Sunday, 20 January 2019

Double trouble

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In a year that will always be associated with the oil spill in the Gulf of Mexico, BP had its work cut out to raise the financing it needed in the summer of 2010. But in a highly innovative deal the energy giant pulled off one of the loan coups of the year, just one of the deals it completed in the 12 month period. Chris Mangham reports.

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In the summer of 2010 BP overcame the seemingly insurmountable obstacle presented by the worst-ever US oil spill to raise US$4.75bn in the loan market, with four banks coming together to underwrite two loans covering the sum. The financing, non-recourse to BP and linked to the company’s operations in Angola and Azerbaijan, enabled the borrower to demonstrate to the markets that it had full access to liquidity.

In July 2010, with BP’s Macondo well in the Gulf of Mexico ruptured and spewing an unprecedented volume of oil into the sea, the oil company needed liquidity – and to prove to shareholders and the wider markets it could get it. Its CDS levels reached a peak of 615bp in June and 315-541bp in July, contributing to the air of panic surrounding the company.

Having already raised several billion dollars in bilateral loans, and bond issuance ruled out because of BP’s soaring CDS levels, loans were its only option. With the company’s reputation on the line and its credit in question, an innovative solution was needed.

Amid a swathe of negative noise and headlines around the world, BNP Paribas, Standard Chartered, Societe Generale and Royal Bank of Scotland were mandated to arrange separate non-recourse pre-export financings linked to BP’s operations in Angola and Azerbaijan.

RBS and SG underwrote a US$2bn loan, later increased to US$2.25bn, backed by crude sales from BP’s interest in the Azeri-Chirag-Deepwater Gunashli field in Azerbaijan. BNP Paribas and Standard Chartered underwrote a US$2.5bn loan for BP Angola, backed by BP Angola’s crude oil sales.

In each deal the borrower sells crude oil into new established SPVs, which in turn sell oil on a back-to-back arrangement to BP Oil International, a key trading arm of BP. The loans were paid to the Angolan and Caspian entities but each is repaid out of the proceeds paid to its SPV, with no recourse to the BP group.

The structure meant that if BP was made bankrupt in the UK or US, the loans would not be affected, with creditors having no claim to the oil used as security. Both structures saw the local BP entity as the borrower and lenders had to clear their commitments under their Angolan and Azeri country risk.

Both transactions were among the largest pre-funded, underwritten financings in the emerging markets arena and were the first of this type for BP entities. The deals were agreed separately with BP and then combined between the two sets of underwriters, a unique structure presenting a coordinated syndication with fees enhanced for lenders that chose to join both deals in syndication.

The four bookrunners shared status reports and liquidity analysis, bringing new meaning to clear market clause. The transactions were launched at the same time and closely coordinated to avoid potential conflict. Yet each deal was tailored to the specific circumstances of the asset. Funding from the four underwriters took place in July, the deal was launched in mid-August and despite the summer lull, was funded at the end of October.

The loans, which mature on June 30, 2015, pay margins of 250bp over Libor for the first two years, rising to 300bp for year three, then 325bp thereafter.

The deals were received well in a senior syndication phase with no need for a broader general syndication. On the Caspian linked deal, 17 banks joined SG and RBS, while on the Angolan transaction, 11 banks joined BNP Paribas and Standard Chartered. In all, 12 banks committed to both loans, emphasising the success of the aggregate fee levels designed as an incentive for lenders to join both deals.

The Azeri loan was therefore increased from US$2bn to US$2.25bn, while banks joining the BP Angola deal were scaled back and the amount remained at US$2.5bn.

The deal was not BP’s only success. Via its JV TNK-BP it also took an unsecured US$2bn, three-year club loan through 16 banks, which it signed in October 2010. It priced at just above 200bp over Libor all-in, with a margin of 150bp–175bp over Libor – less than half the 400bp margin TNK paid in August 2009 for a US$600m, three-year pre-export financing.

The borrower was also active in the bond market. In September brought a US$3.5bn trade, comprising a US$2bn five-year tranche and a US$1.5bn 10-year tranche. That was supplemented with a euro deal in October, a €2bn dual-tranche with four-year and seven-year tranches. The trades that were all well received, and were widely interpreted as evidence BP had managed to put the oil spill behind it.

Its 2011 funding programme kicked off in March with a long seven-year sterling benchmark, the maturity having been chosen for the attractive arbitrage it offered by exploiting the tight dollar Libor level achievable in that part of the curve. The same month it came with a US dollar trade offering fives and 10s.

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