As far as the operators of deepwater drillships in Latin America are concerned, the Deepwater Horizon disaster was little more than a blip. US drilling operators face the possibility of tighter regulation, fewer opportunities and higher potential liability for accidents. But Brazil’s national oil company, Petrobras, is pressing ahead with plans to charter large numbers of rigs for its pre-salt exploration and production programme.

The Petrobras charters are long-term, generous, and do not feature market price risk. They increasingly come with local content requirements, part of Brazil’s plans to develop a shipbuilding capability on a par with that of South Korea and Singapore. But these will largely affect forthcoming rounds of tenders, and do not affect sponsor’s plans to finance existing charters.

Until recently, Petrobras would also have been concerned with sponsors’ ability to raise both debt and equity for rig construction and purchases. In the wake of the crisis, pricing jumped sharply, market rates for the more widely used rigs plunged, and a number of global rig operators looked very wobbly. What looked like an opportunity for a distressed asset buyer also seeded doubts about the ability of Brazil’s sponsors to raise the equity they needed to fulfil their charters.

The debt markets recovered rapidly. After a hard-fought restructuring, Grupo Schahin came to terms with its lender group on its Black Gold deal, with banks consenting to an extension on the deal in exchange for higher pricing. The extension was needed because of delays in building the two rigs covered by the financing, which were being built at the Yantai Raffles shipyard in China. The higher pricing essentially wiped out any benefits from the cheaper Chinese construction contract, and hampered Schahin’s ability to move on to its next project, Black Diamond, but maintained Schain’s bank following.

Towards the end of 2009, Odebrecht Oil & Gas closed a $1.34 million commercial bank and export credit agency financing for its Norbe VIII and IX vessels. That financing, which consisted of a $274 million GIEK-covered Eksportfinans direct loan, $165 million direct Kexim loan, $135 million Kexim-covered loan and $770 million commercial bank loan. sold strongly, on the back of Odebrecht’s size, respectable credit rating, and banks’ willingness to return to the Brazilian offshore sector.

High-yield, low repeatability

But the most promising financing development for the smaller Brazilian operators took place in Mexico. In April, Grupo R, a Mexican conglomerate with a long track record of providing offshore services to Mexico’s national oil company, Pemex, used a high-yield bond to help it complete the $655 million purchase of the PetroRig III from PetroMENA, which was in bankruptcy.

The $260 million high-yield bond priced much earlier than the close of the acquisition on 24 February, at the tail end of the first spurt in project bond activity of 2010. The bond was rated B3/B- (Moody’s/S&P), and priced at a discount of 2.869% and coupon of 11.875% for a yield of 12.5%. Jefferies was lead arranger on the bonds, which complemented a much more reasonably-priced BBVA-led $225 million senior secured bank deal, which had a margin of 375bp initially, rising to 400bp in years three and four and 425bp in year five.

Given this comparison in pricing, it was easy for commercial lenders to doubt that capital markets could ever win a substantial slice of the rig financing market. Indeed, bondholders of the Norwegian shipping and oil services groups that fell victim to the crunch would have been inclined to agree. The PetroRig bonds were second lien, and were necessary because PetroRig’s charter with Pemex was short, at five years, and reset to a market rate for the last three of that.

With the $225 million in bank debt the maximum that the banks could fund at the time, the Garza family, which controlled Grupo R, could either look to outside equity providers or try the high yield route. In February 2010 it was easy for a lender to view the bond market as more of an equity substitute than a bank debt substitute. The degree of structuring on the debt bore this verdict out.

Lancer’s long march

But the run of balmy conditions in the US bond market continued throughout 2010, and at the same time that PetroRig closed, rumours surfaced that Schahin was working with Nomura to arrange a bond deal for one of its fleet of rigs. Nomura did not have an established presence in the rig financing market, but had made hires from Merrill Lynch’s principal finance group, which had completed several cross-border issues for Latin infrastructure issuers in the mid-90s.

Schahin needed to raise some equity for the Black Diamond portfolio, which is now in the market for $1.4 billion in debt, including an $800 million commercial bank loan. While Schahin might have been able to release some equity during a post-completion refinancing of the Black Gold vessels, the delays to those ships meant that Schahin had to use another asset to raise this equity.

Nomura pitched Lancer, which can operate in water depths of 1,500m, drill to depths of 6,000m, and was built in 1977, to Schahin as the best candidate. The ship is operational, and benefits from a charter with Petrobras running to 2016, but has an estimated remaining useful life of 11.5 years. Getting a financing for Lancer to investment grade, and therefore raising cost-effective capital with high leverage for recycling, required intensive structuring.

The resulting deal resembled a securitisation much more closely than a conventional project bond, with multiple, detailed, investor protections designed to distance the asset from the Schahin credit as much as possible. The $270 million issue received ratings of Baa3/BBB-sf (Moody’s/ Fitch, the sf denoting a structured finance issue), in part on the back of a complex cash waterfall structure and $18.5 million in funded reserves. According to Roland Vigne, a vice-president at Nomura in Sao Paulo “the advantage of using the structure is you achieve much better leverage and can lower your borrowing costs substantially.”

The key to getting agencies, and putative buyers of the private placement, comfortable, was in coming up with creditable valuations for the vessel both with and without a charter. The financing is designed to amortize completely over its life, but a bondholder would look very carefully at loan-to-value ratios. These govern the ability of bondholders to trap cash, in the event that the residual value is not enough to pay the last few debt repayments, and accelerate prepayment, if the loan to value ratio including the charter, and thus the present value of charter revenues, fell below a certain level. The bondholders, through the trustee, also have the ability to enforce their collateral and sell the asset, if need be.

According to Fitch’s assessment, Lancer has a 60% ratio at issuance, and 15-35% in 2016. Its 33 years of age is belied by some extensive renovations to its topside equipment. The vessel has also averaged 96.3% uptime for the last ten years, indicating that Schahin, whatever its financial resources, is a capable operator, one of the few with experience operating a deepwater vessel for Petrobras and Petrobras has been chartering the vessel since 1992.

One feature of the charter is that on top of the $238,500 day rate, Petrobras pays Schahin a separate taxable operating payment to Schahin, which is pledged to bondholder, but only meets about 40% of operating costs. The remainder are paid from the bottom of the cash waterfall, with a trap on cash at the bottom is the debt service coverage ratio falls below 1.4x. This feature is present on the more recent generation of charters, and the inclusion of the operating payment in the waterfall simply allows bondholders to take control of the vessel more easily if the financing defaults.

The issuer, British Virgin Islands-registered Lancer Finance Company, Delaware registered charter counterparty, Turasoria SA LLC, and Panama-registered ship-owner, Turasoria SA, are also made bankruptcy remote from Schahin using a pledge of shares, granting the trustee proxy power to vote on bankruptcy, and because to drag the project into a bankruptcy proceeding might allow Petrobras to cancel the charter.

The bonds closed on 21 October, after an extensive period of tightening and tweaking of the documentation. This long lead-time was natural, according to one participant in the deal, given the challenges in getting a single-asset financing to investment grade, and the need to adapt structures in use in other industries, most notably conventional shipping and toll roads, to the project.

The financing was ready to go in March, but was delayed after the ban on offshore drilling in the US took effect, since the ban had the potential to seriously affect residual values and potential bond buyers were briefly concerned that Petrobras might be subject to a similar ban. The final coupon on the deal, at 5.5%, was a little under half PetroRig’s, though yields on the seven-year Treasury had fallen by roughly 1.2 percentage points between the two deals.

The father refinances, the son nears close

Neither deal featured any construction risk, however, a boost to the commercial lenders’ position that bondholders could not assess this risk as well as the banks. Late in 2009, just as it was putting the finishing touches to the Norbe VIII and IX financings, Odebrecht was trying to decide which of its existing rig assets would make the best candidate for a capital markets deal. “We wanted to diversify our funding sources,” says Marco Rabello, the chief financial officer of Odebrecht Oil & Gas, “and had to decide whether one or both of the Norbe VIII and IX vessels, or the Norbe VI rig, which was financed a little earlier, would work best”.

The Norbe VI financing, a $440 million deal led by ABN Amro, closed long before the crunch. The financings for the later two rigs reflected post-crunch bank pricing expectations, and the rigs have fixed-price ten-year charters that were certain to be appealing to bondholders. Odebrecht decided to take the later two rigs to market, mandating HSBC and Santander to lead the deal, with Deutsche and Banco do Brasil coming in at a later date.

The rigs are close to completion, with the VIII vessel 95% complete and due for a January 2011 delivery and IX 88% complete, and due in April that year, according to Fitch’s BBBsf rating in late October. The rigs are in commissioning and the charters with Petrobras allow for a six-month delay. Bondholders would rely on a full refund guarantee from Daewoo Shipping and Marine Engineering, which is building the rigs, backed up in turn by Kexim letters of credit.

But the size of the proposed financing for the two Norbe rigs – $1.5 billion – dwarfed the earlier two rig deals, Rabello notes that Odebrecht would have to call on bondholders who were familiar with Odebrecht and sister companies such as Braskem that had already visited the bond markets. The Brazilian conglomerate, with a series of toll road issues in Peru, and recent success in the Brazilian roads sector with the Rota das Bandeiras financing, has experience of opening up project bond markets.

The bonds, with a 10.5-year maturity, priced at 99.818% of par, at a spread of 370.3bp over the equivalent Treasury, for a coupon of 6.35%, and a yield of 6.375%. The biggest challenge, notes Helena Ramos, structured operations manager at Odebrecht Oil & Gas, was structuring the bonds in such a way as to minimise refinancing risk. “The agencies do not like to award investment grade ratings to transactions with refinancing risk,” adds Rabello.

The Norbe rigs have a very long useful life – up to 40 years – but the sponsors had to incorporate a cash trap in the final six semesters of the charter that would fund a retention account, which would then be used to pay down the 30% balloon on the bonds at maturity. This solves in part the anxieties that bondholders might have about being left with a drill-ship, rather than cash, in 2021. The issuer for the two rigs, Norbe VIII/IX Finance Ltd, lends the proceeds on to separate operating companies, and while the assets are cross-collateralised, the charters with Petrobras do not default.

Norte proves that bonds are possible for assets under construction, if the charters are long and lucrative enough, if the construction security package is rock-solid, and if the sponsor is experienced. Odebrecht’s Ramos notes that while the sponsor did not guarantee the project’s operating performance its size and experience were important to investors. It would, agrees Rabello, be possible to finance a new drillship from scratch in the bond market, though the cost of carry would be a heavy one.

As if to stress this point, Odebrecht’s next two drill-ships, ODN1 and ODNII, will be financed with a similar cast of commercial banks (roughly $900 million) and export credit agencies ($400 million). The pricing on this deal, dubbed Son of Norbe, is likely to be much keener than the two parents, maybe by as much as 100bp, at about 240bp over Libor making a refinancing much less attractive. Interest in the deal, say Latin syndications bankers, was strong. The leads, BNP and HSBC, brought in Banco do Brasil, Banesto, BTMU, Caja Madrid, Citigroup, Credit Agricole, DNB Nor, ING, ItauBBA, Banca Intesa, Natixis, Santander, SG, SMBC, Unicredit and WestLB. The three bond deals look like a natural progression, but their timing was a matter of luck, and the three sponsors enjoy very different circumstances.

Still, Rabello says that the Norbe VI rig could still be a possible candidate for a bond refinancing. There are, moreover, a number of Brazilian operators such as Petroserv, Quiroz Galvao and Etesco that have financed their vessels with loan-to-value-based ship finance structures, and they should see some immediate benefits in terms of leverage by refinancing with a contract cashflow-based bond deal. As Nomura’s Vigne notes, even where ECA-backed deals make commercial bank financing very competitive, a bond market option can have a beneficial effect on keeping this pricing low. 

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

Lancer Finance Company

Status: Priced 21 October

Size: $270 million

Location: Brazil

Description: Recapitalisation of mid-depth drill-ship

Sponsor: Schahin Holdings

Maturity: 6 years

Coupon: 5.5%

Underwriter: Nomura

Collateral agent: WestLB

Trustee: Deutsche

Underwriter legal: Hogan Lovells (international); Souza Cescon (local)

Sponsor legal: Linklaters (international), Lefosse (local)

Insurance: Moore-McNeil

Market consultant: ODS Petrodata

Independent engineer: Bureau Veritas

Norbe VIII/IX Finance Ltd

Status: Priced 10 November

Size: $1.5 billion

Location: Brazil

Description: Refinancing of construction debt for two ultra-deepwater ships

Sponsor: Odebrecht Oil & Gas

Maturity: 10.5 years

Bookrunners: Santander, HSBC, Banco do Brasil, Deutsche

Coupon: 6.35%

Sponsor legal: Davis Polk

Underwriter legal: White & Case (international), Souza Cescon (local)

Model auditor: PwC

Market consultant: ODS Petrodata

Insurance: Aon