The largest-ever syndicated project loan to be exclusively financed by Colombian banks has funded the first phase of the Bicentario Pipeline, an estimated $4.2 billion project to transport oil from the Llanos Orientales region to the port of Covenas.
The $1.2 billion ($2.1 trillion pesos) loan accounts for 70% of phase-one of the project, with the remaining 30% coming as direct contributions from eight partnering crude shippers lead by Ecopetrol.
Lenders were likely encouraged by Ecopetrols 55% stake in Oleoducto Bicentenario de Colombia, the company created to complete and operate the pipeline and majority-owned by the Colombian government. While there is no guarantee the project will be finished, government support is said to reduce some of the completion risk.
Whether they finish the construction or not, the shippers will start paying the banks independently next year, Jaime Robledo Vásquez, partner with Gómez-Pinzón Quleta Abogados, said.
The loan matures in 12 years and includes a one-year grace period at an interest rate of DTF (Depósitos Termino Fijo) 4.54%. Payments are to be made in accordance with a ship-or-pay contract, meaning the lenders are entitled to tariffs paid by shippers regardless of whether any oil is transported.
These are very strong shippers, Robledo Vásquez said. I dont believe they will allow the project to not finish. The project had already started construction when the banks came into the picture thats why they decided to assume the risk.
While Colombian banks were able to provide the necessary funds for the expected completion of Phase-1, Phase-2 and Phase-3 will likely require some international assistance.
Robledo Vásquez said the syndicated loan had to be unsecured so as to allow for further international financing in phases two and three of the project in light of World Bank negative pledge issues.
We had to convince the banks to forgo first priority collateral, he said.
International investors might be wary of required environmental permits, already obtained for Phase-1 but pending for the rest of the project. Lawyers said it might be a while before the remaining permits are granted. Highly-publicised security issues involving Colombian guerillas targeting project workers is also a concern.
Construction is to be financed through a trust that holds and deploys both the loan and income from current and future oil production. It was important to structure the accounts in a trust to avoid taxation concerns.
Natalia Quiñones, partner with Quiñones Cruz Abogados, said the trust prevents municipalities from potentially freezing the accounts in an attempt to receive additional, undue, tax revenue.
Assets in a civil law trust cannot be seized by creditors, Quiñones said. The trust has the right of levying the money on behalf of Bicentenario.
Our structure had to have a permanent account where you would transfer operational income in order to fund the interest guarantee fund and then the principal fund, Quiñones said. This was a requirement of senior lenders.
Income and interest payments were retained in a single legal entity for another reason, to preserve the value of a tax deduction. They are kept in accounts within the trust, but Bicentenario retains legal title through the income to claim a deduction on interest payments.
Another tax issue facing the project was Colombias 0.4% transaction tax. Quiñones said the trust was structured in a way to limit the number of transactions to a minimum, a difficult task considering all of the different banks and shippers involved.
Ship-or-pay contracts are the security for lenders. Shippers are to pay a tariff to Bicentenario to finance construction of the pipeline as well as service the companys debt obligations. If the project is not completed, shippers still have to pay the tariffs.
Lenders retain the majority of the risk, as 70% of phase-1 is financed through the syndicated loan. This is mitigated by the federal governments majority share in the majority partner, Ecopetrol. Remaining risk lies with the partners and investors who purchased equity in Bicentenario.
Gómez-Pinzón Zuleta Abogados and Allen & Overy represented Oleoducto Bicentenario de Colombia, and Quiñones Cruz Abogados advised the company on tax issues. Lenders were represented by in-house counsel.