PetroRig III: Bond from bankruptcy
Mexicos Grupo R has closed the acquisition of the drillship PetroRig III from bankrupt rig owner and operator PetroMENA. The $655 million acquisition blends a $225 million non-recourse bank loan with a $260 million bond tranche, the first time that these instruments have been combined for a new drillship financing. It increases Grupo Rs ultra-deepwater work with Pemex, the Mexican state oil company to which the rig is chartered. It also takes in a bitter dispute between Larsen Oil & Gas and Seadrill, two Norwegian rig operators.
The financing, for special purpose vehicle RDS Ultra-Deepwater, consists of a $225 million five-year first lien senior secured loan from BBVA, priced at 375bp initially, rising to 400bp in years three and four and 425bp in year five, and a $260 million second lien senior secured bond issue, led by Jefferies. The bonds priced on 24 February, for a coupon of 11.875%, and, thanks to an original issue discount of 2.869%, yield 12.5%. The debt has an annual debt service coverage ratio of 1.25x, and a loan life coverage ratio of 1.35x.
The bank debt, like the bond debt, has a bullet maturity, and attracted mandated lead arranger commitments from UniCredit, Natixis, Banco Espirito Santo, NIBC, SG and WestLB ($25.5 million each, with BBVA retaining $27 million) and arranger commitments from CIC ($18 million), Sumitomo ($15 million) and DVB affiliate ITF ($12.5 million). The bank debt is scheduled for draw down in July 2010, when the rig is due to be delivered.
The sponsor, controlled by the Garza family, and bookrunners had to contend with two major challenges: financing a ship subject to a short and variable charter with Pemex, and avoiding becoming entangled in the PetroMENA bankruptcy. Grupo R benefits from experience with working for Pemex and a strong following in the bank market. In August 2008, it closed a $584 million loan with BBVA and WestLB to fund the acquisition of a deepwater semi-submersible rig from Daewoo.
PetroRig III can operate at water depths of up to 10,000 feet, and drill down another 30,000. PetroMENA signed a five-year charter with Pemex in May 2007, at a day rate of $475,000 for the first two years, and with a mobilisation fee of $33 million. It signed contracts with Petrobras for two other rigs, PetroRig I and II, and arranged for all three to be built at Jurong shipyard in Singapore. The Pemex charter is much shorter than the ten years on offer from Petrobras, and resets to a market rate in years three, four, and five.
Banks have become comfortable with the length of these charters, since many of them take on residual value risk on vessels when financing them according to shipping market norms. La Muralla also provided an education in financing a rig under charter to Pemex, which is fiercely suspicious of outside involvement in oil production, but is considered a good credit. The earlier Grupo R financing brought in ten banks at pricing of 175bp, but this time BBVA held onto the commitment until funding, until which point it had its participant banks lined up.
Lenders might be sceptical of the deal going through with reason: the demise of PetroMENA has been messy and acrimonious. Larsen Oil & Gas, which is privately held, controls Petrolia, which is listed and in turn owns 51% of PetroMENA, which is also listed. Volatile commodity prices and tightened access to credit have made it difficult for many rig operators to close financing, though PetroMENA had Kr2 billion ($330 million at todays rates) and $300 million in bonds outstanding. It also had a corporate bank facility with LloydsTSB, but this had restrictions on the amount of operating debt that it could raise with a higher priority security position.
In March 2009, Seadrill, another Norwegian rig owner, bought 80.2% of the Krone bond for Kr1.1 billion. It said at the time in a statement: If a situation should arise where Petromena is not in the position to finance the rigs or repay the amounts due to the bondholders in accordance with the existing loan agreements, Seadrill might be prepared to assist the projects with senior financing and operational expertise. The following month the trustee on the bonds, Norsk Tillitsmann, declared a default and placed the special purpose vehicles for the three PetroRig vessels into bankruptcy.
PetroMENA was furious, seeing the default declaration as Seadrills attempt to get control of its assets on the cheap, and alleging improprieties in Seadrill and its advisers role in the process, allegations that attracted the threat of a lawsuit from Seadrill. It also claimed that the default ruined its chance to close a sale for the PetroRig I vessel. Seadrill denied these allegations, and if it hoped to gain control of the Pemex-chartered vessel it was disappointed, because Grupo R offered the best price to the trustee after an auction, beating bids from Seadrill, Diamond, and an unnamed fund.
Before funding, the charter with Pemex was assigned to the borrower. Revenues under the charter will be directed by the trustee for the bonds towards debt service after operating expenses and bank lenders have been paid. IPC, Grupo Rs largest and longest-established offshore venture, will provide the SPV with corporate services.
The sponsor and its adviser BBVA sized the bank loan according to the amount that banks would be comfortable with, and the high-yield bond, at 12.5%, is an expensive means of rounding out the debt requirement. Its make-whole premium, at 50bp, is a substantial, though manageable, impediment to a refinancing of the bonds. According to Moodys, which rated the bonds B3, and the issuer B2, the issuer base case has the first lien term loan repaid by early 2013, meaning the banks are exposed to some market risk. The financing has a debt to capitalization ratio of 74%, and Ebit-to interest of 2.1x (sponsor case) or 1.3x (Moodys case, using a market day rate of $375,000).
The bond financing, despite its high coupon, is a genuine innovation in the bond market, which has not been asked before to finance single-asset and non-recourse drillship assets. It is unlikely to spark the replacement of project banks on drill-ship deals in Latin America, though it allows sponsors to avoid selling equity to outside partners and might compete with shipping-style loans. The PetroRig charter is set to begin on 1 July 2010.
RDS UDW, Ltd
Status: Bonds closed 24 February, bank debt closed 10 March, funded 30 April
Size: $655 million
Location: Mexico
Description: Acquisition of semi-submersible ultra-deepwater drill-ship
Sponsor: Grupo R
Debt: $225 million non-recourse bank loan and $260 million bond tranche
Lead arranger and financial adviser: BBVA
Bookrunners: UniCredit, Natixis, Banco Espirito Santo, NIBC and WestLB
Bond bookrunner: Jefferies
Lender legal adviser and sponsor bond counsel: Clifford Chance
Bond counsel: White & Case
The financing, for special purpose vehicle RDS Ultra-Deepwater, consists of a $225 million five-year first lien senior secured loan from BBVA, priced at 375bp initially, rising to 400bp in years three and four and 425bp in year five, and a $260 million second lien senior secured bond issue, led by Jefferies. The bonds priced on 24 February, for a coupon of 11.875%, and, thanks to an original issue discount of 2.869%, yield 12.5%. The debt has an annual debt service coverage ratio of 1.25x, and a loan life coverage ratio of 1.35x.
The bank debt, like the bond debt, has a bullet maturity, and attracted mandated lead arranger commitments from UniCredit, Natixis, Banco Espirito Santo, NIBC, SG and WestLB ($25.5 million each, with BBVA retaining $27 million) and arranger commitments from CIC ($18 million), Sumitomo ($15 million) and DVB affiliate ITF ($12.5 million). The bank debt is scheduled for draw down in July 2010, when the rig is due to be delivered.
The sponsor, controlled by the Garza family, and bookrunners had to contend with two major challenges: financing a ship subject to a short and variable charter with Pemex, and avoiding becoming entangled in the PetroMENA bankruptcy. Grupo R benefits from experience with working for Pemex and a strong following in the bank market. In August 2008, it closed a $584 million loan with BBVA and WestLB to fund the acquisition of a deepwater semi-submersible rig from Daewoo.
PetroRig III can operate at water depths of up to 10,000 feet, and drill down another 30,000. PetroMENA signed a five-year charter with Pemex in May 2007, at a day rate of $475,000 for the first two years, and with a mobilisation fee of $33 million. It signed contracts with Petrobras for two other rigs, PetroRig I and II, and arranged for all three to be built at Jurong shipyard in Singapore. The Pemex charter is much shorter than the ten years on offer from Petrobras, and resets to a market rate in years three, four, and five.
Banks have become comfortable with the length of these charters, since many of them take on residual value risk on vessels when financing them according to shipping market norms. La Muralla also provided an education in financing a rig under charter to Pemex, which is fiercely suspicious of outside involvement in oil production, but is considered a good credit. The earlier Grupo R financing brought in ten banks at pricing of 175bp, but this time BBVA held onto the commitment until funding, until which point it had its participant banks lined up.
Lenders might be sceptical of the deal going through with reason: the demise of PetroMENA has been messy and acrimonious. Larsen Oil & Gas, which is privately held, controls Petrolia, which is listed and in turn owns 51% of PetroMENA, which is also listed. Volatile commodity prices and tightened access to credit have made it difficult for many rig operators to close financing, though PetroMENA had Kr2 billion ($330 million at todays rates) and $300 million in bonds outstanding. It also had a corporate bank facility with LloydsTSB, but this had restrictions on the amount of operating debt that it could raise with a higher priority security position.
In March 2009, Seadrill, another Norwegian rig owner, bought 80.2% of the Krone bond for Kr1.1 billion. It said at the time in a statement: If a situation should arise where Petromena is not in the position to finance the rigs or repay the amounts due to the bondholders in accordance with the existing loan agreements, Seadrill might be prepared to assist the projects with senior financing and operational expertise. The following month the trustee on the bonds, Norsk Tillitsmann, declared a default and placed the special purpose vehicles for the three PetroRig vessels into bankruptcy.
PetroMENA was furious, seeing the default declaration as Seadrills attempt to get control of its assets on the cheap, and alleging improprieties in Seadrill and its advisers role in the process, allegations that attracted the threat of a lawsuit from Seadrill. It also claimed that the default ruined its chance to close a sale for the PetroRig I vessel. Seadrill denied these allegations, and if it hoped to gain control of the Pemex-chartered vessel it was disappointed, because Grupo R offered the best price to the trustee after an auction, beating bids from Seadrill, Diamond, and an unnamed fund.
Before funding, the charter with Pemex was assigned to the borrower. Revenues under the charter will be directed by the trustee for the bonds towards debt service after operating expenses and bank lenders have been paid. IPC, Grupo Rs largest and longest-established offshore venture, will provide the SPV with corporate services.
The sponsor and its adviser BBVA sized the bank loan according to the amount that banks would be comfortable with, and the high-yield bond, at 12.5%, is an expensive means of rounding out the debt requirement. Its make-whole premium, at 50bp, is a substantial, though manageable, impediment to a refinancing of the bonds. According to Moodys, which rated the bonds B3, and the issuer B2, the issuer base case has the first lien term loan repaid by early 2013, meaning the banks are exposed to some market risk. The financing has a debt to capitalization ratio of 74%, and Ebit-to interest of 2.1x (sponsor case) or 1.3x (Moodys case, using a market day rate of $375,000).
The bond financing, despite its high coupon, is a genuine innovation in the bond market, which has not been asked before to finance single-asset and non-recourse drillship assets. It is unlikely to spark the replacement of project banks on drill-ship deals in Latin America, though it allows sponsors to avoid selling equity to outside partners and might compete with shipping-style loans. The PetroRig charter is set to begin on 1 July 2010.
RDS UDW, Ltd
Status: Bonds closed 24 February, bank debt closed 10 March, funded 30 April
Size: $655 million
Location: Mexico
Description: Acquisition of semi-submersible ultra-deepwater drill-ship
Sponsor: Grupo R
Debt: $225 million non-recourse bank loan and $260 million bond tranche
Lead arranger and financial adviser: BBVA
Bookrunners: UniCredit, Natixis, Banco Espirito Santo, NIBC and WestLB
Bond bookrunner: Jefferies
Lender legal adviser and sponsor bond counsel: Clifford Chance
Bond counsel: White & Case
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