Feature

posted 26 Jan 2004 in Volume 7 Issue 4

Deals of the year

ECA financing: Flying high

In 2002, Russian airline Aeroflot embarked, with a $38.7m receivables-backed LC issuance facility organised by Citigroup, Raiffeisenbank and BNP Paribas, to finance eight new Airbus aircraft through a European export credit financing transaction. This was part of a larger $194m export credit agency (ECA) guaranteed facility set up to assist Aeroflot in modernising its fleet by replacing 27 of its old aircraft with nine new Boeing 767s and 18 Airbus A320s and 319s.

As part of the deal, manufacturers and others bought part of Aeroflot’s existing fleet and obtained LCs to the value of $38.7m to guarantee the Russian company’s performance. Citigroup and BNP Paribas were mandated to finance the Airbus aircraft with the support of the UK Export Credits Guarantee Department (ECGD) and the ECAs of France (Coface) and Germany (Euler Hermes).

Market reception was very positive. The facility was syndicated to Commerzbank and Natexis Banques Populaires as lead managers, and West LB joined the deal as co-arranger. Using a leasing structure and the aircraft as security, the deal required more than a year to refine, get approved and documented. However, the October 2003 transaction marked the very first ECA asset-based financing deal to take place in Russia and the first in the country to benefit from a 100% guarantee from all three ECAs.

UK trade minister Mike O’Brien said of the deal: “I am extremely pleased that Airbus has managed to break into a new market that has traditionally bought aircraft from its competitors. The European Airbus consortium has been able to win this important business in a competitive global marketplace with the support of ECGD.”

According to Valentino Gallo, Citigroup’s global manager of structured trade finance, the financing package is potentially extendable to the next deliveries, which is extremely important to both Airbus and Aeroflot.

Aeroflot commenced the long-awaited modernisation of its fleet with the delivery of the first aircraft on October 15, 2003, following many years of lobbying by Airbus, Boeing and Russian aircraft-makers.

The fleet restructuring, which is expected to be completed in 2005 to allow Aeroflot to save $95m annually, also represents a sales success for the Airbus consortium, given that Aeroflot has in recent years sourced from Boeing when looking for its aircraft outside Russia. According to an Airbus spokesperson, the deal is important for anchoring a substantial part of the A319 fleet within Aeroflot, not only via operating leases, but also for part of the order by way of long-term ECA financing.

ECGD’s role in the high-profile transaction, marked by somewhat complicated negotiations, is expected to lead to additional opportunities for British exporters in Russia and other CIS markets.

While banking market sentiments towards the aviation industry are improving, prudence is still the dominant feeling, says Gallo, “but the enhancements provided by the ECAs make long-term financing solutions possible.”

Import finance: Powering China’s growth

Trade & Forfaiting Review’s import-finance deal of the year is, among many other things, one that signifies a trend towards using capital-market instruments for traditional trade-finance transactions. It is unique in that the arranger, JPMorgan, did the syndication itself instead of going through the primary market, and the two-and-a-half-year LC facility is also noteworthy for its size at $600m.

JPMorgan was asked to arrange, advise and underwrite a financing structure for one of the world’s leading suppliers of power-generation technology, energy services and management systems in 2003, following the award of a mandate to supply power-generation equipment to plants in China.

Because LCs would be issued by several Chinese banks, including the Bank of China and Bank of Communications, the Fortune 10 company, which prefers to remain anonymous, required a financial structure arranged to mitigate the risk.

Given the size and complexity of the deal in such a challenging marketplace, JPMorgan put together a risk-mitigation structure combining US Ex-Im Bank insurance and private commercial insurance with distribution in the secondary market and a credit default swap, which was signed at the end of October 2003.

JPMorgan has invited selected banks to participate in the transaction and reports receiving an overwhelming response. “The participating banks’ involvement in this transaction will be disclosed to the client, which should be a very interesting feature for those participants who come into the deal,” said Joseph Stark, vice president of JPMorgan Treasury Services in Singapore.

“There is no better satisfaction than bringing a creative, winning solution to an important client,” says Asif Raza, global head of network trade for JPMorgan in London. “This deal is a testimonial to JPMorgan’s capabilities in delivering innovative solutions, leveraging capital-market instruments and the global network, demonstrating a commitment to the Asia region and to the network trade business. We are excited to be part of a project of such strategic importance to the supplier and our clients in China.”

According to Astar Saleh, Asia regional head of network trade for JPMorgan in Singapore, there is an increasing trend towards medium-term import financing using LC structures. JPMorgan was recently awarded another mandate for $150m for a medium-term import-financing deal in India from a large American telecommunications company, which has both a US-dollar and a domestic-currency component. This not only highlights the trend but bears testimony to JPMorgan’s creative risk-mitigation solutions and trade-risk distribution capabilities. China meanwhile, looks to grow in importance to not only JPMorgan but other large trade banks, as its trade figures suggest enormous potential for financing.

Mandate of the year: Present at creation

Post-war reconstruction and development in Iraq represents one of the world’s latest and largest emerging markets where, up until August 2003, many companies looking to do business in that turbulent part of the world were wondering how to arrange for financing there. The answer, of course, was found in the establishment of the Trade Bank of Iraq (TBI) last year.

In August 2003 a consortium of 13 banks from 14 countries, led by JPMorgan, won the contract to establish and operate TBI,

a state institution designed to be the primary provider of import and export financing for both private- and public-sector cross-border trade.

Participating banks included ANZ, Standard Chartered Bank, National Bank of Kuwait, Bank Millennium of Poland, Bank of Tokyo-Mitsubishi, San Paolo IMI, Royal Bank of Canada, Credit Lyonnais, Caja De Ahorros y Pensiones de Barcelona, Standard Bank, Akbank, and Banco Commercial Portuges, with JPMorgan beating five finalist groups headed by ABN Amro, Banc One, Bank of America, Citigroup and Wachovia to lead the consortium.

Initially funded by resources from the Development Fund for Iraq, $5m from the Coalition Provisional Authority and up to $95m from a UN reconstruction fund made up primarily of oil revenues, TBI commenced offering LC-opening services (electronically) as well as export negotiation within 100 days of being awarded the mandate. During the same period, 18 national export credit agencies (representing 17 countries) signed financing agreements with TBI in an aggregate amount exceeding $2.5bn.

With a 12-month period of operation scheduled, and the option to remain open for another two years, initial import flows of approximately $1.2bn are expected to rise to as much as $6bn per year by mid-2004. The bank has not handled oil revenues, but it has enabled Iraqi agencies and oil concerns to buy big-ticket items from other countries using LCs. The US hopes private commercial banks will eventually take over the business of providing LCs for trade.

In December 2003, the US Ex-Im Bank approved a $500m short-term insurance programme for TBI to provide for bank-LC and financial-institution buyer-credit insurance policies that, in turn, allow US companies to be assured of payment for goods exported to Iraqi buyers. Before the end of last year, up to $250m in LCs had been approved to be issued by, or on behalf of, TBI to support trade financing from JPMorgan and the sales of US agricultural goods, equipment and other products to Iraq.

Reflecting on the mandate, Bruce Proctor, global trade-services head at JPMorgan Treasury Services in New York, said: “By drawing upon the structuring, syndication and operational skills of the bank, the excellent capabilities the entire consortium, and working in close conjunction with both the coalition provisional authority and TBI, JPMorgan developed an innovative, customised financial services package which will result in Iraq’s ability to move forward successfully with its re-integration into the world economy.”

Pre-export finance: No regrets

Picking a pre-export-finance deal of the year proved to be somewhat difficult considering the various merits of the top three contenders, all of which were Russian oil deals.

If the decision was based purely on which was the longest-ever pre-finance deal, the award would certainly have gone to the Lukoil deal, which boasted a seven-year tenor. If it was down to the biggest, and one that certainly had its fair share of media coverage, the Yukos deal would certainly have stolen the show. It was 30% oversubscribed in primary syndication, involved many of the most experienced lenders into the Russian oil sector and, in some respects, it was a triumph that the deal got away in the first place because Yukos’s new American managers would certainly have preferred the bond route had they had the remotest chance of achieving it before Mikhail Khodorkovsky was imprisoned.

However, the 2003 pre-export-finance deal of the year goes to ABN Amro for its leadership and diplomacy in corralling five other joint mandated lead arrangers in closing the best structured and best priced deal. Rosneft wasn’t the biggest at $500m (the borrower declined to increase it despite the fact that it was healthily oversubscribed) and it wasn’t the longest at under five years, but it was a “classic” of the structured trade- and commodity-finance genre with good pricing and plenty of documentation. “Nobody was left with a bad taste, whether from the arranging or bookrunning banks or the company itself,” says one trade financier, “and none of us is looking back at Rosneft with second thoughts.”

Despite attracting commitments in excess of $600m, Rosneft elected not to increase the facility, which turned out to be the second-largest syndicated loan facility extended to a Russian company since 1998. The proceeds are being used to refinance existing debt associated with Rosneft’s $600m acquisition of fellow Russian producer Severnaya Neft in February 2003.

With several issues to overcome, such as Rosneft being in technical default on the bond and on its existing bank transactions, the bookrunners (ABN Amro, Deutsche Bank and Dresdner Kleinwort Wasserstein) wanted to re-establish Rosneft strongly in the capital markets and ABN Amro felt that by assembling a strong mandated lead group, it could achieve this and reduce the distribution risk of the transaction. In addition to the six mandated lead arrangers – ABN Amro, Commerzbank, Deutsche Bank, Dresdner Kleinwort Wasserstein, KBC Bank and Natexis Banques Populaires –18 other institutions joined the facility during syndication.

On the deal ABN Amro used its pet structure for Russia, local currency loop (or Lucille), even bringing in a few Lucille sceptics. “At the end of the day, I think we put together the strongest lead group ever for a Russian deal. It was challenging, but everybody was very pleased with the way it turned out,” says Steve Thunem, head of financial markets at ABN Amro in Moscow.

Project finance: Let it flow

Financing of the $2.1bn Umm Al Nar independent water and power project in Abu Dhabi, the largest project-finance deal in the United Arab Emirates to date and the first in the region since the conclusion of the Iraq war, wins the Trade & Forfaiting Review project-finance deal award for 2003. The syndicated deal, which raised $1.778m in debt and equity when it reached its financial close in July, was secured by a new equity joint venture, the Arabian Power Company, 40% of which is jointly owned by subsidiaries of International Power, the Tokyo Electric Power Company and Mitsui and Company, with the other 60% owned by the Abu Dhabi Water and Electricity Authority.

International Power, Mitsui and Company and the Tokyo Electric Power Company won a competitive tender in 2002 to acquire the power and desalination plant at Umm Al Nar Island and to build another to enhance the power and water capacity of the existing plant. Under a purchase agreement, the Arabian Power Company will sell the new plant’s entire water and power capacity and output to Abu Dhabi Water and Electricity Company until 2026.

HSBC played a considerable role in facilitating the deal, acting as joint mandated lead arranger and joint bookrunner, as well as interest-rate swap co-ordinator, offshore-security trustee and account bank, technical and insurance bank and purchase-price escrow agent. Mandated lead arrangers included Abu Dhabi Commercial Bank, Abu Dhabi Investment Company, Abu Dhabi Islamic Bank, Bank of Tokyo Mitsubishi, Bayerische Landesbank, First Gulf Bank, Gulf International Bank, ING, KfW, Mizuho, National Bank of Abu Dhabi, Sumitomo Mitsubishi Banking Corporation and West LB.

The deal was put together in 12 months and included the largest Islamic financing component to comply with Sharia law. Senior debt was apportioned between five-year and 20-year tranches to optimise cashflow from existing assets, and equity bridge facilities were split between commercial and Islamic tranches to optimise available international, regional and local market liquidity. HSBC hopes that following the completion of the new building in 2006, some of the $250m, long-term Islamic tranche might be able to be refinanced, which would be a first in this type of project.

Aside from attracting considerable long-term foreign investment, the deal is a significant part of the emirate’s long-term privatisation plan. Abu Dhabi began its privatisation drive in 1997 with a reorganisation of its water and electricity authority, which opened its utilities to private investment.

Reflecting on the significance of the deal, Mark Lemmon, deputy chief executive of HSBC’s project- and export-finance department said: “Arguably the most significant aspect of this deal is that it demonstrates the ability of experienced financiers to continue delivering tight pricing and long tenors, which reaffirms the markets’ ability and capacity to complete high-quality, well-structured water and power transactions in the Middle East, and the quality of the Abu Dhabi Water and Electricity Authority privatisation model.”

Securitisation: Bringing Brazil back

A common financing technique in emerging markets, securitisations are useful in situations where issuers hold assets that can be easily pooled for financing purposes. Commodity-export securitisations, as in the case of the $750m Petroleo Brasileiro (Petrobras) deal in 2003, are particularly useful for borrowers that have achieved an investment-grade local-currency rating but are in a country, such as Brazil, that is perhaps not quite investment grade. Citigroup’s issuance for Petrobras in 2003 provided a shining example.

Petrobras’s commodity-export securitisation programme was set up in 2001 as a means for the company to achieve low-cost dollar financing, and the purpose of the $750m deal in 2003 was to extend the maturity profile of Petrobras’s debt structure. With receivables generated by the company’s exports of heavy fuel oil and bunker fuel, Citigroup’s issuance was well received in the capital markets, with both series oversubscribed. Tranche A was set at $550m, with a 12-year final maturity, 5.99-year average life and 6.436% coupon, and tranche B at $200m, with a 10-year final maturity, 5.95-year average life and 3.748% coupon, insured by MBIA.

Citigroup provided the heavy-fuel offtake agreement and embedded commodity price hedge, which were facilitated by tight debt-service coverage ratios. The bank also acted as joint lead manager and joint bookrunner along with BBVA. This clearly assisted in improving the overall credit quality of the issuance, which helped the programme achieve investment-grade ratings with wrapped notes rated AAA/Aaa/AAA by Standard & Poor’s, Moody’s and Fitch respectively, and unwrapped notes rated investment-grade by all three agencies.

The issuance confirmed the comeback of the country’s cross-border securitisation market, which started in 2002 and has seen considerable growth in plain-vanilla bonds in the past few years. And it reflects favourably on economic conditions in Brazil and the gradual return of investors to Brazilian paper. “This was the first corporate bond issue executed in 2003,” says Valentino Gallo, Citigroup’s global manager of structured trade finance. “Clearly the transaction helped investors feel confident about Brazilian risk again, and it also led to the execution of several other corporate deals during the second part of the year.”

The Petrobras deal was the largest export-receivables securitisation to come out of Latin America in the first half of 2003 and one of the largest unwrapped export-receivables securitisations in Brazil’s history. It was also the longest and largest corporate bond deal out of Brazil since the Lula administration took office. “Looking retrospectively at the deal and at the other private-sector bond issues executed afterwards,” says Gallo, “the transaction confirms that secured structures are the preferred choice for issuers when they want to again attract the interest of hesitant emerging-market investors and change market sentiments to positive.”

Structured commodity finance: A model deal

With a turnaround time of less than one year, Sonangol made history with the conclusion of a staggering $1.25bn commodity-financing deal in late September 2003. It was the largest ever in the Angolan parastatal’s 25-year history (almost double the size of its former record deal) and certainly the most challenging for the oil company and mandated lead arrangers – Bank Belgolaise, BNP Paribas, Natexis Banques Populaires and SG – which had to underwrite $1bn under pressing time constraints.

Others involved in the deal included Commerzbank, Crédit Agricole Indosuez, Crédit Lyonnais, KBC Bank, the Royal Bank of Scotland, Standard Chartered, and WestLB as sub-underwriter.

Launched in early December 2002, the offer got a rapid-fire reaction from banks, which submitted their proposals just days before Christmas. “It was a huge syndication risk,” says Jean-Luc Tauleigne, head of the energy-commodities department for Natexis Banques Populaires, which acted as bookrunner for the syndicate. But it was one that paid off as the market responded even better than Sonangol and Natexis Banques Populaires anticipated. The deal was oversubscribed by 10%.

Even though the financing is based on crude-oil receivables, the transaction terms are groundbreaking in that they afford Sonangol far greater flexibility in terms of its crude-oil trading operations. Sonangol is free to market its crude, choose its buyers, develop better pricing and go directly to end users without using traders, as the arrangers offered the company five years for the first time without involving Cabinda or Soyo/Palanca trusts or other such security constraints.

The deal was set up with three tranches of $400m, $300m and $300m, with the remaining $150m split equally between the tranches to cover contingency costs. And pricing was set at Euribor + 225bps for the first three years and Euribor + 250bps thereafter.

The primary reasons for the structure and overall success of the deal are attributed to Sonangol’s excellent track record (this was its 45th deal) and, with the government in peace talks with Unita, Angola’s new climate of lower political risk. “With lower margins, less structured deals and longer maturities in other markets like Russia, it was a good package in terms of risk,” Tauleigne adds.

The deal represented a breakthrough of its kind, especially in terms of transparency, indicating to other African countries like Nigeria, Congo and Equatorial Guinea that large amounts of money can be raised with the help of a good track record and the right partners. “Sonangol is a good example of what others can aspire to,” says Tauleigne. “I think we will see more bank-driven transactions rather than trader-driven transactions in the future.” The deal, which Tauleigne describes as having progressed with the precision of a “Swiss watch”, is also a promising one for Sub-Saharan African countries in terms of what can be achieved with a little political stability.

Structured trade finance: Clubbing in Kazakhstan

Trade & Forfaiting Review’s structured-trade-finance award for 2003 goes to Deutsche Bank London and Citibank NA London for jointly arranging the largest ever syndicated loan in the CIS with a total of 51 participants.

In August 2003, the banks signed a $245m syndicated trade-related loan for Bank TuranAlem (BTA), the second-largest bank in Kazakhstan in terms of assets and equity, to finance specific import and export contracts for select clients of BTA. The facility was initially set at $100m but was substantially increased following successful pre-syndication and general syndication phases in which it was heavily oversubscribed.

The facility has two tranches, one of 12 months for $134.75m with a 2.15% p.a. margin and the other of 18 months for $110.25m with 2.5% p.a. margin. Each tranche can, at BTA’s request and the lender’s discretion, be extended for a further year. This is the first Kazakh bank loan with an 18-month tranche and the success appears to signify the lenders’ increasing comfort with top-tier Kazakh bank risks. Furthermore, this tranche also assists BTA in financing contracts for tenors of more than 12 months.

Deutsche Bank acted as joint mandated lead arranger and joint bookrunner with Citibank, and ABN Amro, Alpha Bank, Sumitomo Mitsui Banking Corporation Europe and Wachovia Bank acted as co-arrangers. HSH Nordbank was appointed joint lead arranger with American Express Bank, Commerzbank, Dresdner Kleinwort Wasserstein and GarantiBank International participating as senior lead managers.

According to Ben Dobson, vice president of Deutsche Bank Global Trade Finance, “This deal reflects the positive developments within Kazakhstan as well as the strong reputation of BTA, especially in the field of trade finance.” It also indicates the extent of Deutsche Bank Global Trade Finance’s capabilities in originating, syndicating and executing trade-related loans for bank borrowers in Central and Eastern Europe and the CIS given the sheer size of the BTA deal and the number of participant banks. At the time of signing the deal, Deutsche Bank, as mandated arranger, had already closed seven syndicated trade loans for Kazakh banks with a combined value of more than $730m.

BTA, formed in 1997, is a fully licensed commercial bank offering a complete range of banking products in foreign countries. A private institution, it is the second-largest bank in Kazakhstan in terms of assets and equity.