Subordinated debt financings in African infrastructure usually come from development finance institutions and usually close at the same time as senior debt deals. Lenders such as the International Finance Corporation and FMO have made subordinated loans a standard part of their product offerings. There is little in the way of a leveraged finance market for African infrastructure, partly because there are few assets on the market, and partly because there is little lender appetite for such highly- geared deals.

The R600 million ($75 million) subordinated financing for an expansion to the Republic of Mozambique Pipeline Investment Company’s (ROMPCO) pipeline has no real precedents. It benefits from substantial levels of sponsor support, though has little integration with the pipeline’s existing senior debt. But it allows its sponsors to release some equity from a capital-intensive project without the disruption that a full refinancing might cause.

ROMPCO runs 865km from the upstream Temane and Pande gas fields in Mozambique to synthetic fuels production facilities owned by Sasol at Secunda, South Africa. The original $1.2 billion pipeline financing featured gearing of 50% and debt from Standard Bank, Development Bank of Southern Africa, the African Development Bank, Proparco, FMO, DEG and the European Investment Bank.

The pipeline and associated gas-field project were among Sasol’s first forays into the rest of sub-Saharan Africa when they closed in 2004. They were designed to exploit Sasol’s apartheid-era coal- and gas-to-liquids expertise, and open up Mozambique’s gas reserves for viable production. Sasol’s demand, whether in liquids, chemicals or for domestic or export use, drove the development of the pipeline – Sasol was its offtaker, and originally Sasol was its sole sponsor.

In 2006, Sasol spun off a 50% stake in the pipeline to the governments of Mozambique and South Africa after the South African government exercised a call option. Mozambique, which holds its stake through holding company Companhia Mozambique de Gasuduto (CMG), and South Africa, which holds its stake through its Central Energy Fund and then iGas, each own 25% stakes. At the time of the spin-off the original financing was amended to take account of the change in ownership, but there was little change to its outline features.

In 2008, the sponsors decided to expand the capacity of the pipeline from 120GJ to 147GJ per year by building a new gas- fuelled compressor station at Komatipoort, just inside the South African border. The project, for which Foster Wheeler was construction contractor, had a total cost of R1 billion. The increased capacity is designed to feed an increase in capacity at Secunda (and a reduction in the proportion of its capacity that uses coal) and feed a gas-fired generation unit at the plant.

A developed market sponsor might try and finance an expansion with a short-term bank facility, and look to refinance it in the bond market later. African sponsors’ options are fewer, though despite that Sasol settled on the strategy that would give it the lowest cost of funding in the circumstances. Sasol and iGas funded the work with arms-length shareholder loans on terms roughly equivalent to those that an external lender would offer.

The existing senior debt, particularly the R900 million EIB financing, had low pricing and a long tenor. Refinancing it in the 2008-9 period with more competitive financing was not an option. Moreover, the existing lenders were extremely sensitive to the prospect of the project raising additional debt, especially if that might affect their position.

Standard Bank, which had been working with the sponsors as far back as the use of the shareholder financing, was mandated to provide them with a subordinated loan to refinance the shareholder loans. The debt would not benefit from any direct security interest, not even over the additional compressor station, and would rank behind the senior debt in terms of cashflows. At least one senior debt provider was unhappy with the idea that the 4-year subordinated debt would be repaid earlier than the senior debt, and was ultimately mollified with the inclusion of standstill and other provisions.

Because of the length of time that it took to close the financing, however, only the EIB debt now matures after the subordinated debt is repaid, roughly 1.5 years later, with the other debt maturing at the same time. The subordinated debt benefits from sponsor guarantees, with Sasol guaranteeing half of the debt pro rata to its ownership, iGas/CEF guaranteeing another 25%, with Sasol also guaranteeing two thirds of CMG’s pro rata obligation, or another 17% of the debt, leaving only 8% uncovered. This small uncovered portion still gave Sasol a cost of debt that it could live with.

Joining Standard Bank, which provided 52% of the facility, was DEG, with 48%. The two lenders signed separate facility agreements, and separate subordination agreements, though they shared legal counsel, in the shape of Webber Wentzel. Given that even if subordinated debt becomes more popular development finance banks are likely to provide much of the liquidity, the exercise of documenting a deal to development lender standards will not have been wasted.

Republic of Mozambique Pipeline Investments Company
STATUS: Signed June 2011
TOTAL PROJECT COST: R1 billion (inclusive of R400 million from internal cashflows)
DESCRIPTION: Subordinated refinancing of expansion to 865km gas pipeline from Mozambique to South Africa
SPONSORS: Sasol (50%), Central Energy Fund (25%), Government of Mozambique (35%)
DEBT: R600 million
LEAD ARRANGER: Standard Bank
PARTICIPANT: DEG
LENDER LEGAL COUNSEL: Webber Wentzel
SPONSOR LEGAL COUNSEL: Edward Nathan Sonnenbergs