Cairn India – the listed subsidiary of Cairn Energy (62%) and Malaysia's Petronas (14.9%) – closed two parallel oil field development facilities together worth $1.6 billion in late November 2009. The loans represent India's largest reserves based deal. The proceeds were used to repay an existing facility of $850 million and to continue to fund Cairn's projects in Rajasthan.

The deal is innovative in that it uses a dual currency approach and ringfences different assets as security for both sets of lenders. The deal is also a rare instance of a true reserves-based lending facility in India, with a typical structure where the loan is sized against actual production and reserves.
The deal breaks down into a rupee-denominated Rs40 billion ($850 million) tranche from State Bank of India and an international $750 million tranche provided by Standard Chartered and IFC. Total development costs for Cairn India's 70% stake are round $2.8 billion, made up from $1.6 billion debt and equity of $1.2 billion. State-owned Oil & Natural Gas Corporation holds the residual 30% stake.

SBI underwrote the 6.25-year Rs40 billion facility, is holding 50%, and sold the remaining 50% down to a syndicate of six private and public lenders. The margin floats but is pegged to 125bp below SBI's prime lending rate, which at the time of financial close was 11.75%. There is a grace period of 2.5 years and repayment period of over 4 years. There is Rs46.5 billion of equity in the rupee deal, giving a debt-equity split of around 47:53.

The $750 million international facility was structured on the back of a common terms agreement, whereby the 6.25-year reserves-based revolver splits into a $250 million IFC A Loan and a $500 million commercial bank fully underwritten by Standard Chartered – the first underwriting of Indian risk by an international for some time. The facility pays a margin of 325bp over Libor, stepping up to 375bp at year three, and a front-end fee of 275bp. The FLCR was 1.5x, and the LLCR was 1.3x.

Cairn India holds 70% in the pre-NELP block, RJ-ON-90/1 through its two wholly owned subsidiaries: Cairn Energy India Pty Limited (CEIPL), 35% and Cairn Energy Hydrocarbons Limited, 35%. CEI is operator for the block and ONGC acquired a 30% participating interest by exercising the 'back-in' right under the production sharing contract.

The $850 million SBI-led domestic facility is lent to the Cairn Energy India subsidiary CEIPL to fund the development expenditure of its 35% share in the Rajasthan block. Since the loan will be utilized by CEIPL, with the security for the loan being ring-fenced to its 35% share of the project assets, it has been made co-obligor to the loan. The parallel dollar facilities were made to the other 35% subsidiary, Cairn Energy Hydrocarbons Limited.

Cairn India began pumping crude from its Mangala oil field in the RJ-ON-90/1 Rajasthan block in August 2008 – the first major discovery in India for 20 years. Plateau production for the Mangala, Bhagyam and Aishwariya fields is expected to reach 125,000bpd in the first half of 2010 from an initial 30,000bpd, and peak production of 175,000bpd is expected to start in 2011 and account for 20% of India's domestic oil production.

US consultants DeGolyer & MacNaughton estimate that the Rajasthan Block contains gross 2P reserves of 493.61 million barrels. Cairn India is developing the three largest fields (first Mangala, then Bhagyam and then Aishwarya) in the North of its license area and it is also constructing a heated and insulated 650km long crude oil export pipeline from the processing terminal in Barmer to a marine terminal in Bhogat (Gujarat). The pipeline crosses 109 roads, 23 major rivers, 8 railways and 11 canals. This is world's largest heated and insulated pipeline.

The delivery point for the Rajasthan Block has been approved to be in Bhogat. According with the terms of the PSC, all the costs for the field development as well as the construction of the crude oil pipeline are 100% cost recoverable. The pipeline will provide the company an access to more than 75% of India's refining capacity for its crude.

The crude from the Rajasthan Block is of moderate gravity, low sulfur content and highly paraffinic. The extraction and transportation of the crude is challenging because it is waxy and results in a high pour point which means that the crude will remain in the liquid form only at high temperatures (over 60-65 C).

Because of India's high dependence on imported oil, the government is expected to directly place all of the offtake. The government has nominated three state-owned refiners for the initial off-take quantities: Mangalore Refinery & Petrochemicals, Indian Oil Corporation and Hindustan Petroleum Corporation. The commercial terms and pricing negotiations have been concluded with IOC and MRPL. The government has permitted sale of crude to private refineries in the country and the production sharing agreement allows exports if the government is not able to nominate the buyers for the crude.

The pricing of the Rajasthan crude is linked to the Brent or Bonny light crude with a certain discount for the quality of the crude. The discount for the refineries will be in the range of 10%-15%. The company will be responsible for the transfer of the crude to the delivery point (Bhogat) through its crude oil pipeline, beyond which the responsibility for the crude transport lies with the buyers.

Cairn India Limited
Status: Financial close for rupee facilities 24 November 2009; financial close for dollar facilities 30 November 2009
Description: Debt of Rs40 billion ($850 million) and $750 million for development of crude discovery Rajasthan Block, RJ-ON-90/1
Sponsor: Cairn India Limited
Lead arrangers: SBI Capital Markets, IFC and Standard Chartered
Sub-participants (rupee): Canara Bank, Bank of Baroda, Bank of India, Oriental Bank of Commerce, HDFC Bank and IDFC
Sub-participants (dollar): Bank of Scotland/Lloyds, Credit Agricole, HSBC, Societe Generale and SMBC
Financial adviser (rupee): SBI Capital Markets
Sponsor legal counsel: Luthra & Luthra Law Offices
Lender legal counsel (rupee): Amarchand & Mangaldas & Suresh A Shroff & Co
Lender legal counsel (dollar): Herbert Smith
Technical adviser: J P Kenny
Reserves Engineer: DeGoyler & McNaughton
EPC contractor: Larson & Toubro