider and the corporate loan margin. Both ECICSA and IBRD have aligned PRI cover at 100%. However, MIGA is only offering 95% cover which leaves Standard Bank theoretically exposed to 5% risk on MIGA's umbrella.

The R1.47 billion Tranche 2 is entirely multilateral/development fund backed and was lead arranged by DBSA - the bank's most complex undertaking to date. Participations comprise DBSA with R300 million for the upstream and R350 million for the downstream, the African Development Bank with R350 million for the upstream and R200 million for the downstream, and R270 million in Euro denominated debt for the upstream only, equally from Proparco. DEG and FMO. Margin across the tranche is 300bp

The final tranche is R450 million from the EIB, although total EIB commitment to the project is R900 million, with the remainder coming from its recently established Cotonou Investment Facility in Mozambique.

This deal is significant, both in its structuring and the fact that it is a major African deal with all-African lead arrangers. Documentation for the project is currently in escrow pending the approval of the Mozambique Central Bank after which funds will be disbursed. Standard Bank will be syndicating some of its debt, which will give an indication of how comfortable commercial banks feel about the novel structuring. If the deal proves popular, the MOSAGAS structure may find further applications elsewhere.

Mozambique-South Africa

Gas Pipeline

Status: Financial close 15 March 2004

Description: Debt portion on $1.2 billion upstream and downstream extraction and pipeline project.

Sponsors: Sasol (50%); government of South Africa (25%); government of Mozambique (25%)

Financial advisor to sponsors: Dresdner Kleinwort Wasserstein

Mandated arrangers:

Standard Corporate and Merchant Bank; Development Bank of South Africa

Lenders: Proparco; DEG; FMO; ADB; DBSA; Standard Bank; EIB

PRI: MIGA; ECICSA; IBRD; Sace; EFIC

Legal counsel to lenders: Cadwalader Wickersham & Taft (international); Webber Wentzel Bowens (South Africa)

Legal counsel to sponsor: Allen & Overy

Legal counsel to concession awarder: Denton Wilde Sapte

EPC contractors: Grinaker-LTA; McConnell Dowell; CCIC; Foster Wheeler