OCP: maximum recourse
WestLB and the project company Oleoducto de Crudos Pesados (OCP)
have closed $900 million in financing to construct an Ecuadorian
oil pipeline 10 years in the planning. The deal is a milestone in
the country's ? and its investors' ? plans to monetize their
interests in the oil reserves of eastern Ecuador. But the
pipeline's sponsors have been left holding more risk than a longer
gestation period for the financing might have allowed.
OCP is a 503km pipeline that runs from the Oriente Basin in the east to the Pacific Coast at Balao, near Esmeraldas. The project's aim is to stimulate development of oilfield production in the Basin, which is currently constrained by a lack of adequate pipeline capacity. The existing Sistema Oleoducto Transecuatoriano (SOTE) line has a capacity of between 350 and 390 thousand barrels per day. OCP's planned capacity is 450,000.
At least one reason for the delay in getting the project off the ground has been the widespread perception, particularly amongst non-governmental organisations, that the pipeline would carry too high an environmental cost. This perception is highlighted by the political instability that has periodically affected Ecuador. A coup took place in January 2000, roughly six months after the sponsor group started work on the project, and the dispute over the country's southern border with Peru has only recently been settled.
The government, however, sees the project as the centrepiece of its development plans and has been pushing the work for 10 years. The final sponsor group, consisting of Alberta Energy (30%), Repsol YPF, Pecom (or Perez Companc, 15%), Oxy (or Occidental Petroleum ), Agip (7.5%), Tenco (a Techint affiliate) and Kerr-McGee, emerged towards the end of 1999, and beat out competition from, amongst others, Petrobras and Williams. The government gets 60,000 barrels per day of capacity and the return of the pipeline after 20 years.
The project has been extremely controversial, mostly because of its possible effects on wildlife and indigenous peoples along the route of the pipeline. A number of non-governmental organisations, including Amazon Watch, Friends of the Earth and local group Accion Ecolgica have remonstrated against OCP. In September, OCP's headquarters in Quito were the focus of a demonstration, and WestLB has received a petition from several groups asking it to cease funding.
The sponsors, on the other hand, can point to the use of World Bank environmental guidelines in planning. They have commissioned a report from Shaw subsidiary Stone & Webster and Entrix to ensure compliance, and have met with some concerned wildlife groups. Nevertheless, some of the sponsors have released only sketchy details of their involvement, and multilaterals are conspicuous by their absence from the financing.
Sources close to the deal, however, say that speed was the overwhelming factor in the financing route chosen. As one participant put it, ?we simply did not have the time to go through the process of negotiations with these institutions, and some of their demands can be very burdensome.? It is probably fair to take the explanation of speed at face value, if only because of the guarantees offered by the shareholders to get the deal sold.
Bids were solicited earlier this year based on prefabricated financing documents assembled with the assistance of JP Morgan Chase. Several institutions put forward proposals, running the gamut from a bond, through an institutional to a bank deal. WestLB won the contest, with what several banks involved with the process said was a very aggressive bid. This assessment is borne out by a source at the sponsors, which says that the advantage of WestLB for a borrower lies in the access to the bank's balance sheet and that any tweaks to the financing during the sell-down are confined to talks between participants and the arrangers.
The most important, and earliest, arrival on the arranging team is BBVA, which has taken a $150 million co-arranger role. More importantly, WestLB has managed to provide 17-year money by bringing the pension funds on board. This has been structured to reduce the tenor that commercial banks have to go out to down to 15 years. The institutions were apparently on board during the final negotiations and have been provided with a make-hold, or penalty to paid in the event of voluntary prepayment. This would not be paid in the event of a forced acceleration. John Hancock has put up $150 million and New York Life has put up $40 million. Other interested banks are BNL, Caja Madrid, ABB, Unicredito and Banco Espirito Santo, and relationship pull has apparently been considerable.
The process will have been aided by OCP's rating of Baa2 from Moody's Investors Service and BBB+ from Standard & Poor's. This was a condition precedent of the financing, but has not been a contentious process, although Moody's says that it was concerned about the looseness of the covenant and default structure where it impacts on security and offshore accounts. OCP is based in the Cayman Islands, where revenues are channelled, whilst the government, in a bid to demonstrate fiscal prudence has set up its own domestic account dedicated to its cut from the pipeline.
There are, however, few other worries for lenders, since the sponsors guarantee most other operational aspects. Capacity contracts are of the ship-or-pay type, whilst Techint has the EPC contract, and the sponsors have extended performance guarantees during construction. The deal is, in fact, an Ecuadorian one only in name, since all country risk aspects have been stripped out, unsurprisingly for a project in a country that defaulted on its Brady Bonds in the not-too distant past. Coverage levels are at around 1.68x, and the project can withstand a 30% default. And, as one sponsor has pointed out, the investments planned by the shareholders in production will make the pipeline equity look tiny.
OCP is a benchmark investment in Ecuador, and a vote of confidence in the current administration.
OCP is a 503km pipeline that runs from the Oriente Basin in the east to the Pacific Coast at Balao, near Esmeraldas. The project's aim is to stimulate development of oilfield production in the Basin, which is currently constrained by a lack of adequate pipeline capacity. The existing Sistema Oleoducto Transecuatoriano (SOTE) line has a capacity of between 350 and 390 thousand barrels per day. OCP's planned capacity is 450,000.
At least one reason for the delay in getting the project off the ground has been the widespread perception, particularly amongst non-governmental organisations, that the pipeline would carry too high an environmental cost. This perception is highlighted by the political instability that has periodically affected Ecuador. A coup took place in January 2000, roughly six months after the sponsor group started work on the project, and the dispute over the country's southern border with Peru has only recently been settled.
The government, however, sees the project as the centrepiece of its development plans and has been pushing the work for 10 years. The final sponsor group, consisting of Alberta Energy (30%), Repsol YPF, Pecom (or Perez Companc, 15%), Oxy (or Occidental Petroleum ), Agip (7.5%), Tenco (a Techint affiliate) and Kerr-McGee, emerged towards the end of 1999, and beat out competition from, amongst others, Petrobras and Williams. The government gets 60,000 barrels per day of capacity and the return of the pipeline after 20 years.
The project has been extremely controversial, mostly because of its possible effects on wildlife and indigenous peoples along the route of the pipeline. A number of non-governmental organisations, including Amazon Watch, Friends of the Earth and local group Accion Ecolgica have remonstrated against OCP. In September, OCP's headquarters in Quito were the focus of a demonstration, and WestLB has received a petition from several groups asking it to cease funding.
The sponsors, on the other hand, can point to the use of World Bank environmental guidelines in planning. They have commissioned a report from Shaw subsidiary Stone & Webster and Entrix to ensure compliance, and have met with some concerned wildlife groups. Nevertheless, some of the sponsors have released only sketchy details of their involvement, and multilaterals are conspicuous by their absence from the financing.
Sources close to the deal, however, say that speed was the overwhelming factor in the financing route chosen. As one participant put it, ?we simply did not have the time to go through the process of negotiations with these institutions, and some of their demands can be very burdensome.? It is probably fair to take the explanation of speed at face value, if only because of the guarantees offered by the shareholders to get the deal sold.
Bids were solicited earlier this year based on prefabricated financing documents assembled with the assistance of JP Morgan Chase. Several institutions put forward proposals, running the gamut from a bond, through an institutional to a bank deal. WestLB won the contest, with what several banks involved with the process said was a very aggressive bid. This assessment is borne out by a source at the sponsors, which says that the advantage of WestLB for a borrower lies in the access to the bank's balance sheet and that any tweaks to the financing during the sell-down are confined to talks between participants and the arrangers.
The most important, and earliest, arrival on the arranging team is BBVA, which has taken a $150 million co-arranger role. More importantly, WestLB has managed to provide 17-year money by bringing the pension funds on board. This has been structured to reduce the tenor that commercial banks have to go out to down to 15 years. The institutions were apparently on board during the final negotiations and have been provided with a make-hold, or penalty to paid in the event of voluntary prepayment. This would not be paid in the event of a forced acceleration. John Hancock has put up $150 million and New York Life has put up $40 million. Other interested banks are BNL, Caja Madrid, ABB, Unicredito and Banco Espirito Santo, and relationship pull has apparently been considerable.
The process will have been aided by OCP's rating of Baa2 from Moody's Investors Service and BBB+ from Standard & Poor's. This was a condition precedent of the financing, but has not been a contentious process, although Moody's says that it was concerned about the looseness of the covenant and default structure where it impacts on security and offshore accounts. OCP is based in the Cayman Islands, where revenues are channelled, whilst the government, in a bid to demonstrate fiscal prudence has set up its own domestic account dedicated to its cut from the pipeline.
There are, however, few other worries for lenders, since the sponsors guarantee most other operational aspects. Capacity contracts are of the ship-or-pay type, whilst Techint has the EPC contract, and the sponsors have extended performance guarantees during construction. The deal is, in fact, an Ecuadorian one only in name, since all country risk aspects have been stripped out, unsurprisingly for a project in a country that defaulted on its Brady Bonds in the not-too distant past. Coverage levels are at around 1.68x, and the project can withstand a 30% default. And, as one sponsor has pointed out, the investments planned by the shareholders in production will make the pipeline equity look tiny.
OCP is a benchmark investment in Ecuador, and a vote of confidence in the current administration.
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