Financing for an ultra deepwater drill ship to be used by Brazillian oil and gas firm PetroBras reached its US$820 million close last month.

The Etesco drill ship deal raised US$650 million in commercial debt to fund the construction of a vessel capable of drilling oil reserves buried below thick layers of salt on the Atlantic seabed off Brazil's coast [Projects Database].

It was the first Greenfield drill ship project finance to close since the Dryships Deepwater Drillships deal in July 2008 [Projects Database] and reflects the market post-Lehman Brothers collapse, with a greater number of banks coming in on smaller tickets.

The project

Brazil's discovery of "pre-salt" oil reserves, so called because they are located under a thick layer of salt, was first announced in late 2007.

It is estimated that these reserves in the Atlantic seabed could eventually lead to a near six-fold increase in Brazil's current proven reserves of 14 billion barrels and transform the South American nation into a major oil exporter. Indeed, oil & gas exploration is seen as the main driver for economic growth in Brazil [Americas Outlook 2009].

Brazillian national oil company Petrobras awarded 12 drilling contracts for the pre-salt layer in May 2008 and of those the first to come to the debt market for financing was oil and gas contractor Etesco's Etesco VIII drillship.

With capacity to drill in water depths of up to 10,000ft (3,048m) and at a cost of US$820 million, the Etesco VIII will be built in the Samsung shipyard in South Korea. Drilling and subsea equipment will be supplied by National Oilwell Norway. Construction will start in July 2009 and be complete by April 2012.

Petrobras has signed a 10-year charter agreement for the drill ship with Etesco for just under US$400,000 per day, which will begin upon the unit's delivery in early 2012.

The financing

Banks were first mandated on the deal in November 2008 with IJ reporting a debt package of US$700 million split between a US$400 million uncovered commercial banking tranche and a US$300 million ECA tranche guaranteed by Norway's GEIK.

The core bookrunner group on the commercial tranche comprised five banks. With underwriting unattractive in the market, then as it is now, the deal would be on a take-and-hold basis, with other banks being sought to come in on the financing.

The initial MLAs were:

• Bank of Tokyo Mitsubishi
• GE Capital
• ING
• Mizuho
• SMBC

However, at the start of 2009 GE Capital pulled out of the deal. This left four lenders only prepared to lend up to a maximum of US$75 million each - a total of US$280 million - and some way short of the total bank debt required, by then thought more likely to be around the US$380 million mark.

Additional banks to come in on the deal were sought and found, and when the financing closed on 12 June 2009 the four remaining MLAs were joined by Standard Chartered Bank and Société Générale.

Lending commitments on the debt were split as follows:

• MLAs and bookrunners Bank of Tokyo Mitsubishi, ING, Mizuho and SMBC took tickets of US$70 million
• MLAs Standard Chartered Bank and Société Générale took tickets of US$50 million

The bank debt is on a take-and-hold basis with a tenor of nine years and is priced at Libor +300bp.

Thanks to falling EPC costs, total debt required for the project fell from the initial US$700 million to US$650 million.

After the bank tranche, the remainder of the debt came in the form of a GIEK-guaranteed loan by Eksportfinans for US$270 million with a tenor of 12 years. The GIEK guarantee was made on condition of National Oilwell Norway supplying the drilling and subsea equipment for the vessel.

Debt to equity ratio on the deal was 79:21, with US$170 million provided by the project sponsors to complete the US$820 million funding package for Etesco VIII's construction. More than three-quarters of the equity was supplied by Japanese firms.

The sponsors and their shares of equity are as follows:

• Nippon Yusen Kabushiki Kaisha 33.7 per cent
• Mitsui & Co 21.78 per cent
• Kawasaki Kisen Kaisha 20 per cent
• Etesco Construcoes E Comercio 11.76 per cent
• Mike Mullen Energy 11.76 per cent
• Japan Drilling Co 1 per cent

Latham & Watkins was legal adviser to the sponsors, while Norton Rose was legal adviser to the lenders.

The future

The US$270 million GIEK/Eksportfinans facility meant that more than 40 per cent of the debt supplied for the Etesco drill ship deal came from an ECA.

Moving forward this trend is unlikely to change for drill ship deals, particularly in Latin America.

The next drill ship project financing anticipated to reach financial close in the region is the Schahin deal [Projects Database]. This deal would fund a further two drill ships to operate off Brazil's coast, built by Samsung Heavy Industries.

However, the conclusion of this deal, originally targeted to close in Q2 2009, has been pushed back to the end of the year due to the increased role of ECAs on the project.

GIEK is again involved, as are South Korea's K-Exim and KEIC, while it is likely there will be five MLAs.

Brazil's development bank BNDES is currently driving much of the infrastructure spend in the country. With commercial banks having to compete with it on pricing and tenor [Americas Outlook 2009] it is likely that ECA-heavy club deals will dominate the financing of Brazil's exploration of pre-salt oil reserves for the foreseeable future.

The project at a glance