By Simon Pirani
Sakhalin Energy, the project company majority-owned by Shell, last month announced that about half of the estimated $10 billion cost of its LNG plant is likely to be debt financed. Most of the debt will come from a group of multilaterals and export credit agencies led by the Japanese Bank for International Cooperation (JBIC). But up to $2 billion is expected to be funded by a bond issue or syndicated loan.
CSFB, taken on in December 2000 as financial adviser to Sakhalin Energy, would be strongly placed to win the mandate for a bond issue. But if a portion of the debt is syndicated to the bank market, another arranger, or more likely group of arrangers, would be brought in. Société Générale and BNP Paribas are among the frontrunners.
Peter Firmin, director in CSFB’s global energy group, says the attraction of financing through a bond “is that capital markets can offer a longer tenor than straight bank debt, or even agency money – and with a very back-ended structure, which is attractive in the current climate. Clearly the sweet spot for capacity and liquidity – tenor and pricing – is distribution via the Rule 144a market.”
An uncertain market Only a handful of oil and gas projects of this size have sought financing from the bond market and few of those deals have been successful. A notable success was the financing for Rasgas, the Qatari LNG project for which Goldman Sachs arranged a $1.2 billion project bond in the Rule 144a market in December 1996: before the Asian and
Russian crises. Others have not been so fortunate. A banker who worked on the Rasgas deal says: “The 144a market’s great advantage is that it can be very long term. But issuers are at the mercy of market sentiment. After the success of Rasgas, a series of similar deals were expected, but conditions made some of them impracticable.”
In Venezuela’s heavy-oil sector, the Cerro Negro and Petrozuata projects raised capital markets debt, but the Sincor (2000) and Hamaca (2001) projects fell back on more restricted ECA funding. In late 2001, the owners of the Oman LNG project were poised to issue a bond to refinance a $1.3 billion 1997 project debt financing, but the September 11 attacks and their fallout caused a switch to the costlier bank market.
Qatar, where Rasgas was situated, is investment grade; Russia is not. But Sakhalin and its advisers hope the positive sentiment for Russia among emerging market investors will still make a bond possible.
The Russian debt boom is breaking one record after another. In February, Gazprom issued a $1.75 billion 10-year Eurobond – the biggest ever from an emerging market corporate and still five times oversubscribed.
The second-biggest oil company, Yukos, whose merger with Sibneft in April was Russia’s biggest ever domestic M&A deal, has been talking to bankers about a $1 billion Eurobond later this year to help pay for it. That would provide another important indication of market sentiment.
In the syndicated loan market, where Russian oil companies are playing banks off against each other and pushing margins below Libor plus 3%, number one oil company LUKoil is this month expected to mandate an arranger for a $500 million seven-year deal. That will be a record tenor for the structured commodity finance market.
Sakhalin Energy will hope to follow the trend. Firmin of CSFB says that the development announcement is “a very big vote of confidence in Russia. The Gazprom bond was a clear sign of investor interest in, and appetite for, Russian deals.”
That appetite could grow in March when president Vladimir Putin hopes to romp to a second term in office that will provide renewed political stability. Only a substantial oil price fall can spoil the Russian party.
