On 31 October 2012, Luxembourg-registered SBM Baleia Azul closed a $500 million project bond for the lease and operation of the floating production storage and offloading vessel the Cidade de Anchieta. The transaction is the first ever bond financing in the US capital markets for a standalone FPSO, and sponsor SBM’s first ever structured bond financing. The bond will finance the conversion costs of the FPSO Cidade de Anchieta, which is producing in the deep water of the Campos Basin, offshore Brazil. The FPSO is on charter to Petrobrás for an initial term of 18 years.

The transaction

SBM Baleia Azul, a special purpose company wholly-owned by SBM Holding, issued $500 million in senior secured with an average life of 8.5 years and a final maturity of 15 years. The proceeds of the notes have been used to reimburse SBM for the costs associated with the refurbishment and conversion of the FPSO Espadarte, which has since been renamed FPSO Cidade de Anchieta.

An FPSO can either be a purpose-built unit or a converted hulled oil tanker, permanently moored on site, and is typically used by oil companies to produce, store and offload hydrocarbons from offshore oil fields. The facilities that are located on the deck of the unit (the topside facilities) are used to receive and separate the fluids from the well (such as crude oil, water, gas and solids).

Water and gas are re-injected in the wells in order to maintain sufficient pressure on the field over the life of the field processing facilities. Further, gas from the field is used as the primary energy source for operating boilers, power generators, compressors and water injection pumps onboard. The treated crude oil is then stored before being offloaded using shuttle tankers to transport the oil to shore. FPSOs provide a cost effective solution to extract, process and store oil from offshore oil fields.

The notes benefit from a first priority interest in essentially all of the assets of the issuer. Petroleo Brasileiro (Petrobrás) has chartered the Cidade de Anchieta and has hired SBM do Brasil to operate the vessel. Petrobrás operates most of Brazil’s producing oil and gas fields and holds a large base of proved reserves and a developed operational infrastructure.

The Cidade de Anchieta was originally a very large crude carrier, which was built in Norway in 1974. She was first converted to a FPSO in 1985, as FPSO VI, and served for 13 years in the Ebughu, Akam and Adanga fields, offshore Nigeria. Subsequently, she was refurbished and renamed FPSO Espadarte in 1999 for use at the Espadarte field and was on charter with Petrobrás. The charter party contract was originally signed in January 1999 and was subsequently amended in September 2010 to allow the refurbishment and relocation of the unit to its new location. SBM selected Keppel in Singapore, where the FPSO Espadarte was also previously converted in 1999-2000, for the fast-track modification and upgrading of the FPSO Cidade de Anchieta. The unit was completed in June 2012 and started operations at the Baleia Azul field on 10 September 2012.

Under the present charter agreement, Petrobrás pays the issuer a daily rate according to the up-time performance of the FPSO. The charter agreement revenue comprises 90% of the total revenue from Petrobrás, with the remaining 10% stemming from the corresponding service agreements between Petrobrás and SBM do Brasil. The charter revenues are pledged to a project account that will pay debt service on the notes according to an amortisation schedule that fully repays the notes by September 2027 from project cash flows.

The operator is key to the success of the project, given that the payments from Petrobrás are based on the availability of the FPSO. SBM do Brasil is a company set up to manage the local operations of the unit. It is the counterparty for the services contract with Petrobrás covering the local content and operational costs denominated in Brazilian Reais. The operation employs 56 people, including 36 Brazilian nationals, with key senior staff retained from FPSO Espadarte.

SBM PC is wholly owned by SBM, is incorporated in Switzerland and is responsible for managing SBM’s global fleet. The fleet currently consists of 25 units, of which seven are under construction or conversion and 18 are on lease and/or operated by SBM. SBM PC serves as an interface between head office corporate functions and the decentralised onshore operations in each and every country. SBM PC is party to the operational agreements with various project companies and prepares, manages and controls the operational expenditures for operating the FPSO.

In Brazil, SBM PC opened an office in Macaé in 1997, out of which it managed the local operations of FPSO II. Since 1997 the global production capacity under management with SBM PC grew from 20 million barrels of oil equivalent per day (boepd) to 770 million boepd in 2012, or around 40% of current Brazilian production output. The FPSO Cidade de Anchieta will be the latest addition to the Brazilian fleet, which constitutes of three vessels under construction, four vessels on lease and two vessels in operations.

The right asset

SBM decided that FPSO Cidade de Anchieta was the best candidate for a US capital markets debut. The FPSO had been under contract with Petrobrás since 2000 and SBM initially refurbished the unit in Keppel's shipyard in Singapore. Over its 10-year charter at the Espadarte field, the FPSO recorded an overall oil uptime performance of 99%. The economic life of the FPSO Cidade de Anchieta is at least 18 years, during which no dry-docking will be required. Petrobrás has already accepted the installed and completed FPSO Cidade de Anchieta and therefore there is no construction risk for the investors. The facility has the best available technology within SBM’s fleet. The 18-year charter with A3/BBB/BBB (Moody’s/Standard & Poor’s/Fitch) Petrobrás provides stable and predictable cashflows.

SBM’s track record

SBM has achieved an overall historical operational performance of 99.1% across its fleet and currently operates six FPSOs in Brazil, including four for Petrobrás, with two more underway.

SBM pioneered the development of the floating production concept, supplied the mooring system for the first FPSO in 1976, for Shell’s Castellon field in Spain, and in 1981 provided the offshore industry’s first leased FPSO, FPSO II, for Amoco’s Cadlao field in the Philippines. Since that time, SBM has been involved in over 40 FPSO projects worldwide.

SBM started to use project finance in the mid 1990s with the financing of FPSO Tantawan Explorer, leased to Chevron in Thailand in 1996. Since then, it has arranged 21 project financings, mainly for assets in use offshore Brazil and Angola, and SBM is a market leader in using project finance for its FPSO lease and operate business model.

SBM’s financing model in the bank market is established and effective. In 2006, SBM arranged its largest project financing for FPSO Kikeh. Two years later, in July 2008, SBM and MISC Berhad reached financial close with FPSO Espirito Santo, the largest single financing for a FPSO, before the worst of credit crunch struck global financial markets. Since then, and though bank market conditions remain difficult, SBM has successfully closed project financings for FPSOs.

In July 2011, SBM, QGOG, NYK and Itochu closed their first ever US$1bn bank loan for the financing of FPSO Cidade de Paraty, which will be deployed on the Lula field in Brazil once completed. And one year later, in August 2012, SBM, QGOG and Mitsubishi closed the largest single commercial financing ever for an FPSO for the Cidade de Ihlabela, with a total bank facility of $1.05 billion – soon to be increased to $1.2 billion.

Diversifying funding sources

Bank debt has historically been a key element of SBM’s project development and financial competitiveness. However, today’s challenging credit environment, coupled with concerns about the strength of the banking sector are putting pressure on banks to de-leverage and focus on key relationships. Bank of Tokyo-Mitsubishi UFJ started a new business relationship with SBM at the time financial crisis began, but since then the number of project finance players in the international bank market has reduced significantly.

The exploration and production supply chain faces growing capital expenditure challenges. Market forecasts show a strong short-term increase in demand in the floating production sector. Most of the growth will come from the increasing move of oil and gas producers into deep waters such as the Gulf of Mexico, West Africa and Brazil. The relatively low operating costs, coupled with the potential to re-deploy vessels, have made FPSOs the technology of choice in remote areas compared to long distance pipelines connecting offshore oil fields to onshore receiving terminals.

However, the increasing size and the technical complexity of FPSOs operating in deeper waters are now leading to higher capital expenditures. In addition, in countries like Brazil, contractors face a requirement to source up to 65% of their floating production-related equipment from local providers, which can result in increased capital costs.

To overcome the local content challenge in Brazil, SBM has established joint venture Naval Ventures to use the capacity of the existing BRASA yard in Rio de Janeiro. In the meantime, banks’ capital constraints and the more stringent bank regulations make it more difficult to secure long-term bank financing. Such technical and financial challenges require that SBM widen its core banking group and diversify its financing sources. Therefore, direct access to debt capital markets is becoming increasingly important to sponsors.

The oversubscription for the SBM Baleia Azul notes shows that US investors were very receptive to SBM’s business model. Debt capital markets represented a competitive source of financing, increasing competition on tenor, but also pricing competitively with the bank market. It is important that SBM builds on its recent success and regularly accesses the capital markets as a complementary source of funding to the bank market. A bank and/or bond solution allows SBM to demonstrate to its clients that it can meet its funding requirements. This is a growing risk consideration for oil and gas companies, which must decide whether to charter assets – or simply buy them outright.

Bond essentials

To run the bond deal, SBM mandated relationship banks dedicated to project finance, which were also first-tier players in its revolving credit facility. It named Mitsubishi UFJ Securities, ABN/TD Securities and Rabobank Securities to act as placement agents for the financing, and Mizuho Corporate Bank to act as co-placement agent. In addition, the four banks committed back-stop financing to SBM until successful closing of the US private placement bond.

The transaction will create a new project bond asset class in the offshore production sector. One of the keys to the success of the deal was obtaining a consistent rating of Baa2 and BBB from Moody’s and Fitch, respectively. There are no standalone FPSO transactions that have been publicly rated. But SBM’s advisers and placement agents were able to take into consideration rated transactions in the drilling sector and the broader energy industry.

The transaction offers investors enhanced credit protections, robust debt service coverage ratios and a fully amortising project finance structure. Hence, there is no refinancing risk and no reliance at maturity on the projected market value of the underlying asset. In addition, SBM has already funded the conversion works of the Cidade de Anchieta. Therefore, post-acceptance, all cash flow generated under the charter party contract is used to pay debt service.

The Baa2/BBB ratings from Moody’s/Fitch also reflect the reliance on Petrobrás as a highly stable and predictable source of revenue for the repayment of the notes, SBM’s track record in operating medium-scale FPSOs, as well as its long-standing relationship with Petrobrás. The transaction represents the first standalone FPSO to be rated in the market and Moody’s and Fitch took the characteristics and metrics of Petrobrás-chartered drilling units in Brazil into consideration. The placement agents were of the view that FPSOs have less risky operating characteristics, compared to drilling units, and wanted to achieve a better investment grade rating compared to the comparable transactions.

David Falcon is a director, structured finance solutions at the Bank of Tokyo-Mitsubishi UFJ in London and Conrad Owen is managing director and head of private placements at Mitsubishi UFJ Securities in New York.