Omifco
Middle East Petrochemicals Deal of the Year 2002
Although Omifco took four years from its initial mandate to close, and has had one of the more chequered histories of a gulf financing, it is one of the most remarkable deals to close in 2002. But the $969 million deal overcame doubts about the viability ? and value ? of an Indian offtake contract, as well as heightened risk perceptions of the Middle East, to close 30% oversubscribed. It would be hard, even for those following the deal since 1998, not to share the enthusiasm of the arrangers for the package they assembled.
Omifco is the largest joint venture ever carried out by Indian companies, and also the first offtake agreement ever signed by the Indian government. This was the context in which Omifco was pitched to a market bruised by its experience of the Dabhol project. The reasons for its success ultimately lie in its strong economic fundamentals and solid sovereign backing.Omifco, or, to give its full name, the Oman-India Fertilizer Company, is a petrochemicals project that will produce 1.6 million tonnes per year of urea and 250,000 tonnes of surplus ammonia. It will export its output to India, the third largest user of nitrogen fertilizers in the world (after China and the US), despite a comparatively low level of application per hectare.A memorandum of understanding was signed between the governments of India and Oman in 1994, but despite the clear desire of the Government of India (GOI) and that of Oman to move the project forward, finding a bankable offtake agreement was difficult. While the Oman Oil Company (50% shareholder) is well known, the Indian Farm Fertilizers Cooperative (Iffco, 25%) and Krishak Bharati Cooperative (Kribhco, 25%) are less familiar. And the fertiliser market is notoriously cyclical.The two counterparties are less weak than might be supposed since they control 25% of the Indian market, have an aggregate net worth of $1 billion and are each over two-thirds owned by the GOI. Lenders gain comfort, however, from the fact that the project will be one of the lowest cost producers in the world, and that at present most of India's fertilizer, like Dabhol's power, comes from expensive naptha.The original structure put forward by the sponsors, however, did not lay off enough risk onto the GOI, which ultimately signed a 15-year agreement with the project. The government also agreed to set end-user prices at the same levels as historically. This means that with a fall in the cost of imports (as should happen when Omifco is running), the potential profit to the co-operatives should incline them to honour their contracts. Moreover, lenders sought, and were granted, the agreement that all documentation was to be under English law and its creditor-friendly provisions. The agreement included step in rights, a cure period before termination, a consent to assignment, a waiver of sovereign immunity, and an agreement not to amend the offtake contract. The security package is similarly tight, and is standard for a project finance deal, save for the absence of a pledge of shares.This last placed a premium on the export credit agency cover that was a key feature of the financing. Considering the element of Indian risk in the transaction, there was always likely to be demand for ECA cover, but ECA processes now add considerably to the time that it takes to complete a deal. The agencies have all introduced new environmental guidelines as a result of domestic pressure, and these tend to follow, and sometimes exceed, World Bank guidelines.In particular, Coface and Sace insisted on alterations to the engineering procurement and construction (EPC) contract, and on the appointment of an environmental engineer. Deal participants have several stories of environmental monitoring requirements that include corral, turtle, and gazelle populations.Further obstacles were provided by the lack of appropriate insurance cover for the project, in particular the drastic decline in the availability of sabotage and terrorism cover following 11 September 2001. Ultimately lenders, led by BNP Paribas, ANZ Investment Bank and Arab Banking Corporation, agreed that such coverage be implemented in stages (and therefore allow the market to recover) and correspond to at least 75% of the debt. Finally, the Government of Oman would step up if cover could not be found.The debt consists of a $321 million, 11.5-year commercial facility, a $210 million, 12.5-year Sace-covered tranche and a $115 million, 12.5-year Coface-covered tranche. The commercial facility is priced at 175bp over Libor pre-completion; from completion the debt pays 200bp up to year 8.5, 225bp to year 11, and 235bp to maturity. The $210 million Sace tranche pays 80bp and provides commercial cover before and after completion. The $115 million Coface facility pays 75bp and provides commercial cover following completion only. The margins are 45bp higher pre-completion for both tranches. The final element is a $28 million standby facility.The three leads chose, in an uncertain syndication environment, to conduct a book building exercise and bring in all of the participants on tickets at the same tier. Despite the added worry of growing tension between India and Pakistan, the deal sold well. Banks that signed up were split roughly equally between local and international institutions.2002 was a year in which sizeable Gulf project finance deals were thin on the ground, albeit largely because of the quieter pace of Emirates financings. In retrospect this was a bonus to the project, which could push ahead of the limited competition and establish itself as a benchmark project for the year. The deal bodes well for the Omani government's continuing efforts to diversify and monetise its gas reserves.
Oman-India Fertilizer Company
Status: signed 5 July 2002
Size: $969 million
Location: Oman
Description: Ammonia and urea production plant
Sponsors: Oman Oil, IFFCO, KRIBHCO
Debt: $321 million, 11.5-year commercial facility, $210 million, 12.5-year Sace-covered tranche, $115 million, 12.5-year Coface-covered tranche. and a $28 million standby facility
Arrangers: ANZ, BNP Paribas, ABC
Lawyers to the sponsors: Allen & Overy
Lawyers to the lenders: White & Case
Financial advisor to the sponsors: Lazard
EPC Contractor: Snamprogetti/Mitsubishi Heavy Industries and Toyo Engineering
Insurance advisor: Marsh
Market consultant: ChemSystems
Technical consultant: Jacobs Consultancy
Although Omifco took four years from its initial mandate to close, and has had one of the more chequered histories of a gulf financing, it is one of the most remarkable deals to close in 2002. But the $969 million deal overcame doubts about the viability ? and value ? of an Indian offtake contract, as well as heightened risk perceptions of the Middle East, to close 30% oversubscribed. It would be hard, even for those following the deal since 1998, not to share the enthusiasm of the arrangers for the package they assembled.
Omifco is the largest joint venture ever carried out by Indian companies, and also the first offtake agreement ever signed by the Indian government. This was the context in which Omifco was pitched to a market bruised by its experience of the Dabhol project. The reasons for its success ultimately lie in its strong economic fundamentals and solid sovereign backing.Omifco, or, to give its full name, the Oman-India Fertilizer Company, is a petrochemicals project that will produce 1.6 million tonnes per year of urea and 250,000 tonnes of surplus ammonia. It will export its output to India, the third largest user of nitrogen fertilizers in the world (after China and the US), despite a comparatively low level of application per hectare.A memorandum of understanding was signed between the governments of India and Oman in 1994, but despite the clear desire of the Government of India (GOI) and that of Oman to move the project forward, finding a bankable offtake agreement was difficult. While the Oman Oil Company (50% shareholder) is well known, the Indian Farm Fertilizers Cooperative (Iffco, 25%) and Krishak Bharati Cooperative (Kribhco, 25%) are less familiar. And the fertiliser market is notoriously cyclical.The two counterparties are less weak than might be supposed since they control 25% of the Indian market, have an aggregate net worth of $1 billion and are each over two-thirds owned by the GOI. Lenders gain comfort, however, from the fact that the project will be one of the lowest cost producers in the world, and that at present most of India's fertilizer, like Dabhol's power, comes from expensive naptha.The original structure put forward by the sponsors, however, did not lay off enough risk onto the GOI, which ultimately signed a 15-year agreement with the project. The government also agreed to set end-user prices at the same levels as historically. This means that with a fall in the cost of imports (as should happen when Omifco is running), the potential profit to the co-operatives should incline them to honour their contracts. Moreover, lenders sought, and were granted, the agreement that all documentation was to be under English law and its creditor-friendly provisions. The agreement included step in rights, a cure period before termination, a consent to assignment, a waiver of sovereign immunity, and an agreement not to amend the offtake contract. The security package is similarly tight, and is standard for a project finance deal, save for the absence of a pledge of shares.This last placed a premium on the export credit agency cover that was a key feature of the financing. Considering the element of Indian risk in the transaction, there was always likely to be demand for ECA cover, but ECA processes now add considerably to the time that it takes to complete a deal. The agencies have all introduced new environmental guidelines as a result of domestic pressure, and these tend to follow, and sometimes exceed, World Bank guidelines.In particular, Coface and Sace insisted on alterations to the engineering procurement and construction (EPC) contract, and on the appointment of an environmental engineer. Deal participants have several stories of environmental monitoring requirements that include corral, turtle, and gazelle populations.Further obstacles were provided by the lack of appropriate insurance cover for the project, in particular the drastic decline in the availability of sabotage and terrorism cover following 11 September 2001. Ultimately lenders, led by BNP Paribas, ANZ Investment Bank and Arab Banking Corporation, agreed that such coverage be implemented in stages (and therefore allow the market to recover) and correspond to at least 75% of the debt. Finally, the Government of Oman would step up if cover could not be found.The debt consists of a $321 million, 11.5-year commercial facility, a $210 million, 12.5-year Sace-covered tranche and a $115 million, 12.5-year Coface-covered tranche. The commercial facility is priced at 175bp over Libor pre-completion; from completion the debt pays 200bp up to year 8.5, 225bp to year 11, and 235bp to maturity. The $210 million Sace tranche pays 80bp and provides commercial cover before and after completion. The $115 million Coface facility pays 75bp and provides commercial cover following completion only. The margins are 45bp higher pre-completion for both tranches. The final element is a $28 million standby facility.The three leads chose, in an uncertain syndication environment, to conduct a book building exercise and bring in all of the participants on tickets at the same tier. Despite the added worry of growing tension between India and Pakistan, the deal sold well. Banks that signed up were split roughly equally between local and international institutions.2002 was a year in which sizeable Gulf project finance deals were thin on the ground, albeit largely because of the quieter pace of Emirates financings. In retrospect this was a bonus to the project, which could push ahead of the limited competition and establish itself as a benchmark project for the year. The deal bodes well for the Omani government's continuing efforts to diversify and monetise its gas reserves.
Oman-India Fertilizer Company
Status: signed 5 July 2002
Size: $969 million
Location: Oman
Description: Ammonia and urea production plant
Sponsors: Oman Oil, IFFCO, KRIBHCO
Debt: $321 million, 11.5-year commercial facility, $210 million, 12.5-year Sace-covered tranche, $115 million, 12.5-year Coface-covered tranche. and a $28 million standby facility
Arrangers: ANZ, BNP Paribas, ABC
Lawyers to the sponsors: Allen & Overy
Lawyers to the lenders: White & Case
Financial advisor to the sponsors: Lazard
EPC Contractor: Snamprogetti/Mitsubishi Heavy Industries and Toyo Engineering
Insurance advisor: Marsh
Market consultant: ChemSystems
Technical consultant: Jacobs Consultancy
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