Infrastructure boom hits capital desert
Two pipelines will run in parallel for 1,210 kilometres under the Baltic sea, from Vyborg in Russia, just north of St Petersburg, close to the border with Finland, running between the Baltic states and Poland to the south and Sweden and Denmark to the north before making land at Greifswald in Germany.
Back in 2005, it was estimated that the European Union’s annual requirement for gas imports would rise from 336 billion cubic metres to 536bcm in 2015. The pipeline under the Baltic is designed to supply just over 25%, 55bcm, of that increased 200bcm annual requirement.
The justification for running the pipeline under the sea is that it will be shorter, cheaper and have a greater capacity than a land-based pipeline and also be less damaging to the environment.
It will not be easy, though, and Nord Stream has been set a tight deadline to complete the project and begin delivery by spring 2011.
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“The show must go on. They must do some business. And we think this project ticks all the boxes from a credit committee point of view” Paul Corcoran, Nord Stream |
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Most people working on the financing of large infrastructure projects betray greater excitement at the engineering details than in discussing the financing and Paul Corcoran, CFO of Nord Stream, is no exception, as he describes some of the constraints that the delivery schedule entails. “We placed the steel orders and tendered the construction orders back in November 2007 for the first pipeline. We need a stock of around 400 kilometres of finished pipe before we start to lay because we can lay it faster than we can make it. There aren’t many mills in the world that could make pipes of the diameter we require. And there are only three lay barges in the world large enough to handle our pipe and so you need to book those in advance.”
Financing for those orders has been provided by Nord Stream’s shareholders, which include, as well as Gazprom, BASF Wintershall and E.ON Ruhrgas with 20% each and NV Nederlandse Gasunie, with 9%. The budget is designed on the basis of a ratio of 30% in equity to 70% in debt. The shareholders have provided €1.3 billion already, to allow Nord Stream to press on with the construction contracts.
Corcoran plans two debt financings totalling up to €6 billion, half of which will carry export credit agency guarantees, half of which will be straight, limited-recourse project finance to be serviced by earnings from the transportation contracts between the supplier, Gazprom, and Nord Stream whose other shareholders are buyers of the gas. Crucially, banks are not being asked to take construction risk.
“We decided from the very start to try to make the financing package as attractive as possible to lenders and, looking at the banking market today, I am very glad we did so,” says Corcoran. “Shareholders will guarantee completion and banks come on risk post completion.”
Bankers were making informal offers to Nord Stream two years ago to take participations in the hundreds of millions of euros, even up to €1 billion, confident that they could easily sub-participate these commitments to a liquid banking market. No longer – banks are only prepared to commit the amounts they are prepared to hold, guessing there will be no liquid secondary market.
One of the challenges for Nord Stream will be to secure long-term financing for what it argues is a low-risk project. This will be crucial in marrying a smooth debt-servicing requirement to a steady transportation tariff. Corcoran points out that it is not the price of gas to which bankers are exposed – which has been highly volatile over the past 18 months and is just lagging the oil price in its rate of decline – but rather the cost of transporting the gas, which is a fraction of the value of the gas itself.
The key underlying transportation contract for bankers runs for 22 years and covers 100% of the pipeline’s capacity. Corcoran is hoping for “tenors as long as the market will provide, in the range of 10 to 14 years” on the €3.5 billion first-phase financing which Nord Stream hopes to draw down as early as July. It is looking to maximize the average life of seven and a quarter years on export credit agency backed financing, implying longer final maturities.
When Nord Stream first sketched the outlines of the financing plan two years ago, it was designed to get a very low price, for low risk. Today, that means it stands a chance of getting done. The market has changed fundamentally. Nord Stream had been considering a capital markets component to the financing but decided in 2008 this was no longer realistic. In the bank market, Corcoran says, “lending margins have increased substantially, but base rates have come down. Obviously banks have much less liquidity and much more stringent requirements. But the show must go on. They must do some business. And we think this project ticks all the boxes from a credit committee point of view.”
Nord Stream’s financial advisers are Société Générale, RBS, through the business it took over from ABN Amro, and Commerzbank through the business it acquired with Dresdner.
