On 10 August 2012 Delek Drilling, Avner Oil and Dor Gas Exploration closed a $902 million eight-year debt facility for their share of the Tamar gas field in Israel. The deal combines the structures of reserve based lending with a coverage-focused approach typical in project finance, and is a rare attempt to refinance a reserve development bridge loan pre-completion. Other large untapped gas deposits have recently been located in the Mediterranean Sea, so the deal will be influential both in Israel and and the oil and gas market.

Located 90km from Haifa, Tamar has an estimated 275 billion cubic feet of gas in place, and a potential greater reserve of 8.4 trillion cubic feet, though Lebanon claims some of the field is in its waters. The sponsors have signed a 15-year offtake agreement for 2.7 billion cubic meters per year with Israel Electric Corporation, which they say could bring in between $400 million and $750 million per year. The total cost of the Tamar development has been estimated at $2.8 billion.

Several recent natural gas discoveries off the coast Israel have the potential to transform Israel into a net exporter of gas. Along with Tamar, the Dalit field is due to start production next year, and the much larger Leviathan field will follow shortly afterwards. Leviathan holds as much as 480 billion cubic meters of gas in place, and international lenders would have been following the Tamar deal with one eye on its bigger brother.

Tamar is owned jointly by Noble Energy (36%), Isramco Negev 2 (28.75%), Avner (15.625%), Delek (15.625%) and Dor Gas Exploration (4%). Avner and Delek, both members of the Delek conglomerate, and junior partner Dor Gas Exploration signed an 18-month bridge loan to fund their equity contributions to the project in June 2010. HSBC and Barclays Capital were financial advisers and sole lenders on that bridge loan, underwriting $215 million each. The two banks went on to transfer that advisory mandate to the main facility.

HSBC and Barclays syndicated out the bridge loan, which was priced at 400bp above Libor, to Israeli banks Discount Bank, Bank Hapoalim and Mizrahi Tefahot Bank. The two advisers and the local lenders formed the core banking group for the main facility, with Barclays and HSBC using the regional banks’ local knowledge to help shape the deal. HSBC’s upstream oil and gas group was just three years old and Barclays had similarly limited experience with such assets, so the work on Delek and Noble’s 2011 Yam Tethys deal proved highly instructive.

The $902 million eight-year Tamar facility is made up of two separate limited recourse deals of $400 million each for Avner and Delek, and a $102 million loan for Dor Gas Exploration. It has a hybrid structure, in that it has project finance risk allocation along with reserve-based lending metrics such as a reserve tail. According to one banker close to the deal, “it is based on strong technical analysis with certain limited redeterminations of the underlying financial model, but not in the way a standard six-monthly reserve-based transaction would be.”

A typical reserve-based deal would be sized off a net present value figure, with reference to a loan-life coverage ratio and a floating borrowing base. Instead Tamar is structured around a fixed debt service coverage ratio and amortisation schedule so that it is sized backwards to meet certain repayments over the eight-year tenor. This extra project finance rigidity creates security for the lenders because the deal is more closely structured around cash-flows. But the deal benefits from a 25% reserve tail, comforting banks that the underlying resource will remain substantial after the debt matures.

The lenders structured a club deal rather than syndicating down the debt. This provided protection against the uncertainties of a market showing weak appetite for underwriting long-term loans, and was possible because of strong initial interest from key lenders. Nine lenders, along with the two advising banks, signed on the debt on 20 April 2012.

Barclays, HSBC, Citigroup, Credit Agricole, Nedbank, Mizhari and Hapoalim committed to $90 million each, Natixis and Discount signed on $75 million, Societe Generale provided $70 million and ING underwrote $50 million. The dollar-denominated debt is priced at 475bp over 3-month Libor pre-completion, dropping to 425bp for the next two years, then rising to 475bp for the following two years and then to 550bp until maturity.

The borrowers will start repaying the loan on 31 January 2014. Delek and Avner each started to draw down on $205 million of the facility at financial close on 10 August, to repay the balance of the original bridge loan. The development is expected to be completed during the second quarter of 2013. Delek Group is thought to be considering launching a $1.5 billion bond issue once construction is over to refinance the bank debt. 

Delek Drilling, Avner Oil and Dor Gas Exploration
STATUS
Signed 20 April 2012, financial close 10 August 2012
SIZE
$2.8 billion
DESCRIPTION
Development of the Tamar offshore gas field, located 90km from Haifa
SPONSORS
Noble Energy (36%), Isramco Negev 2 (28.75%), Avner (15.625%), Delek (15.625%) and Dor Gas Exploration (4%).
DEBT
$902 million
LENDERS
HSBC, Barclay Capital, Citigroup, Credit Agricole, Nedbank, Mizhari, Hapoalim, Natixis, Discount Bank, Societe Generale and ING.
SPONSORS’ FINANCIAL ADVISERS
Barclays Capital and HSBC
LENDERS’ LEGAL ADVISER
Shearman & Sterling
SPONSORS’ LEGAL ADVISER
Allen & Overy

Correction 14/11/12: An earlier version of this article incorrectly identified Leumi as a participant in the bridge and long-term debt, rather than Hapoalim.