Issue 134 • 7 March, 2008

Oando financing sets oil lending milestones

A $200m naira-linked loan for Nigerian energy player Oando has set a series of benchmarks, writes Kevin Godier.

Indigenous oil and gas company Oando has raised an innovative naira-linked loan to help it purchase two offshore oil licences from Royal Dutch Shell for $625.7m. The two-year bilateral loan, solely arranged and provided by Merrill Lynch International, was fully guaranteed by local banks Zenith Bank and Guaranty Trust Bank (GTB), marking the first time that these institutions have sat behind an offshore loan. The $200m transaction forms part of a larger funding package structured for potential upstream acquisitions by Oando. A number of funds entered the syndicated deal as investors, one of which took the lion’s share of the loan exposure, Merrill Lynch’s London-based head of sub-Saharan Africa, global markets Alex von Sponeck told African Energy. The larger deal, which is being arranged by Merrill, Standard Chartered, Standard Bank and BNP Paribas, should be completed “in the next few months,” he said.

The overall package will “transform Oando’s business, taking it from a downstream player, and a player in the oil services business, to a whole new role as an upstream participant in Nigeria,” von Sponeck said. The Shell asset sales give Oando a 49.8% stake in oil mining licences (OMLs) 125 and 134, operated by 50.2% shareholder Agip. There has been significant competition for the blocks from a host of international oil companies since bidding started last year, including a strong rival bid from China National Offshore Oil Corporation (CNOOC), China’s largest offshore producer.

According to Lagos and Johannesburg-listed Oando, this is the largest ever naira-linked bilateral loan made to a Nigerian corporate; as well as the first ever equity financing bridge loan made to a Nigerian corporate. Oando said in a 21 February statement that the transaction’s three-week execution time was the fastest on record from mandate to funding for a Nigerian bilateral loan. “This is a first for Nigeria, and is a structure for acquisition financings in the oil and gas sector that we intend to replicate in the future,” said von Sponeck. The “Oando credit itself, the guarantees from GTB and Zenith Bank, and the specific acquisition opportunity are what led to the equity bridge financing being arranged and placed in such record time.” The new lending tapped by Oando follows a recent $100m syndicated credit raised by the company, and led by Standard Chartered (AE 130/18).

The naira-linked structure was crafted by Merrill Lynch to allow investors in the deal to take exchange rate risk on the naira, which has appreciated against the dollar of late. The structure obviates the need for a Nigerian banking licence to lend in naira. “The money is lent in dollars, and then wherever the exchange rate stands at each six-month repayment date, the repayment is spotted at that rate, and the equivalent amount in dollars paid back to the investors,” explained von Sponeck. “The technique has been used once or twice already for Nigerian corporates and banks by us.”

The guarantee from GTB and Zenith Bank enables these institutions to enjoy a 20% risk-weighting on their exposure, compared to the full 100% weighting — and consequent provisioning — required for any direct lending by Nigerian banks. “It keeps them away from their lending limits, yet allows them more access to the good credit risk represented by Oando, which is Nigeria’s biggest energy firm,” von Sponeck said.

Debt moves faster than equity

The larger Oando loan, which is expected to conclude in April, will provide a further $375m towards the purchase of the new oil assets. Whereas the $200m deal was done at a plc/corporate level, the coming loan will be borrowed over five years on a non-recourse basis at the asset level, and split into a senior $200m debt tranche and a $175m mezzanine tranche. “The deal will be sized off the existing and projected production, the oil price hedge and offtake agreements,” said von Sponeck. “We know how much of the revenues are allocated to Oando, based on existing production, the oil price hedge and the share Oando receives as an equity holder.”

Von Sponeck said the new lending template was required because Oando needed money swiftly – at too short a notice for an equity-raising. “Other banks lending to Nigeria’s oil sector have typically produced more standard, reserve-based structures, whereas this required an innovative approach to the structure and timetable.” Merrill has already transacted six debt deals in Nigeria in the past 13 months, but “this is our first big oil deal in Nigeria,” said von Sponeck. And, as other oil majors start to divest stakes, aligning with the government’s desire to increase the role of Nigerian energy companies in the local energy sector, “we can apply this structure again – and also outside Nigeria”, said von Sponeck.

More funds needed for acquisitions

Further finance could also be required by Oando, whose chief executive Wale Tinubu told Dow Jones on 25 February that his company was in negotiations with another European oil major and a US major about purchasing three more oil blocks. DLA Piper advised Oando on the purchase of the Shell offshore stakes, which is subject to approval by the government and waiver of pre-emption rights by Agip. The acquisition makes Oando the first Nigerian company to secure producing assets from a multinational oil company operating in Nigeria. For Shell, this was part of a restructuring programme initiated in November to cut costs after its production facilities in the Niger Delta came under repeated militant attacks, cutting output.

OML 125 is producing 18,000 b/d of oil from the Abo field, with potential for near term production growth and further discoveries. OML 134 is still at exploration phase but has already recorded significant discoveries. Oando said a 10% deposit was paid for the oil blocks on 22 February, while the balance of $563.18m will be paid on completion.

The loan facilities will also enable Oando to push ahead with a series of planned upstream projects, including the supply of oil field service equipment, improving the technical skill of its Nigerian employees, and technology transfer projects from some of its technical partners. Its Oando Energy Services subsidiary intends to increase its operational rigs in the country in a phased expansion plan over the next five years, and recently acquired two swamp rigs for upstream operations in the Niger Delta area – the Searex 6 and Searex 12 rigs, with a water depth rating of 25ft and a drilling depth of 22,000ft. The rigs will be managed by Oando Energy Services, in partnership with Frazimex, a local company, with technical assistance provided by Transocean International. The rigs will be fully operational by the end of Q1 2008 after being upgraded.

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