Latin Americas project bond market has
been reopened by Odebrecht Oil & Gass (OOG) $1.5
The deal shows that assets under construction can
be financed through the capital markets - but refinancing risk
must be addressed and the structure flexible enough to respond
to a fast moving market.
Through its SPV issuer Odebrecht Drilling Norbe
VIII/IX, Brazils OOG placed the 6.35% senior secured
notes due 2021. These will fund the completion and refinancing
of two drillships being built in Korea to be chartered to
Brazils state-owned energy company Petrobras.
This was a bond financing which was replacing
a project financing midstream not completed and up and
running - so it was an interesting exercise, said Victor
DeSantis, a White & Case partner who acted for the initial
Its the largest debt offering out of Brazil
in 2010 and one of the regions largest project bond
issues ever. But its most notable for being a rare case
where lawyers had to overcome pre-completion issues about
balloon repayment and bond investors aversion to
Refinancing risk was dealt with through a retention
account and call period mechanism. Completion risk through
sponsor support followed by stringent completion test, plus a
well established shipyard (Daewoo Shipbuilding & Marine
Engineering (DSME)) building the vessels.
Another challenge was having the structure react to
a dynamic market.
Bond pricing is very volatile and bond
markets can go away in a nanosecond, said one lawyer on
the deal. So one of the benefits to a project when you
are trying to reach a bond market is the incentive to move
It means lawyers must work with a structure that is
flexible enough to issue the bonds when pricing is optimal. In
the OOG issue, this meant placing the bonds before the final
transaction structure had completed.
The project has been set up with US companies
at the moment, but its part of the offering circular
conditions that a reorganisation occurs and they [the ships]
will be migrated to Austria, which is not common, said
Paul Doralt, a partner with Austrian firm Dorda Brugger Jordis
which advised OOG.
A tax treaty between the two countries offers
beneficial treatment of dividends for Austrian project
companies. But there wasnt time before the launch to get
all consents for contract assignments to the Austrian
The solution was for the ships (once construction
finishes) to initially be owned by Delaware companies, the
shares of which will later be transferred to the Austrian shell
companies. The Delaware companies will then be liquidated and
their assets moved across to Austria.
Investors arent used to a domicile change,
and the offering circular had to provide all necessary
information about investing in an Austrian company. This will
enable the changes that couldnt occur before going to
It was a bit of a race to lock in the best
financing terms, said a lawyer on the OOG issue.
This is the context in which this deal was
OOGs offering closed less than a month after
a $270 million issue by Brazils Schahin Group to
refinance its Petrobras-chartered drillships. Together the
deals tested the market and the rating agencies attitude
to project bonds.
It seems to have paid off. The OOG issue was more
than three times oversubscribed.
I assume there might be efforts to replicate
it, said DeSantis. Particularly given Petrobrass
plan to hire 28 vessels (not yet built) over the next eight
Part of Petrobrass programme to exploit
pre-salt finds and take advantage of oil and gas resources is
relying on the private sector and companies like Odebrecht to
structure the financings for these vessels, DeSantis
added. This was an innovative way to access financing for
these purposes that hasnt been used before, or certainly
not on this scale.
Bonds long tenor, better rates than loans and
offer of operational flexibility, combined with a strong
sponsor and offtaker, is thought a good rationale for the
markets expansion in Brazil at least.
The OOG bonds were issued through a Cayman Islands
company and the ships will be flagged in the Bahamas; the deal
required legal advice from five jurisdictions.
There was some concern surrounding the
projects refinancing risk. Credit rating agencies are
reluctant to award investment grade status to securities
carrying this risk, so mitigating it was a priority. This was
achieved in two ways.
A cash-trap was built into the project companies to
collect payments from the two charter agreements towards the
end of their terms. This money will reduce the balloon
repayment expected at the bonds maturity.
The risk relating to the uncovered portion of
the balloon is also addressed by the assessment of the residual
value of the drillships at the balloon payment date, which are
very likely to be substantially higher than the outstanding
balloon amount, said Clarice Garcia, in-house counsel for
The reliability of Petrobras revenues was key to
minimising operational risk and obtaining investment grade
ratings (BBBsf and Baa3 rating by Fitch and Moodys,
The other tactic was making the bonds callable, but
giving investors the comfort of a call protection period that
ends only once sponsor support (covering up to $110 million of
cost overruns) has been exhausted. The issuer can only call the
bonds immediately before there would otherwise be the need to
fund additional collateral accounts.
Bond investors aversion to construction risk
has been a major stumbling block for the project bond
In a bond as opposed to a financing, the
investors are more detached from the documents
themselves, said Guilherme Forbes from Souza Cescon
Barrieu & Flesch, Brazilian counsel to the issuer. Bond
trustees dont take a coordination role which makes it
impossible for issuers to get waivers and amendments to project
timetables, as happens in a bank financing.
This is dealt with through a covenant package that
gives the sponsor flexibility to manage the project and
investors adequate protection in case of material events, said
Garcia. Also, there is relatively little technical risk of
The drillships are being built by DSME, a
first class shipyard with a solid track record and the
construction is in an advanced stage, said Garcia. The
construction risk there is, is substantially taken on by DSME
which is building the vessels under turnkey, fixed price EPC
Kexim has also issued a refund guarantee to
the project companies in the form of a transferable,
irrevocable, standby letter of credit to cover any refund
payable by DSME to a project company following termination of
the EPC contract due to DSMEs breach, Garcia
Finally, an independent engineer will certify that
the ships have been completed to the specifications.
The security package replicated the initial bank
loans, and is what is customarily granted in a project
financing. It includes pledges over revenues from the Petrobras
contracts and bond proceeds accounts; pledges over the shares
of the issuer and guarantor (Delaware project companies); an
obligation to mortgage the drillships once completed; a letter
of credit covering the sponsors contributions prior to
delivery; and assignment of the project contracts and insurance
Odebrecht Oil & Gas through
its project subsidiary Odebrecht Drilling Norbe VIII/IX issued
$1.5 billion of 6.35% senior secured notes due 2021. The funds
will be used to finance two drillships to be chartered to
Petrobras. The initial purchasers were HSBC, Deutsche Bank,
Santander and BB Securities.
Lead counsel to issuer: Davis
Polk & Wardwell
Austrian counsel to issuer: Dorda
Cayman Islands counsel to issuer:
Maples & Calder
Bahamas counsel to issuer:
Lead counsel to initial
purchasers: White & Case
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