European Oil & Gas Upstream Deal of the Year 2011: Yuzhno
In effect, the Eu1.1 billion ($1.53 billion at the time) equivalent eight-year miniperm is the first time that foreign lenders have countenanced a limited recourse deal governed by Russian law though the legal risk was offset with bespoke English law side contracts that reflect typical arrangements in an international oil and gas project.
The deal also combines reserve-based finance and project finance structures with relatively low coverage ratios (more typical of infrastructure projects) reflecting the projects stable gas production profile and robust contracts.
Sponsored by Gazprom, BASF/Wintershall and E.ON, the Eu2 billion Yuzhno-Russkoye gas field project is located onshore in the Yamal-Nenets autonomous area of the Tyumen region of Russia. In November 2007 BASF/Wintershall took a 25% stake in the project via an asset swap agreement with Gazprom which retained 75%. Societe Generale and Russian Project Finance Bank were also appointed as financial advisers and in 2009 closed a one-year bridge loan for the project. 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. The final shareholder split is Gazprom 50%, Wintershall 25% and E.ON 25%.
The sponsors refinanced the first bridge loan in June 2010, with a new nine-month dollar and euro facility. Pricing on the Gazprom tranches was reduced from 450bp to 175bp, and on the Wintershall tranches from 125bp to 62.5bp. The E.ON tranches also priced at the E.ON margin.
In July 2010 the request for proposals for the long-term deal went out to the bank market. The financing had to overcome some major contractual hurdles. For example, the licence for the Yuzhno-Russkoye field is held by an incorporated joint venture, Severneftegazprom (SNGP). At the same time, the division of the production volume between the three gas sales agreements exposed each sponsor to the risk that one of the two other sponsors might fail to perform under its gas buyer obligations. The level of risk increased with SNGP raising debt on a project finance/secured basis, as a non-performing gas buyer could trigger a security enforcement which in turn would affect the two other sponsors. So the deal had to incorporate contracts that maintained the sponsors severability.
Gas sales arrangements added additional complexity. For regulatory reasons the Yuzhno gas is sold domestically, with Gazprom acting as final buyer. The price of the gas is determined on the basis of a cost-plus formula, passing certain risks through to the buyer but also capping the level of SNGPs profit. Hence for the two foreign shareholders to receive their share in the economics of the project, the production is sold under three take-or-pay gas sales agreements proportionally to
the economic interest of each of the three sponsors in the project. Two of these gas sales agreements are signed between SNGP and two Russian trading companies. Each trading company sells the gas on to Gazprom and generates a trading margin that can be sent back up to each foreign shareholder. This created an extra level of risk for the lenders trading company payment risk.
The structuring of the deal under Russian law created further issues particularly in the enforcement of gas sales agreements. For example, availability-based contracts may be deemed as not concluded by a Russian court; take-or-pay provisions conflict with a basic Russian law principle that payment by the buyer is dependent upon the sellers acceptance of delivery; and agreements not to terminate a contract can be overruled by a Russian court on the basis that it is not possible to contractually ignore certain grounds for unilateral termination.
The grey areas in Russian law were overcome by supplementing the domestic gas sales agreements with additional English law agreements between international lenders and the Russian contracting parties or sponsors.
The eight-year miniperm financing is as complex as the contracts it is grounded on. Denominated in three currencies the rouble tranche to keep hedging to a minimum on the domestic income stream, the dollar tranche because Gazproms accounts are dollar denominated, and the euro tranche because the two other sponsors operate in euros the deal was, nevertheless, 1.5x oversubscribed, with Eu1.649 billion ($2.394 billion) equivalent in commitments from 13 banking groups.
The financing comprises Eu1.1 billion equivalent of debt and R24.247 billion ($692 million at the time) of equity. The Eu474 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 tranche, which comes solely from Gazprombank, has a fixed interest rate of 11.4%.
Severneftegazprom
STATUS: Financial close 25 May 2011
TOTAL PROJECT COST: Eu2 billion
DEBT: Eu1.1 billion equivalent
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 (50%), BASF/Wintershall (25%), E.ON (25%).
FINANCIAL ADVISERS: Societe Generale; Russian Project Finance Bank
MLAS: Gazprombank; Societe Europeenne de Banque/Intesa; Bank of Tokyo-Mitsubishi UFJ; Credit Agricole; ING Bank; Mizuho Corporate Bank Nederland; Natixis; Societe Generale (SG CIB); Sumitomo Mitsui Finance Dublin; UniCredit; ZAO Unicredit
LEAD ARRANGERS: BNP Paribas; WestLB
PARTICIPANT: DZ Bank
LENDER LEGAL COUNSEL: Linklaters
SPONSOR LEGAL COUNSEL: Herbert Smith
INSURANCE ADVISER: Willis
TAX ADVISER: Ernst & Young
RESERVES STUDY: DeGolyer & MacNaughton
MODEL AUDIT: PKF
ECOLOGICAL ADVISER: Environmental Resources Management
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