How do you get international banks and insurance companies to lend
for up to 17 years on a pipeline involving complicated engineering
at high altitude passing through an area subject to earthquakes, in
a country known for its political instability that recently
defaulted on its external debt, and which has a credit rating of
Caa2?
“We knew the sovereign situation was way too unstable,” says Erik
Codrington, vice president at JP Morgan Securities, who worked for
more than two years to put the financing together. “The only way to
attract finance was that the shippers would have to commit.”
That meant getting cast-iron ship-or-pay contracts from shippers,
guaranteeing OCP’s income even if the shippers failed to use their
contracted capacity. In the early stages, Codrington says, this
involved “excruciating” negotiations as the relationship between
sponsors and shippers was in constant flux. By the end of
negotiations, shippers and sponsors were all reading from the same
page. With the exception of Techint, the construction company, all
members of the consortium will ship oil through the pipeline, using
an initial 390,000 barrels per day of the pipeline’s 450,000 bpd
capacity.
Because of these guarantees, the sovereign risk of the project
virtually disappeared. But there was additional risk associated
with the consortium: three of the members were based in Argentina
(although YPF became Spanish during negotiations). When Pérez
Companc came forward to take 13.6% of the project late in the day,
it had to produce a $195 million letter of credit as guarantee.
The sponsors themselves put up $300 million for the project. They
were able to raise a further $900 million (the $1.2 billion finance
includes a cushion of $100 million on the projected cost of $1.1
billion) at rates starting in the region of Libor plus 112.5 basis
points, stepping up over the 17-year term into the 200s. “For the
higher-rated sponsors this was a premium of up to 100 bps [on their
corporate borrowing rate],” Codrington says, “but for the weaker
sponsors this was reasonably priced, or even cheaper than they
could obtain on their own.”
JP Morgan and WestLB, the lead arranger on the loan, had just two
months after the deal was structured to raise the $900 million.
Most of the longer-term financing came from insurance companies in
private placement which reduced the tenor on the outstanding to 13
years. The remainder was raised in the form of bank loans.
LatinFinance selected OCP as its project finance transaction of
2001 “in view of the speed, solidity and size of the financing for
Ecuador’s largest-ever construction project.”