The biggest debt deal of the year from eastern Europe wasn't the Yukos loan, or the Poland dollar deal, or even the Gazprom blowout. For once, the banks involved don't want to tell you how well it went, and it probably doesn't appear on any league table. That's because it's an arms financing deal, one of the biggest private financings of this type for several years.
In November 2002, Poland agreed to buy 48 F-16 jets from Lockheed Martin, through the US government's foreign military sales programme. The aircraft were to modernize Poland's ageing air force, in order to make a good contribution to Nato's combined forces, of which Poland is a relatively new member. In March 2003 the financing for the deal was finalized, with JPMorgan arranging a $5.5 billion facility, guaranteed by the US government, at an interest rate, according to one banker, of Libor plus 10 basis points. This was syndicated to several US and European banks in March, through a US special purpose vehicle, according to a banker who worked on the deal. JPMorgan did not return calls to comment.
Fortuitous repayment holiday
According to the term sheet, which Euromoney has seen, the deal was structured in two options - a $1.9 billion option A, and a $3.5 billion option B. Option B will address the possible expansion of the deal beyond the F-16s to "include other government contractors providing goods and services".
The loan is structured so that Poland doesn't have to begin repaying principal before 2008, according to a banker who worked on it. By then Poland hopes to have joined the EU single currency, which, in theory at least, entails compliance with Maastricht budgetary restrictions. A source from the US government says it was not structured with this in mind. The final repayment is due in 2015.
The financial package for the deal also includes around $6 billion-worth of "off-sets". These entail Lockheed Martin or other US companies that may be suppliers, agreeing to reinvest the profit from the deal in investments in Poland. Off-sets are increasingly a part of the competitive global arms market, though they draw criticism from domestic lobby groups, which say the US arms industry should not be subsidized by the US government if the economic benefit of its deals end up in other countries.
Critics also point out that the US is taking on the risk of the deal, even if it is off balance sheet and so doesn't appear in the federal debt. One project finance banker says the US debt is actually several billion dollars bigger than it appears, because of such state guarantees. The US ambassador to Poland, Christopher Hill, denies that Lockheed is subsidized by the US government, and says the deal is important for geo-strategic reasons for the US government.
The deal was also controversial with the losers of the bid. UK aerospace company BAE Systems and its Swedish collaborator, Saab Aerospace, bid together to put forward their Gripen jet. European Commission president Romano Prodi was unhappy when the deal was awarded to a US contractor, the day after Polish accession to the EU was confirmed. Figures from the US government and Lockheed argue that Poland wanted a jet that was Nato-compatible, and the Gripen jet is not. A BAE spokesperson says it can be very cheaply adapted to become Nato-compatible and that Poland had chosen the Lockheed jet for political reasons.
Despite the political controversy surrounding the deal, bankers involved reckon it was a success for them. One says: "The deal had a good pick-up considering it was guaranteed by the US government. Frankly, we'd like to do more of these deals, but we don't get to hear of them that often."