Odebrecht Oil & Gas’s $1.5 billion refinancing of its Norbe VIII and IX rigs was the high point of a busy year for capital markets activity in the drill ship market. Ode­brecht’s 10.5-year bond was the longest-dated and largest of any of them. It also featured a small element of construction risk, indicating that bonds might be a financing option for earlier stages of drill ships’ existence.

The bonds, which priced on 10 Novem­ber, 2010 were sold 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 lead bookrunners were HSBC and Santander, joined by Banco do Brasil and Deutsche. The bonds were rated BBB(sf) and Baa3 (Moody’s).

The bond debt refinances $1.34 billion construction financing that Odebrecht closed in October 2009 with a variety of export credit agency and commercial lend­ers. That deal broke down into a $274 million GIEK-covered Eksportfinans direct loan, $165 million direct Kexim loan, $135 million Kexim-covered loan and $770 million commercial bank loan. The com­mer­cial bank financial advisers were BNP Paribas, Santander, and Societe Generale, while the lead arrangers were BNP Paribas, Santander, Societe Generale, Banco do Brasil, Banco Espirito Santo, Calyon, HSBC, Caixo Geral de Depositos, NIBC, ING, WestLB, Credit Industriel et Commercial.

The bond financing had three major chal­lenges. The first issue, endemic to bond financings, was coping with con­struc­tion risk. The second was being able to move fast enough to close an oppor­tunistic issue. The last was getting an investment grade rating on a deal that would not amortise fully over the term of the bonds.

The first element was probably the easiest to cope with. When the bonds closed the two rigs were under construction at the Daewoo Shipping and Marine Engineering shipyard in South Korea, with VIII 95% complete and set for delivery in January, and the IX ship 88% and due for delivery in April. The residual completion risk was covered by a builder guarantee and Kexim letter of credit backstop. The vessels, on completion, will benefit from a ten-year charter with Brazil’s national oil company, Petrobras, and there is enough room in the charter schedule to accommodate a six-month delay to completion

The second issue involved coordinating drafting and registration between a number of jurisdictions, and making sure con­struction, maintenance and charter contracts could be assigned to the right parts of the holding company structure for the assets. The issuer, Norbe VIII/IX Finance Ltd, is Cayman Islands-registered, and the vessels are Bahamas-flagged, while the project companies for each ship are Delaware-registered, at least until the sponsor can assign all relevant contracts to an Austrian corporation to benefit from a double taxation treaty between Austria and Brazil.

Residual value risk was the hardest thing to mitigate. The charters with Petrobras would not provide enough cash to fully amortise even a ten-year bond issue. The rigs have a 40-year useful life, and every chance of being rechartered, by Petrobras or another counterparty, at the end of the initial charters, but agencies were wary of assigning investment-grade ratings to bonds with refinancing risk. The solution is to use a retention account, which traps cash from the last six semesters of the charter and will use it to pay down the 30% balloon payment at maturity. The ships are cross-collateralised, though the charters with Petrobras do not default

The financing benefits from Odebrecht’s size and experience operating rig ships, which clearly served as a comfort to ratings agencies.

The bond financing can be viewed as addressing unfinished business from the original bank financing. Odebrecht was clear­ly taken aback by the change in lender sentiment on the Norbe construction deal. It had to accept a two-year reduction to the all-in tenor, to 10 years, the elimination of a balloon, and a slightly tighter debt service coverage ratio, at 1.2x instead of 1.15x. With the exception of the DSCR, which bet­ween 2012 and 2016 is an annual average of 1.43x the bond terms are markedly improv­ed. The financing also allows the sponsor to release some equity from the project.

The fact that bank terms were noticeably bad in the aftermath of the crunch is probably the main reason, together with the fact that they could support more debt, why Odebrecht chose to refinance the Norbe VIII and IX rigs, rather than the $440 million Norbe VI financing, which closed earlier in the decade. But that deal is probably a post-completion refinancing candidate.

The other big reason, is that at the same time as closing the bond refinancing, Ode­brecht was syndicating an $860 million construction financing for the $1.35 bil­lion ODN I and II drill ships. That financ­ing closed little more than two weeks before the end of 2010 and featured a very similar cast of lenders to the first deal. Bank deals still have a strong commercial logic for the early stages of construction of drill ships – the nega­tive carry on bonds is too onerous to use them from scratch.

Norbe VIII/IX Finance Ltd
Status: Priced 10 November 2010
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%
Borrower legal: Davis Polk & Wardwell (international), Dorda Brugger Jordis (Austrian), Maples & Calder (Cayman Islands), Constantakis Knowles (Bahamas)
Underwriter legal: White & Case (international), Souza Cescon (Brazil)
Model auditor: PwC
Market consultant: ODS Petrodata
Insurance: Aon