Petroleos de Brasil has a hold on high finance players that at times seems to border on the hypnotic. ABS players have also been loath to look away as the company waves its epic $224-billion investment plan in their faces.
The notion that ABS might be an ingredient in Petrobras' deepwater oil expansion was validated last month, with the closing of a transaction backed by revenues stemming from a seven-year charter agreement between the energy company and SPV Turasoria DE for the use of the Lancer drilling vessel.
Players agree: there will be more of the same, as drill ship operators scramble for financing to feed this kraken's appetite for new vessels.
Indeed, at press time news broke that Brazil's Odebrecht Oleo e Gas was working on a similar $1.5 billion deal, with Santander and HSBC reportedly the arrangers. One twist on the template is the fact that two brand-new vessels are apparently part of the Odebrecht structure, as opposed to the seasoned Lancer. The ships are not even online yet, although construction is 95.5% complete for one and 88% complete for the other.
Notwithstanding its appeal to Brazilian operators, this structure's applicability to other countries and companies that have no connection to Petrobras is, at best, a stretch.
Lancer Finance Co. closed Oct. 21. The six-year-final, $270 million transaction priced at 5.85%. Led by Nomura Securities International, the deal's proceeds went to refinance a $150 million loan owed by Brazil's Schahin Group and fund new vessel construction by the conglomerate. Schahin owns the issuer of the deal and Turasoria DE. Unit Schahin Engenharia is the operator of the Lancer drill ship, which has a long track record working deepwater oil wells off the coast of Brazil. Rights to the services agreement between Schahin Engenharia and Petrobras have also been assigned to the issuer.
The deal's maturity mirrors that of the charter contract, which, having been signed in August 2009, runs until August 2016, the same date as the transaction's expected maturity.
Fitch Ratings and Moody's Investors Service both rated the deal investment-grade, with respective scores of 'BBB-sf' and 'Baa3'. Both cited Petrobras' role as a crucial strength in the deal.
"One of the most positive elements in this deal is Petrobras as off-taker, which carries a BBB foreign currency rating," said Fitch Director Bernardo Costa.
This is a big motivator for more deals of the same stripe from other operators that work with Petrobras, which number over a dozen, according to sources.
"This allows an unrated operator such as Schahin to obtain an investment-grade rating from an asset that has operating risk," said Emil Arca, a partner at Hogan Lovells, which advised Nomura on the Lancer transaction. "This is a real breakthrough transaction because it achieves what structured finance is supposed to do - give the borrower the ability to borrow at a lower rate than they would otherwise have. The ratings are only a notch off Petrobras."
For Petrobras' drill ship clients, tapping into that cheaper funding source will be vital in the years ahead. Petrobras is pursuing a $224 billion investment program in oil and gas over the next four to five years. Given the company's recent discoveries of massive oil deposits in a pre-salt layer off its coast - deposits that sit as deep as 7,000 meters below the surface of the ocean - Petrobras' demand for ultra-deepwater drill ships has been booming.
According to Nomura Vice President Roland Vigne, there will be an estimated $20 billion and $30 billion invested in drilling units (ships and rigs) operating off the coast of Brazil over the next eight years. Petrobras is in the process of tripling the fleet that services its wells to 90 drilling units. "All the new ones will be in ultra-deep water, and they cost between $550 million and $650 million to build," Vigne said. "That would mean at least $30 billion."
The Lancer boilerplate would be replicable by a number of operators that have long-term contracts with Petrobras and vessels with a history. Apart from Schahin and Odebrecht, operators include Delba, Etesco, Queiroz Galvao and Transocean. An e-mail and phone call to Odebrecht were not returned. Vigne said about five plus operators that are looking to obtain project financing would be suitable candidates for this style of deal.
"This is an alternative to financing them strictly in the banking market," said Arca.
A vessel with a history in these deals is arguably a strength, but age can have a downside as well. In the case of Lancer, the 33-year-old ship has an excellent operating history, with a 96% uptime record - a salient advantage as Petrobras pays nothing to a drill ship that is idle, although there are cushions against extended downtime. On the other hand, being long in the tooth might raise questions that a vessel's best years are behind it, a point addressed by Nomura during the roadshow.
"We showed investors a study that [concluded] it would have at least 12 more years of useful life as a drill ship, and also show them the state of the technology onboard," Vigne said. Tecnitas, a maritime-focused unit of the international group Bureau Veritas, ran the study.
In the event the operator goes under, there are a few outcomes where the deal survives or gets paid down. Fitch's Costa explains: "Should Schahin Engenharia no longer be able to operate the vessel, there are three possible scenarios. Scenario one is where Petrobras doesn't tear up the charter agreement and the transaction hires another operator for the vessel. Scenario two is Petrobras tears up the charter agreement and the transaction releases the vessel to another oil company. Scenario three is selling the vessel and prepaying investors with the proceeds."
Costa added that the 1.25x average DSCR should cover potential increased operating fees or lower charter day rates - the payment from Petrobras for use of the vessel - in case of scenarios one and two. Regarding scenario three, he said the 60% loan-to-value ratio at issuance and a quick pace of deleverage should be enough to handle outstanding principal, even in the event that the value of the vessel markedly drops.
While existing vessels could be employed in this manner to finance construction, it is obviously trickier to use a future charter agreement with a ship in construction, especially ones that are not as close to completion as those in the Odebrecht transaction. Vigne said, however, that a guarantee to the constructor might be enough to get over the hurdle of completion risk. The Export-Import Bank of Korea, for instance, provides performance bonds for the construction of ships. "If you have the right guarantee, you can make the deal in the capital market," Vigne said.
While drill ship construction has historically been the province of Asian builders and operators in other parts of the globe could use the financing, the particularities of Lancer's structure may make it an exercise that is primarily, if not uniquely, Brazilian.
The long-term contract that Petrobras signs with its operators is the crucial difference with many other players across the globe, sources said. Oil companies in Asia, for instance, tend to work under two- to three-year contracts. For a deal of this nature to work, five is the minimum, sources said. Also, having a fixed day rate for the life of a charter contract is rare. The fact that this is a standard feature of a Petrobras contract makes it eminently securitizable.
Among the Brazilian company's larger Latin American peers, Petroleos Mexicanos' contracts have more "outs," and the Mexican producer does not have the kind of deep sea deposits that would lend themselves to the same financing needs or structural features.
One particular challenge that Nomura faced with the 144A crowd that may fade away for future deals was the still-strong memory of the recent spill in the Gulf and the resulting moratorium on deepwater drilling for oil and gas in the U.S. Brazil, Vigne argued, is an entirely different animal. "This was confirmed by Petrobras' share offering last month," Vigne said, referring to the $70 billion issue that hit a record for a corporate equity offerings. "The issue was done to exploit deep sea oil. It showed there was a government willingness to go for that oil."
On Oct. 12, the U.S. Department of Interior lifted the ban on deepwater drilling for oil and gas that had been put in place in May after the blowout in BP's Deepwater Horizon rig resulted in nearly three months of a torrential spill. Operators in the Gulf are unlikely to resume operations quickly as they now face tighter rules, such as proving they have the resources to promptly contain a spill.
