On July 31, 2001, bankers finally closed the financing for one of the largest, most complex and most arduously negotiated project finance transactions in Latin America. JP Morgan, which advised a group of seven oil and construction companies, had worked for more than two years to assemble $900 million in financing for a new pipeline in Ecuador.
During the 30 months it took to design the financial structure for the Oleoducto de Crudos Pesados (OCP) pipeline and find backers for the project, Ecuador went through three presidents and nearly half a dozen finance ministers, defaulted on its Brady bonds and Eurobonds, suffered a military coup and adopted the US dollar as its national currency. Adding to the confusion was a wave of mergers and acquisitions in the energy sector that changed the identity or management of nearly all the project’s sponsors. Even the consortium’s initial advisor, Chase Manhattan, was affected when it merged with JP Morgan in 2000.
JP Morgan and the lead arranger on the loan, WestLB, designed a structure that addressed Ecuador’s instability and coped with the range in the sponsor companies’ backgrounds and credit strength. After the deal was finally structured, the sponsors only gave WestLB two months to raise the financing. In view of the speed, solidity and size of the financing for Ecuador’s largest-ever construction project, LatinFinance has selected OCP as the project finance transaction of 2001.
The lengthy negotiation process involved convincing sponsors that a non-recourse structure would not work in Ecuador because of its instability, says Erik Codrington, the JP Morgan banker who worked on the project. Banks recoiled at lending for 17-years to a project in a country with a rating of Caa2.
Moreover, companies based in Argentina own 45% of OCP, which further weakened its creditworthiness. Pecom Energía, a subsidiary of Argentina’s Pérez Companc, with 15% of the project, had to post a $195 million letter of credit as guarantee after joining the consortium. Only the presence of blue-chip firms such as Alberta Energy Company, Occidental Petroleum Corp, Agip and Repsol raised OCP’s creditworthiness. The seven sponsors are investing $300 million in equity in the $1.2 billion project, with the balance coming from lenders.
JP Morgan used “hell or highwater” ship-or-pay contracts guaranteed by the sponsors as the foundation of the deal. Shippers committed to taking oil at an agreed rate from OCP’s Pacific Ocean terminal or paying the pipeline’s owners if they failed to do so. These contracts mitigated commercial, political risk and force majeure risk. Says Codrington, “We knew we would need a very robust structure, that there was more downside than upside risk.” OCP is the borrower, but the project’s financial strength structure comes from the financial soundness of OCP’s clients, the shippers, as well as the sponsors themselves.
However, Codrington says this approach required “excruciating [negotiations over] division of risk between shippers and the sponsors, because at the time we were structuring, there were shippers that were not sponsors.” As the companies consolidated, the distinction between pipeline operator and shipper blurred. Now the only sponsor without a shipping interest is Techint, the Argentine construction company building the pipeline and 4% owner of OCP’s equity.
JP Morgan and WestLB approached insurance companies that generally want longer-dated paper and back-end amortization. Insurers such as John Hancock and Provident provided most of the long-term financing. This lowered the tenor on the remaining debt to 13 1/2 years, which attracted nine bank lenders, including Banco Bilbao Vizacaya Argentaria as co-lead arranger and Caja Madrid of Spain, plus Bank of Scotland as senior managing agent.
Work on the 343-mile pipeline should be finished by August 2003, allowing Ecuador to begin exporting 356,000 barrels a day of oil. If all goes well, the OCP project will help ease international skepticism about Ecuador’s economic prospects and attractiveness as a country in which to invest.
Financial markets preoccupied with events in Argentina and the downturn in the world economy were generally slow to back projects in Latin America last year. In 2001, project financing volumes fell heavily to $17.4 billion from $25.3 billion the year before.
Venezuela’s $3.5 billion Hamaca oilfield project closed at the end of September, with $1.1 billion in loan financing. Lead arrangers BNP Paribas and Royal Bank of Scotland syndicated a $470 million 14-year term loan, but most of the financing came from the US Export-Import Bank, which provided a $628 million 17-year guarantee facility.
Banks had to devise a new structure to deal with resistance to Latin American risk in the markets, such as the region’s first collateralized bond obligation of project loans. In August, Citibank placed a $350 million, three-tranche bond with European investors. This enables banks to sell assets and create more liquidity for fresh project finance activity.