Deal of the Year 2012

Dolphin: Patience pays

Since the 2008 financial crisis and throughout the eurozone crisis, project sponsors have learned that bank sentiment can be fickle and fleeting. Banks pass on increases in funding costs both through pricing benchmarks but also through markets. They shrink tenors sharply and leave the market altogether, sometimes with little warning. The project bond market, for all its structuring, regulatory and credit challenges, is meant to be more dependable.

But, as bankers have come to realise, project bonds aren’t always ready and willing, even for experienced sponsors with access to a ready investor base. The bond market can be subject to the whims of nervous investors, especially at the height of the negotiations over the Greek bailout – and Middle Eastern projects are occasional visitors to market.

The sponsors of Dolphin Energy were sensitive to this volatility. When they started a road show in mid-2011, after completing documentation for the 144A/REG S issue in June 2011, they were upfront with potential investors. They wanted a refinancing that priced inside the $1.42 billion bank financing that they closed in July 2009 – and they were willing to wait for the market turbulence to ease first.

The sponsors of Dolphin Energy are Mubadala (51%), Total (24.5%) and Occidental (24.5%), and Mubadala, in particular, has been vocal in its desire to see capital markets paly a greater role in the Gulf project finance market. “Pricing was very important to us,” says Mansour Al Mulla, adviser on structured finance and capital markets at Mubadala. “Our desired pricing wasn’t quite there in June 2011, but we got it in February 2012.” He attributes the wait to the Greek crisis and regional unrest.

Whereas some deals would wilt if they launched months after their initial roadshows, Dolphin gained favour with investors by waiting to launch in early 2012. Investors appeared to understand that the deal was postponed, but not struggling. The months between the roadshows and the launch allowed investors ample time to study the project company and the refinancing. “They had done their research on us in 2011 and knew Dolphin from the 2009 5.888% $1.25 billion bond, so that helped,” Al Mulla notes.

A few opportunities to issue the bonds emerged in late 2011, but Dolphin decided to wait for further market stability. “We learned the volatility wasn’t going away, but people were learning to live with that volatility, meaning spreads and rates started coming in again,” Al Mulla says.

Demand for Dolphin’s initial $1 billion in fixed-rate senior secured bullet bonds proved particularly robust. The bookrunners – BNP Paribas, Royal Bank of Scotland, Mitsubishi UFJ Financial Group, Société Générale and Abu Dhabi Commercial Bank – received $8.4 billion in orders. A second issue of $300 million attracted orders of $2 billion.

Moody’s Investors Service rated the issue, which matures in 2021, A1. Moody’s estimates Dolphin’s average and minimum debt service coverage ratio, including the new bonds, at 3.6x and 3.21x, respectively, from June 2012 until June 2018. That assumes an average condensate price of $93 per barrel over that period.

Dolphin achieved its pricing objectives on the bond. On the $1 billion issue, it achieved a coupon of 5.5%, from an indicative yield of about 5.75%, and priced at par. The subsequent $300 million issue priced at 101.25% of par to yield 5.336%, or 332bp over the 10-year US Treasury. US-based investors accounted for 48% of the bonds’ buyers, with 23% in the UK and 10% in the rest of Europe.

Pricing of the $1.42 billion bank deal that Dolphin closed in 2009 started at 275bp over Libor and climbs to 350bp. That loan was in turn part of a $4.11 billion refinancing, which also consisted of four tranches: a sponsor loan from Total and Occidental of $1.23 billion, a $218 million SACE-covered facility, and the $1.25 billion in 2009 project bond debt. At the time of the bond refinancing, about $2.87 billion of that package was outstanding.

Besides seeking cheaper debt, Dolphin sought a refinancing in the bond market to allow banks to recycle their commitments.. The sponsor has a number of projects in its pipeline and is keen to employ bank debt for development – and bonds as long-term financing. “We are big pushers and believers in that market,” Al Mulla says.

Al Mulla anticipates more project bonds to emerge from the Middle Eastern market, “but not as frequently as some might think.” He attributes these longer lead times, at least compared to typical corporate bonds, to heavier documentation and additional external parties.

The Dolphin project extracts and processes natural gas and condensate from Qatar’s North Field, which is then transported and sold to government-owned energy companies in the United Arab Emirates and Oman. The sponsors first closed the construction project financing for the project in 2005, a $3.45 billion debt financing for construction. 

Dolphin Energy
STATUS
Priced and closed in February 2012
SIZE
$4.1 billion initial cost
DESCRIPTION
144A/REG S refinancing of gas pipeline that runs between Qatar, the UAE and Oman
SPONSORS
Mubadala (51%), Total (24.5%) and Occidental (24.5%)
DEBT
$1.3 billion in bonds due 2021
BOOKRUNNERS
BNP Paribas, Royal Bank of Scotland, Bank of Tokyo-Mitsubishi UFJ, Société Générale and Abu Dhabi Commercial Bank
ISSUER LEGAL COUNSEL
Shearman & Sterling
UNDERWRITERS’ LEGAL COUNSEL
Sullivan & Cromwell
FINANCIAL ADVISER:
RBS
TECHNICAL ADVISER:
Shaw Stone & Webster