From shore to ship
The lines between project finance and asset finance are becoming
increasingly blurred, with a range of assets from trains to cruise
ships and tankers all getting financed via hybrid structures. Some
are short term financings, designed mainly to cover the asset
construction period, but there are also longer term financings
being closed, which fund both the construction period and the
working life of the asset.
One of the most recent groundbreaking deals to hit the market closed in September and involved an innovative build, own and operate (BOO) financing of a liquefied natural gas (LNG) tanker in Japan. This transaction is seen as having importance beyond its specific asset class, and likely to provide a boost for project finance structures in general, in a country where project finance arrangers have traditionally had little success in getting corporates to move beyond balance sheet bank debt or bond offerings.
Arranged by Bank of Tokyo Mitsubishi, even competing bankers welcome the fact that such high profile names as Tokyo Electric Power and Mitsubishi Corporation have done a deal that will be noticed by other blue chip corporates.
The deal involves the joint venture company Pacific LNG Shipping (PLS), whose sponsors are Tokyo Electric Power, Mitsubishi Corporation and NYK Lines. PLS signed a Yen15 billion ($125 million) financing to build, own and operate a new liquefied natural gas (LNG) tanker. The 135,000 cubic metre tanker, being constructed by Mitsubishi Heavy Industries, and will be delivered in September 2003. It will be operated by NYK Lines, and will provide LNG transportation services for Tokyo Electric.
Traditionally a shipping company or oil & gas company would take the various project risks, such as disruption of production, and sign a contract allowing the ship to be financed. But under the terms of the PLS loan, project risk is being taken by the lenders. ?The advantages are that the lenders bear certain project risks, there is off-balance sheet treatment, and there are also certain benefits from leverage in that it has less equity than in a typical corporate deal,? explains Hendrik Gordenker, partner at White & Case in Tokyo, which acted as counsel to PLS and the project sponsors. ?Doing a project financing also required that the sponsors look closely at the cashflows in the LNG project, and that was a useful exercise in itself.?
?An LNG project is a long chain, from the well heads all the way to the burner tips of the consumers, and one of the differences between project finance and other types of financing is that ship lenders normally don't take any risk outside of the shipping business,? says Gordenker. ?Normally the shipping company, or perhaps the buyer or the seller of the LNG, will take all the project risks in the LNG chain, so that even if there is no LNG to put on the ship, that party still pays the costs associated with ship. But in this deal we have certain events, relating to other parts of the LNG chain, where the lenders are taking project risk.?
Gordenker views the transaction as being important for the development of project finance in Japan. ?There has been very little project financing done in Japan, and this deal is important because it shows that a group of first tier Japanese companies are willing to participate in a project financing,? he says. ?There could be more deals in the future involving other types of assets, perhaps power plants or factories.?
Bonny Gas
One of the sources of gas being imported into Japan is Nigeria, and project finance structures have also been utilised for LNG tankers associated with the vast NLNG project, which is sponsored by the Nigerian National Petroleum Corporation, Shell, TotalFinaElf, and Agip. Nigeria has traditionally flared off most of the gas associated with oil drilling, but is now building up its LNG production, producing new revenues while also intending to reduce flaring to almost zero by 2008.
NLNG, located on Bonny Island in the eastern coastal area of Nigeria, started out as a two train facility, and is currently being expanded to three trains. It is also out in the market looking for project financing to finance trains four and five.
A fleet of tankers is required to export the gas, and financing was recently closed for the tenth ship in the fleet operated by Bonny Gas, with a syndicate of commercial banks making a ten year loan totalling $100 million. The lead arranger was Credit Suisse First Boston. Ship 10 is being built by Hyundai Heavy Industries in Korea, and the shipbuilding contract was structured with an insurance policy that gives a credit enhancement to the shipbuilding contract should the yard fail to deliver the vessel.
?Bonny Gas is a wholly owned subsidiary of Nigerian Liquefied Natural Gas (NLNG), and was specifically set up to hold the ships that are used to transport the LNG on a dedicated basis from Nigeria to customers who are mainly based in the Mediterranean basin,? explains Dean Hudson, vice-president at Credit Suisse First Boston in London.
?A typical project financing takes place in an SPV, and there would be charter payments, either bareboat or timecharter, that support the cashflows into the SPV, but ships 8, 9 and 10 were actually financed within Bonny Gas itself,? Hudson explains.
?The sponsors wanted to maintain a wholly owned ship subsidiary,? he continues, ?so we had to design a structure where lenders could minimise the bankruptcy risk associated with a normal corporate loan. Project lenders are typically willing to take a view on assets versus revenues, and we in effect got a quasi-SPV financing within a corporate structure.?
?For example, ship 10 is carved out to look like an SPV within the company, but it is not a bankruptcy remote SPV that is being financed,? Hudson says. ?There are dedicated cashflows for timecharter payments made to ship 10, that are segregated within the accounts agreements of Bonny Gas, and those cashflows are used to pay back the lenders to ship 10, which is being financed on an asset recourse basis.?
The lenders obviously have to look at the ability of the project to continue to produce gas and deliver it, and clearly any insolvency at NLNG level would cut off the charter payments. But the ship lenders are not actually taking the risk associated with a production shortfall and there not being enough gas produced to keep the ships busy.
?As NLNG pays for the use of ship 10, so we have to look at the creditworthiness of NLNG, which is supported by its sales and purchase agreements that the ships are being used to fulfil. The weighted average credit quality of the purchasers of the gas is in the region of A to AA,? says Hudson. ?The charter payment is similar to a capacity payment in a power station deal- generally, if the ship is available to be used, the charter payments are eligible to be paid.?
Cruise ships
Lenders are also taking project risk in the cruise ship sector. In spite of setback to tourism post-September 11, the cruise industry is still on a long term growth path, particularly as the ageing demographic in wealthy European countries and the United States. But as cruise ships get bigger and more expensive, it has been necessary to diversify sources of funding, and spread the risk around. This has included tapping the bond markets, though these are typically for short term deals where the payments due upon delivery are securitised, and these cashflows underpin an asset backed bond offering.
?There have been a number of deals for large cruise ships where the receivable is securitised,? says John Osborne, partner at Watson Farley & Williams in New York.
?There have also been some deals involving ferries, and what is being securitised is the receivable from the ultimate purchaser. The right to receive this payment is sold to a third party, but once the ship is delivered the financing is finished, so there is no post delivery risk. It is really financing for the shipyard to give them working capital.?
As in other areas of structured finance, the big insurance companies are also getting involved, either as investors or providers of guarantees. A surety bond was featured in the financing for the luxury ResidenSea ship, where rich individuals buy an apartment on board, which they can visit wherever the ship happens to be in the world at any point in time.
Before proceeding with construction, ResidenSea had to address the risk of a shortfall in sales of the 110 residential units during the construction period. It did so with the help of a surety bond provided by the London based Centre group of companies, which is part of Zurich Financial Services. Centre maintained the credit risk support of the contingent equity and junior loan during the construction phase, allowing syndication of the senior loans led by WestLB. Centre also provided guarantee of payment to the Fosen Mek shipyard in Norway where the ship is being built.
There has been a small construction related delay to the ResidenSea, but it will be open for its first cruises with residents on board from February 2002, one month later than originally planned.
In addition to the jitters caused by 11 September, and the specific concerns about the tourism industry, going forward bond market investors are likely to be wary of buying ship backed paper in the light of the well publicised difficulties at Anglo Norwegian group Kvaerner, which at time of going to press was in the midst of emergency talks with its banks to secure fresh lines of credit and stave off bankruptcy.
There has already been a downgrade of one cruise ship asset backed deal. In October Moody's downgraded Eu324 million worth of floating rate secured notes due October 2004, from Baa2 to Baa3. The notes are from an offering which was made in March of this year. The vessel concerned is due to be delivered to Royal Caribbean Cruises Ltd (RCCL), which itself recently had its own senior unsecured rating downgraded from Ba2 to Baa3.
?The right to payment of the invoice has been securitised, and upon the completion of the vessel, Royal Caribbean Cruises will pay the invoice, and the investors will get paid,? explains Paul Mazataud, Senior Credit Officer at Moody's Investors Service in Paris. Thus the investors have to look at the risk that the Chantiers de L'Atlantique shipyard, part of the Alstom group, will not complete the vessel, and also that RCCL will not be in a position to pay for it.
Rail
The rail sector is another area where hybrid asset finance/project finance structures are being looked at, especially given the high cost of the high speed train sets currently on order across Europe.
Such a financing is being considered by Spanish rail operator Renfe, which during 2001 has placed large orders for high speed trains. Earlier this year Bombardier Transportation, together with its Spanish consortium partner Talgo, won a Eu338 million order for 16 HST350 high speed train sets. Production will take place at plants in Germany and Spain. The order price does not include maintenance and servicing which will be carried out by the manufacturers. Deliveries are scheduled to take place between March and December 2004, for the high speed line running between Madrid, Barcelona and the French border town of Le Perthus.
Another 16 train sets are being built by Siemens Transportation Systems, which is providing its ICE 3 model which is also operated by Deutsche Bahn. And in September Renfe signed a third part of its order, this signing up for twelve train sets from CAF-Alstom-Fiat.
Since the orders for the high-speed train sets have been divided up between various manufacturers, there are still questions about whether they will all be put into the same financing pool. But for at least some of the Renfe rolling stock, Royal Bank of Scotland has been looking at a project finance solution covering the construction period, with the assets eventually being pooled and asset financed with the help of Royal Bank of Scotland subsidiary Angel Trains.
One of the most recent groundbreaking deals to hit the market closed in September and involved an innovative build, own and operate (BOO) financing of a liquefied natural gas (LNG) tanker in Japan. This transaction is seen as having importance beyond its specific asset class, and likely to provide a boost for project finance structures in general, in a country where project finance arrangers have traditionally had little success in getting corporates to move beyond balance sheet bank debt or bond offerings.
Arranged by Bank of Tokyo Mitsubishi, even competing bankers welcome the fact that such high profile names as Tokyo Electric Power and Mitsubishi Corporation have done a deal that will be noticed by other blue chip corporates.
The deal involves the joint venture company Pacific LNG Shipping (PLS), whose sponsors are Tokyo Electric Power, Mitsubishi Corporation and NYK Lines. PLS signed a Yen15 billion ($125 million) financing to build, own and operate a new liquefied natural gas (LNG) tanker. The 135,000 cubic metre tanker, being constructed by Mitsubishi Heavy Industries, and will be delivered in September 2003. It will be operated by NYK Lines, and will provide LNG transportation services for Tokyo Electric.
Traditionally a shipping company or oil & gas company would take the various project risks, such as disruption of production, and sign a contract allowing the ship to be financed. But under the terms of the PLS loan, project risk is being taken by the lenders. ?The advantages are that the lenders bear certain project risks, there is off-balance sheet treatment, and there are also certain benefits from leverage in that it has less equity than in a typical corporate deal,? explains Hendrik Gordenker, partner at White & Case in Tokyo, which acted as counsel to PLS and the project sponsors. ?Doing a project financing also required that the sponsors look closely at the cashflows in the LNG project, and that was a useful exercise in itself.?
?An LNG project is a long chain, from the well heads all the way to the burner tips of the consumers, and one of the differences between project finance and other types of financing is that ship lenders normally don't take any risk outside of the shipping business,? says Gordenker. ?Normally the shipping company, or perhaps the buyer or the seller of the LNG, will take all the project risks in the LNG chain, so that even if there is no LNG to put on the ship, that party still pays the costs associated with ship. But in this deal we have certain events, relating to other parts of the LNG chain, where the lenders are taking project risk.?
Gordenker views the transaction as being important for the development of project finance in Japan. ?There has been very little project financing done in Japan, and this deal is important because it shows that a group of first tier Japanese companies are willing to participate in a project financing,? he says. ?There could be more deals in the future involving other types of assets, perhaps power plants or factories.?
Bonny Gas
One of the sources of gas being imported into Japan is Nigeria, and project finance structures have also been utilised for LNG tankers associated with the vast NLNG project, which is sponsored by the Nigerian National Petroleum Corporation, Shell, TotalFinaElf, and Agip. Nigeria has traditionally flared off most of the gas associated with oil drilling, but is now building up its LNG production, producing new revenues while also intending to reduce flaring to almost zero by 2008.
NLNG, located on Bonny Island in the eastern coastal area of Nigeria, started out as a two train facility, and is currently being expanded to three trains. It is also out in the market looking for project financing to finance trains four and five.
A fleet of tankers is required to export the gas, and financing was recently closed for the tenth ship in the fleet operated by Bonny Gas, with a syndicate of commercial banks making a ten year loan totalling $100 million. The lead arranger was Credit Suisse First Boston. Ship 10 is being built by Hyundai Heavy Industries in Korea, and the shipbuilding contract was structured with an insurance policy that gives a credit enhancement to the shipbuilding contract should the yard fail to deliver the vessel.
?Bonny Gas is a wholly owned subsidiary of Nigerian Liquefied Natural Gas (NLNG), and was specifically set up to hold the ships that are used to transport the LNG on a dedicated basis from Nigeria to customers who are mainly based in the Mediterranean basin,? explains Dean Hudson, vice-president at Credit Suisse First Boston in London.
?A typical project financing takes place in an SPV, and there would be charter payments, either bareboat or timecharter, that support the cashflows into the SPV, but ships 8, 9 and 10 were actually financed within Bonny Gas itself,? Hudson explains.
?The sponsors wanted to maintain a wholly owned ship subsidiary,? he continues, ?so we had to design a structure where lenders could minimise the bankruptcy risk associated with a normal corporate loan. Project lenders are typically willing to take a view on assets versus revenues, and we in effect got a quasi-SPV financing within a corporate structure.?
?For example, ship 10 is carved out to look like an SPV within the company, but it is not a bankruptcy remote SPV that is being financed,? Hudson says. ?There are dedicated cashflows for timecharter payments made to ship 10, that are segregated within the accounts agreements of Bonny Gas, and those cashflows are used to pay back the lenders to ship 10, which is being financed on an asset recourse basis.?
The lenders obviously have to look at the ability of the project to continue to produce gas and deliver it, and clearly any insolvency at NLNG level would cut off the charter payments. But the ship lenders are not actually taking the risk associated with a production shortfall and there not being enough gas produced to keep the ships busy.
?As NLNG pays for the use of ship 10, so we have to look at the creditworthiness of NLNG, which is supported by its sales and purchase agreements that the ships are being used to fulfil. The weighted average credit quality of the purchasers of the gas is in the region of A to AA,? says Hudson. ?The charter payment is similar to a capacity payment in a power station deal- generally, if the ship is available to be used, the charter payments are eligible to be paid.?
Cruise ships
Lenders are also taking project risk in the cruise ship sector. In spite of setback to tourism post-September 11, the cruise industry is still on a long term growth path, particularly as the ageing demographic in wealthy European countries and the United States. But as cruise ships get bigger and more expensive, it has been necessary to diversify sources of funding, and spread the risk around. This has included tapping the bond markets, though these are typically for short term deals where the payments due upon delivery are securitised, and these cashflows underpin an asset backed bond offering.
?There have been a number of deals for large cruise ships where the receivable is securitised,? says John Osborne, partner at Watson Farley & Williams in New York.
?There have also been some deals involving ferries, and what is being securitised is the receivable from the ultimate purchaser. The right to receive this payment is sold to a third party, but once the ship is delivered the financing is finished, so there is no post delivery risk. It is really financing for the shipyard to give them working capital.?
As in other areas of structured finance, the big insurance companies are also getting involved, either as investors or providers of guarantees. A surety bond was featured in the financing for the luxury ResidenSea ship, where rich individuals buy an apartment on board, which they can visit wherever the ship happens to be in the world at any point in time.
Before proceeding with construction, ResidenSea had to address the risk of a shortfall in sales of the 110 residential units during the construction period. It did so with the help of a surety bond provided by the London based Centre group of companies, which is part of Zurich Financial Services. Centre maintained the credit risk support of the contingent equity and junior loan during the construction phase, allowing syndication of the senior loans led by WestLB. Centre also provided guarantee of payment to the Fosen Mek shipyard in Norway where the ship is being built.
There has been a small construction related delay to the ResidenSea, but it will be open for its first cruises with residents on board from February 2002, one month later than originally planned.
In addition to the jitters caused by 11 September, and the specific concerns about the tourism industry, going forward bond market investors are likely to be wary of buying ship backed paper in the light of the well publicised difficulties at Anglo Norwegian group Kvaerner, which at time of going to press was in the midst of emergency talks with its banks to secure fresh lines of credit and stave off bankruptcy.
There has already been a downgrade of one cruise ship asset backed deal. In October Moody's downgraded Eu324 million worth of floating rate secured notes due October 2004, from Baa2 to Baa3. The notes are from an offering which was made in March of this year. The vessel concerned is due to be delivered to Royal Caribbean Cruises Ltd (RCCL), which itself recently had its own senior unsecured rating downgraded from Ba2 to Baa3.
?The right to payment of the invoice has been securitised, and upon the completion of the vessel, Royal Caribbean Cruises will pay the invoice, and the investors will get paid,? explains Paul Mazataud, Senior Credit Officer at Moody's Investors Service in Paris. Thus the investors have to look at the risk that the Chantiers de L'Atlantique shipyard, part of the Alstom group, will not complete the vessel, and also that RCCL will not be in a position to pay for it.
Rail
The rail sector is another area where hybrid asset finance/project finance structures are being looked at, especially given the high cost of the high speed train sets currently on order across Europe.
Such a financing is being considered by Spanish rail operator Renfe, which during 2001 has placed large orders for high speed trains. Earlier this year Bombardier Transportation, together with its Spanish consortium partner Talgo, won a Eu338 million order for 16 HST350 high speed train sets. Production will take place at plants in Germany and Spain. The order price does not include maintenance and servicing which will be carried out by the manufacturers. Deliveries are scheduled to take place between March and December 2004, for the high speed line running between Madrid, Barcelona and the French border town of Le Perthus.
Another 16 train sets are being built by Siemens Transportation Systems, which is providing its ICE 3 model which is also operated by Deutsche Bahn. And in September Renfe signed a third part of its order, this signing up for twelve train sets from CAF-Alstom-Fiat.
Since the orders for the high-speed train sets have been divided up between various manufacturers, there are still questions about whether they will all be put into the same financing pool. But for at least some of the Renfe rolling stock, Royal Bank of Scotland has been looking at a project finance solution covering the construction period, with the assets eventually being pooled and asset financed with the help of Royal Bank of Scotland subsidiary Angel Trains.
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