The Yuzhno-Russkoye oil and gas condensate field development financing reach­ed full financial close on 25 May, with first disbursement taking place on 27 May. The eight-year miniperm financing follows on from two bridge loans, and suggests that foreign lenders are now willing to countenance full project financings, for Russian companies, governed by Russian law.

The project is the first onshore up­stream oil and gas project financing in Russia. First gas production was in October 2007 and by late 2009 the field achieved plateau levels of production equivalent to 25 billion cubic metres per year. This level of production is forecast to persist until 2020.

In 2009 the sponsors, at that time Gazprom, with 75%, and BASF’s Wintershall, with 25%, closed a one-year bridge loan split into dollar and euro tranches. Societe Generale, BNP Paribas, Credit Agri­cole, ING, Citi, Intesa, UniCredit, Mizuho and SMBC were the bridge’s mandated lead arrangers. Wintershall’s tranches ac­counted for Eu68 million and $380 million of the bridge, priced at 125bp. Gazprom’s debt was split Eu125 million and $705 million, carrying a hefty 450bp margin.

E.ON completed the acquisition of a 25% share in the project later that year, in return for Gazprom taking over a 49% interest in the Russian company Gerosgaz from E.ON Ruhrgas. Wintershall owns another 10% economic interest in the project through non-voting preference shares, so their economic split of the project is Gazprom, 40%, Wintershall, 35% and E.ON, 25%.

The three sponsors refinanced the bridge loan in June 2010, with a new nine-month bridge. Pricing on the Gazprom tranches (Eu77 million and $434 million) was re­duc­ed to 175bp, and on the Wintershall tranches (Eu68 million and Eu380 million) to 62.5bp. The E.ON tranches (Eu48 million and $271 million) carried the lower margin.

The three sponsors then looked to put in place a long-term financing for the project, backed by take-or-pay gas sales agreements. The sponsors issued requests for proposals for the project financing on 29 July 2010.

Societe Generale was named finan­cial adviser, and 13 banks committed to the financing in October 2010. Mandated lead arrangers were Gazprombank, Intesa, BTMU, Credit Agricole, ING, Mizuho, Natixis, Societe Generale, SMBC, and UniCredit. BNP Paribas and WestLB took lead arranger status, with DZ Bank class­ed as a participant. Bank appetite was strong for the project, as the deal was around 60% oversubscribed, with Eu1.649 billion ($2.394 billion) equivalent in commitments from the 13 banks.

The banks signed the project’s loan agreement on 16 March, but it took two months to fulfill conditions precedent and finalise the project documentation. This is because the project’s gas sales agreements are structured under Russian law, presenting enforcement challenges and making the sponsor guarantee and indemnity package all the more crucial to the lenders.

Even though it took two months, sources involved in the deal have stressed that finalising the project documentation was a smooth process with very few disputed points. Getting internal approval from the sponsors took some time, and there were some tweaks round the edges of their security packages. The sponsors also spent time finalising the wording of their request to draw on the facilities.

The financing is comprised of $1.53 billion equivalent in multi-currency debt and $322 million in equity. Mandated lead arranger status goes to 10 banks: Gazprombank, Intesa, BTMU, Credit Agricole, ING, Mizuho, Natixis, Societe Generale, SMBC, and UniCredit. BNP Paribas and WestLB took lead arranger status, with DZ Bank classed as a participant.

The eight-year debt is split between a dollar tranche, a euro tranche and a rouble tranche. The rationale behind the rouble tranche is that it will decrease the project’s hedging requirements, as the project’s revenue will be in local currency.

The split between euro and dollar tranches is a legacy of the project’s bridge loans. This arrangement also reflects the fact that dollars are Gaz­prom’s currency of choice, because its accounts are de­nom­inated in dollars, whereas the two German sponsors operate in euros.

The Eu474 million ($687 million) term loan and the $657.4 term loan both priced at the mid-200bp range over their respective benchmarks. The contributions from all lenders are split between the dollar and euro tranches, although the banks took varying ticket sizes.

The R5.9 billion ($208.5 million) tranche, which comes solely from Gazprombank, features a fixed interest rate of 11.4%. The deal is highly leveraged, with gearing at 83%. Sponsors Gazprom, BASF/ Win­ters­hall and E.ON are providing $322 mil­lion in equity to round out the financing.

The project has an annual cash sweep, with all cash left at the bottom of the project’s cash waterfall split between the lenders and sponsors 70:30. The project also has three reserve accounts, an expenditure reserve account and two debt service reserve accounts.

Furthermore, the sponsors can only pay their 30% share of the cash into accounts not pledged to the lenders if the reserves accounts are filled to a required level, and if debt service due on the repayment date has been made. The cash sweep means that under the base case the loan will be repaid by mid-2017.

Al­though the sponsor group features Ger­man participants, the project company, Severn­eftgazprom, is registered in Russia and the gas supply contracts are denominated in rubles and regulated by Russian law.

Although Yuzhno closed without ECA support, the upcoming RusVinyl PVC pro­ject features ECA tranches, with BNP Pari­bas, HSBC and ING as mandated lead arrangers. The tranche will come in at around Eu450 million ($633.6 million), split between Coface, with Eu350 million, and ONDD, with Eu100 million. The ECAs will cover 95% of the political risk but the commercial risk coverage is ex­pected to be lower.

Severneftegazprom
Status: Financial close 25 May 2011
Size: Eu1.3 billion equivalent.
Location: Yamal-Nenets autonomous area of the Tyumen Region, Siberia, Russia.
Description: Development of the Yuzhno-Russkoye field, with reserves of 180.9 billion cubic meters of gas and 20.35 million tons of oil and gas condensate.
Sponsors: Gazprom (40%), BASF/Wintershall (35%), E.ON (25%).
Lenders: Gazprombank, Intesa, BTMU, Credit Agricole, ING, Mizuho, Natixis, Societe Generale, SMBC, UniCredit, BNP Paribas, WestLB, DZ Bank.
Lender legal: Linklaters
Sponsor legal: Herbert Smith
Sponsor financial advisers: Societe Generale and Russian Project Finance Bank
Insurance adviser: Willis.
Tax adviser: Ernst & Young
Reserves study: DeGolyer & Macnaughton
Model audit: PKF