The September 2009 refinancing of the Petroterminal de Panama oil pipeline and storage facility caps a remarkable revival for the 30-year-old project. First developed in the late 1970s to carry oil from the North Slope of Alaska to markets on the Gulf and East coasts of the US, the pipeline is now being reversed to carry crude from Europe, the Middle East and Africa to the western United States and Pacific. The $480 million refinancing and expansion financing for PTP is the largest private project financing ever in Central America.

The developer, and the largest private shareholder in PTP, is NIC Holdings, which owns Long Island-based oil marketer Northville Industries. Northville developed the pipeline during the period when Alaska oil had to be consumed in US markets, but the US west coast could not use all of its northern neighbour's output. The pipeline operated until 1996, when a combination of the end of the export ban and declining output put paid to its rationale.

Northville subsequently started up other ventures in Panama, including developing, and then dismantling, a 60MW contracted power plant, and building a cargo terminal. In 2003 it took the pipeline out of mothballs to transport heavy Ecuadorian crude across the isthmus to the Atlantic Ocean. In 2005 Taurus, the oil trader that brought the Ecuadorian opportunity to Northville, suggested it reverse the flow of the pipeline to carry crude to the constrained California market.

The privately-held sponsor had always been open to the possibility that the pipeline might be reversed, and had maintained the pipeline during the seven-year mothballing under the assumption that an opportunity would eventually present itself. The first section of the pipeline, from the Pacific Coast to the pipeline's highest point above sea level, is roughly 40 inches in diameter, while the next section, back down (or west) to the Atlantic, is 36 inches. The second section is much wider than would be needed for a downhill stretch, and added to the costs of the first phase, but is required if oil has to be pumped uphill in the opposite direction.

Taurus was subsequently reorganised as Castor Petroleum, and even more recently bought by Gunvor, a Russian commodities trader. It lacked the financial resources to sign a creditworthy multi-year ship-or-pay capacity agreement for a refurbished pipeline, and therefore brought in US refiner, Tesoro Petroleum, to back up the shipping agreement.

The pipeline refurbishment was comparatively inexpensive, for a 131km project, since it involved a small amount of work on the pipe and the moving of some pumps. But the owner also had to build two new 660,000-barrel storage tanks at the Pacific coast and three new 722,000-barrel tanks on the Atlantic Coast. Contractors for this first phase expansion, on which work is almost complete, are Hayward Baker, Constructora Urbana, Chicago Bridge & Iron Company and Celmec.

NIC and its adviser HSBC went to market with a construction financing for the first phase at an inauspicious time. Castor, which also owns 16.83% of the project, is unrated, and Tesoro, which stands behind Castor's contract, has a sub-investment grade rating. HSBC and an unidentified bank launched the deal just after Lehman's collapse, and the unidentified bank pulled out of the financing just before funding. The sponsor, rather than reaching for its lawyers, stepped up with additional equity. HSBC kept $91.5 million of a $175 million seven-year deal on its books, despite offering 425bp over Libor pricing, though eight regional lenders participated.

With the Tesoro shipping agreement in place, NIC then pitched an additional shipping agreement to BP. With a favourable response from double-A rated BP, the deal could be marketed to international banks, and in better market conditions might have been a bond candidate. BP's agreement only covers 100,000 barrels per day, compared to the 200,000-barrel Castor contract, but it requires the sponsor to build another ten storage tanks, five on the Atlantic of 575,000 barrels.

The project is designed in part to give shippers an alternative route across the isthmus to the Panama Canal, which will soon be able to accommodate larger, though not the largest crude carriers. The sponsors hope that the canal expansion, since it involves raising rates, might even drive some more cargoes onto the pipeline. More significantly, the storage facilities allow shippers a chance to blend different types of crude and wait until the most lucrative opportunity presents itself. Pipeline capacity in the continental US, which also takes oil from the Gulf coast into California, is a more potent threat than the canal.

The biggest difficulty for lenders was coping with the lack of security over the land on which the pipeline is sited. The pipeline is operated under a concession from the government of Panama, an arrangement more prevalent in PPP than the oil and gas industry, and the government owns 50% of the project. Neither the land nor the government equity can be pledged to lenders. Instead a management agreement and association agreement have been pledged to the lenders, as have the shipping contracts, using a Panamanian trust.

The Panamanian government, during the first pipeline incarnation, owned 40% of the project, while Chicago Bridge & Iron owned 20% and Northville owned 40%. At that time, the concession for the pipeline ran to 1999, though in 1996, when the cargo terminal was built, it was extended to 2016.

The concession now runs to 2036, and the Panamanian government owns 50% of the project, with NIC owning 33.17% and Castor the rest. The additional equity was handed over as part of the extension to the concession, and the government will receive another 4% at the start of 2016, and a final 5% at the start of 2026. Any action by the company requires the approval of 85% of shareholders, granting NIC a veto over its direction, and Panamanian lenders treat it as a private entity.

The expansion and refinancing was greeted with much more enthusiasm than the first version, with the $375 million in 8.5-year debt reaching a subscription level of 1.3x. The debt is priced at 425bp over Libor, and featured a Libor floor of 2%, because Panamanian lenders do not primarily fund themselves in the interbank market, but from depositors.

In addition to HSBC, as bookrunner, swap provider, administrative and collateral agent and provider of $55 million, the deal brought in top-level commitments from Northville relationship bank BNP Paribas ($50 million), EDC, on the back of some Canadian content in CB&I's contract for the second set of storage tanks ($40 million), and Panamanian lenders Banco General ($50 million) and Banco Nacional ($55 million).

The commitment of the last, in particular, encouraged other local and regional banks to come in. La Caixa and Scotia came in for arranger titles with $20 million, Banesco committed $17 million, and Bancolombia, CIFI, Global Bank and Towerbank with $10 million. Participant titles went to Metrobank with $7 million, BAC International and Produbanco with $6 million, Banco Panama with $5 million and Multibank with $4 million.

The sponsor's equity comes primarily from contributing the existing assets and cash flow, but is notionally set at $105 million. Lenders also benefit from a standby letter of credit until the first phase of the expansion is complete and the ability to stop draws during the rest of the construction period. The annual debt service coverage ratio is 1.75x, though the Castor contract's earlier start and stop dates flatter this number, and the loan life coverage ratio is 1.39x.

The financing married the relationship pull of BP to PTP's existing presence in the Panamanian market, though lenders also had to learn to get comfortable with an offtake agreement with an oil trader. Given the increasing mobility of oil stocks, the premium that shippers pay for access to storage, and the larger numbers of producers and crude types, facilities like PTP are likely to come in front of lenders more frequently, though few with as loyal, and dollar-rich, home fan-base.

NIC had originally imagined that Venezuelan crude might find a home on the pipeline, as the country's national oil company PDVSA owned a US refiner, Citgo, with operations on two US coasts, and lacked only a base on the US west coast. But Venezuela has since become estranged from the US, with deleterious effects on that country's project financings. But Asian consumers have remained interested in Venezuela, and an Asian national oil company is believed to be sizing up the rest of the capacity on the PTP pipeline. If this contract goes through, and construction risk recedes into the background, then a bond market refinancing is a distinct possibility.

Petroterminal de Panama
Status: Signed 29 September
Size: $480 million
Location: Panama
Description: Refinancing and storage expansion for pipeline and storage operator
Sponsors: Government of Panama (50%), NIC Holding (33.17%) and Castor Petroleum (16.83%)
Equity: $105 million
Debt: $375 million
Tenor: 8.5 years
Margin: 425bp over Libor
Financial adviser: HSBC
Mandated lead arrangers: HSBC, EDC, Banco General, BNP Paribas and Banco Nacional
Sponsor legal advisers: Fulbright & Jaworski (international); Galindo, Arias y Lopez (local), King & Spalding (construction)
Lender legal advisers: Baker Botts (US), Morgan & Morgan (local)
Fuel market consultant: PIRA Energy Group
Independent engineer: RW Beck
Environmental adviser: URS Dames and Moore
Insurance adviser: Willis