Oman Gas: Can’t fail, won’t fail
The $442 million debt financing for Oman Gas Company (OGC) is the
first such deal for an Omani project since the Oman LNG project
closed in 1997. As such, it is seen as an important pointer for the
success of the state's future project deals ? several of which are
expected to come to market before the end of the year.
The project itself consists of two separate gas pipelines. One pipeline will supply gas to Salalah in the south of the country to provide fuel for an independent power plant under development. The second pipeline will provide gas to Sohar, on the north coast, where the government hopes to attract a host of gas-based downstream companies in an industrial zone in an effort to diversify activity away from Muscat.
The project has been under development for a number of years and inevitably in that time it has had to adapt to reflect changing circumstances. Perhaps, the most notable of these changes was the decision to choose commercial bank finance rather than export credits. When the project was first planned, export credits were regarded as a necessary component of the financing for the pipelines given the lack of capacity in the commercial bank market. As such, when bid documents were sent out to potential engineering, procurement and construction (EPC) contractors in July 1999 part of the bidding requirements consisted of a financing package involving export credits.
By the time the EPC bids had been received and evaluated, between February 1999 and December 1999, financing conditions for Oman were very different from when the bid documents had been drawn up. ?Sentiment in the commercial bank market had changed dramatically in that time with the consequence that capacity had increased and that 100% commercial financing was now achievable,? says Richard Grantley, director, project and export finance, at HSBC Investment Bank in London and financial adviser to OGC. ?As a result, by the end of 1999 we began a cost comparison between the two and the ECA financing option was dropped in favour of commercial bank debt.?
Despite Dodsal of India and Italy's Saipem being already selected as preferred bidders on the two EPC contracts, the seven bank groups of all the EPC bidders were asked to re-submit bids based on commercial financing. ?A condition of the re-bidding process was the understanding that the banks which had supported the winning EPC bids, if not successful themselves, would be invited to support the deal at the highest level, while the other banks which supported the unsuccessful EPC bids would be invited to join as co-arrangers? says Grantley at HSBC.
Finally a mandate was awarded to Arab Banking Corporation (regional bookrunner), BNP Paribas (international bookrunner) and Industrial Bank of Japan (documentation, facility agent, intercreditor agent and security trustee) to act as coordinating banks and lead arrangers on the deal.
The final deal emerged as an aggressive combination of price and maturity.
The margin is set at 65bp over Libor pre-completion, after commissioning the margin steps up to 100bp for the first five years, for years six to eight it rises to 115bp, years nine and 10 see the margin at 130bp after which it hits a high of 140bp through to maturity. Repayments will be made in semi-annual installments beginning six months from completion. A commitment commission of 32.5bp is payable semi-annually in arrears on undrawn amounts.
?With the lack of comparable recent projects from Oman itself, we looked closely at the more recently active Qatari project market in terms of benchmarking the deal,? says Joli Bruns, vice president, loans syndications, at BNP-Paribas in Paris. ?Those deals combined with the pricing achieved on Oman's sovereign loan of last year provided a good point of departure.?
Unlike the sovereign however, this deal has a tenor of 12 years by far the longest for a non-export based and non-sovereign guaranteed project in the state. ?A 12 year maturity in the commercial markets without associated export credits would have been unthinkable when we first began working on the project,? says Grantley at HSBC. ?Oman itself had only borrowed for around eight years in the loans markets. But the logic of long-term debt for a project of this nature proved to be persuasive despite the fact the deal is not guaranteed by the sovereign.?
So far, the market appears to have been convinced too. The first phase of syndication got underway with the invitation to banks which supported the initial EPC contract to come into the deal in an expanded lead arranging group. Four out the five banks invited came in at this level ? Apicorp, GIB, Greenwich NatWest and Mediocredito Central ? underwrite an initial $90 million apiece.
The second phase of sell-down on the deal to co-arrangers quickly followed in July. Banks joining at this level are ANZ Investment Bank, Bank of Tokyo-Mitsubishi, Credit Lyonnais and Sumitomo. These banks were invited to join with take-and-hold positions of $20m each. Sumitomo, however, chose to partly underwrite the deal bringing the total number of underwriting banks on the deal to eight.
The deal is scheduled to reach financial close and these banks will be signed towards the end of August after which a general syndication will be launched in September. ?With a good performance during underwriting, the general syndication phase of the deal now only needs to raise moderate amount,? says Bruns at BNP-Paribas. ?We have already received strong indications of appetite for the project from not only Omani and regional banks but also international investors and we are confident that retail will be successful.?
The project itself consists of two separate gas pipelines. One pipeline will supply gas to Salalah in the south of the country to provide fuel for an independent power plant under development. The second pipeline will provide gas to Sohar, on the north coast, where the government hopes to attract a host of gas-based downstream companies in an industrial zone in an effort to diversify activity away from Muscat.
The project has been under development for a number of years and inevitably in that time it has had to adapt to reflect changing circumstances. Perhaps, the most notable of these changes was the decision to choose commercial bank finance rather than export credits. When the project was first planned, export credits were regarded as a necessary component of the financing for the pipelines given the lack of capacity in the commercial bank market. As such, when bid documents were sent out to potential engineering, procurement and construction (EPC) contractors in July 1999 part of the bidding requirements consisted of a financing package involving export credits.
By the time the EPC bids had been received and evaluated, between February 1999 and December 1999, financing conditions for Oman were very different from when the bid documents had been drawn up. ?Sentiment in the commercial bank market had changed dramatically in that time with the consequence that capacity had increased and that 100% commercial financing was now achievable,? says Richard Grantley, director, project and export finance, at HSBC Investment Bank in London and financial adviser to OGC. ?As a result, by the end of 1999 we began a cost comparison between the two and the ECA financing option was dropped in favour of commercial bank debt.?
Despite Dodsal of India and Italy's Saipem being already selected as preferred bidders on the two EPC contracts, the seven bank groups of all the EPC bidders were asked to re-submit bids based on commercial financing. ?A condition of the re-bidding process was the understanding that the banks which had supported the winning EPC bids, if not successful themselves, would be invited to support the deal at the highest level, while the other banks which supported the unsuccessful EPC bids would be invited to join as co-arrangers? says Grantley at HSBC.
Finally a mandate was awarded to Arab Banking Corporation (regional bookrunner), BNP Paribas (international bookrunner) and Industrial Bank of Japan (documentation, facility agent, intercreditor agent and security trustee) to act as coordinating banks and lead arrangers on the deal.
The final deal emerged as an aggressive combination of price and maturity.
The margin is set at 65bp over Libor pre-completion, after commissioning the margin steps up to 100bp for the first five years, for years six to eight it rises to 115bp, years nine and 10 see the margin at 130bp after which it hits a high of 140bp through to maturity. Repayments will be made in semi-annual installments beginning six months from completion. A commitment commission of 32.5bp is payable semi-annually in arrears on undrawn amounts.
?With the lack of comparable recent projects from Oman itself, we looked closely at the more recently active Qatari project market in terms of benchmarking the deal,? says Joli Bruns, vice president, loans syndications, at BNP-Paribas in Paris. ?Those deals combined with the pricing achieved on Oman's sovereign loan of last year provided a good point of departure.?
Unlike the sovereign however, this deal has a tenor of 12 years by far the longest for a non-export based and non-sovereign guaranteed project in the state. ?A 12 year maturity in the commercial markets without associated export credits would have been unthinkable when we first began working on the project,? says Grantley at HSBC. ?Oman itself had only borrowed for around eight years in the loans markets. But the logic of long-term debt for a project of this nature proved to be persuasive despite the fact the deal is not guaranteed by the sovereign.?
So far, the market appears to have been convinced too. The first phase of syndication got underway with the invitation to banks which supported the initial EPC contract to come into the deal in an expanded lead arranging group. Four out the five banks invited came in at this level ? Apicorp, GIB, Greenwich NatWest and Mediocredito Central ? underwrite an initial $90 million apiece.
The second phase of sell-down on the deal to co-arrangers quickly followed in July. Banks joining at this level are ANZ Investment Bank, Bank of Tokyo-Mitsubishi, Credit Lyonnais and Sumitomo. These banks were invited to join with take-and-hold positions of $20m each. Sumitomo, however, chose to partly underwrite the deal bringing the total number of underwriting banks on the deal to eight.
The deal is scheduled to reach financial close and these banks will be signed towards the end of August after which a general syndication will be launched in September. ?With a good performance during underwriting, the general syndication phase of the deal now only needs to raise moderate amount,? says Bruns at BNP-Paribas. ?We have already received strong indications of appetite for the project from not only Omani and regional banks but also international investors and we are confident that retail will be successful.?
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