bergen, 22 september 2015
TRANSCRIPT
Shipping Offshore Seminar Bergen, 22 September 2015
1
Refinancing: Where is the money going to come from?
Geir Ove Røberg 22 September 2015
2
Capital requirement – existing units
• Difficult market conditions make scheduled payments of instalments and interest challenging – in turn a need for amendments or refinancing
• Typical "Events of Default" ‒ "Material adverse effect" ‒ Minimum value ‒ General covenant breach ‒ Financial covenant breach ‒ Non-payment ‒ Insolvency
• Final maturity date – balloon payment / refinancing requirement
3
Capital requirement – bond market "maturity wall"
0,0
10,0
20,0
30,0
40,0
50,0
60,0
2015, rest of year 2016 2017 2018 2019 2020
NOKbn
Maturity Year
E&P
Shipping
Oil service
Source:
4
Capital requirement – newbuildings Source: Upstream 11 September 2015
5
OSV market
Source:
6
Capital sources
Owner
Bank Financing Sponsors / Existing Shareholders
Bond Financing
Seller's Credit
IPO / Public offering
Private Equity
Sale & Leaseback
7
Bank financing – Amendment and refinancing
• Bank may be pragmatic in finding solutions ‒ Knowledgeable and experienced with
cyclical industry ‒ Interested in avoiding "fire sale" ‒ Relationship banks
• Flexible process ‒ No procedural rules for meetings / notice
periods etc. ‒ Advisable to initiate dialogue early ‒ One-to-one negotiations
8
Bank financing – New facilities
• May be a source of (fleet) financing for established companies, but not readily available for single project finance
• Typical requirements for new financing in tough market ‒ Contract backlog and counterparty risk ‒ Equity ratio ‒ Enforceable securities
9
Bond financing – Amendments and refinancing
• Bondholder's reactions may be difficult to predict, with several "unknowns" of the bondholders ‒ Identity ‒ Numbers ‒ Motivations ‒ Various degree of industry knowledge
• Formalistic process / less flexibility
‒ Involvement of brokers ‒ Voting undertakings – 2/3 majority ‒ Bondholder meetings (or written resolutions) ‒ Inside information
• "Buy-back" of Issuer's own bonds
‒ No voting rights ‒ Restrictions under senior financing?
10
Bond financing – New issues
• High-yield bond market has been an important
source for capital for shipping / offshore projects in recent years, but more or less closed for the sectors in H2 2014 / 2015
• Advantage of "established structures" when market window re-opens
11
Sale & leaseback
Previous Owner (Seller / Charterer)
New Owner (Buyer / Owner)
MOA / Sale Agreement
Bareboat Charter
New Loan New Lender
BBCP - Security:
Assignment of insurances
Assignment of management agreements
Assignment of earnings (contracts >12 months)
Parent Guarantee
New Loan - Security: Unit Mortgage Assignment of BBCP +
BBCP Security Fixed/floating charge from
New Owner
Pledge of shares in New Owner
Parent
Call / Put Option
12
Sale & leaseback (cont.)
Previous Owner
(Seller / Charterer)
New Owner
(Buyer / Owner)
MOA / Sale Agreement
Bareboat Charter
BBCP - Security
Parent
Call / Put Option
• Type of transaction ‒ "Classical" free up liquidity / balance sheet ‒ "Lease and sale" of new unit from yard ‒ "Distressed" acquisition of asset by creditors –
with subsequent leaseback to previous debtor • Covenant structure and security package
‒ Typically only operational covenants / security directly related to the unit
‒ Special requirements of "ring-fencing", financial covenants related to balance of Charterer / Charterer Parent and "catch all security"
13
Sale & leaseback (cont.)
Previous Owner
(Seller / Charterer)
New Owner
(Buyer / Owner)
MOA / Sale Agreement
Bareboat Charter
BBCP - Security
Parent
Call / Put Option
• Purchase Option – right to "re-take" ownership / residual value ‒ Fixed purchase price ‒ Clear notice requirements ‒ Flexible acquisition process ‒ Registration in ship registry
• Put Option – shifting risk of residual value
• Termination and enforcement
‒ Notice of termination ‒ Claim for damages ‒ Arrest unit to retake possession ‒ Flexibility in use of unit (re-letting before sale
etc.)
14
Equity
• Existing shareholders – equity injection: ‒ Participate with injection in high risk company ‒ Not participate and have existing equity position
diluted
• Existing shareholders – shareholder loans: Requirement of subordination
• New shareholders / Private Equity / M&A – From refinancing to restructuring
15
Existing lenders
Senior Bank Loan
Junior Bond Loan
Equity
New Senior Loan
Equity
Funding gap?
16
17
Renegotiation – the harsh reality
Christian James-Olsen and Birgitte Karlsen Bergen/Oslo – 22/23 September 2015
18
The harsh market reality
19
No right to renegotiate due to market fluctuations – oil companies still seem to find a way
Offshore Driller Receives 6 Termination Notices - Is Rig Contract Sanctity Crumbling?
http://www.offshoreenergytoday.com/bp-terminates-another-rig-contract/
Is Paragon Offshore Next In Petrobras' Bucket List?
Brazil fleet to shrink again as Petrobras 'cuts to bone'
Low Oil Prices Throw North Sea Oil Into A State Of Crisis
Seadrill delays rig deliveries as profit drops
20
Norwegian Drilling – September 2015
2010
2013
1986
NCS/ Statoil
Brazil/ Petrobras
Nigeria/ Ind oilco
Mexico/ Pemex
495
475
Safe Haven
Samba Exotic
African Adventure
Taco I
Burrito
385
175
Lottery One
21
Safe Haven – Statoil notice of suspension
Contractual position − OilCo may temporarily suspend
performance − Notice shall state the effective time period of
the suspension − Suspension shall have no impact on the
agreed schedule − Occupation of the rig is Rigowner's risk − The intention of suspension clause is for the
OilCo to stop activity due to "operational like" issues
Commercial reality − The rigs with lowest suspension rate were
suspended − Statoil (still) the dominant player in Norway − Long term relationship considerations − No other short (or medium) term alternative
engagement of the rig – stacking? − Suspension clause used to save cost and as
alternative to terminate for convenience
Contracts operate with up to 50 % reduced day rate
3 years firm - suspension no Schedule impact
Termination for convenience
22
Samba Exotic – Petrobras notice of termination
Contractual position
− No explanation of alleged breach in notice − Potential basis:
irregular compliance with contractual conditions
breach of confidentiality clause change of control at parent level
resulting from recent restructuring of the group – despite no impact on performance
− No contractual right for Petrobras to reduce the day rate
− If deemed for termination convenience – termination fee will be payable
Commercial reality
− Petrobras (still) the dominant player in Brazil
− Dispute risk/enforcement risk − No other short (or medium) term alternative
engagement of the rig – stacking? − Loan Agreement – covenants - any solution
will require waivers or amendments from the banks and the bondholders
30 % reduced day rate
15 months firm
contract, 2 x 1 year option, subject to rate
Right to revise if the oil price increases
23
African Adventure – non-payment by oil OilCo
Contractual position
− No right to suspend services for non-payment or any contractual right to terminate
− No PCG or other form of guarantee or
security for payment
− English law contract: Repudiatory breach vs "vesentlig mislighold"
Commercial reality − Independent, medium size OilCo
− OilCo under restructuring – a number of
stakeholders
− Dispute risk/enforcement risk
− No other short (or medium) term alternative engagement of the rig
Amended compensation format
– larger degree of shared market risk, outstanding rate converted to short term (secured) loan
Right to terminate for 30 days non-payment
Early termination fee, secured on second priority over certain assets of the OilCo
24
• Customers will always look for ways to shift the market risk to its suppliers
• Proof read contract terms – do not take anything for granted
• Clear and undisputed right to payment - and clearly defined sanctions against non-payment - are among the most essential risk elements to consider in each contract ‒ right to payment at delayed start up ‒ right to payment during the charter except for situations
specifically stated in the contract ‒ right to payment at suspension of work ‒ right to suspend and/or terminate in the event of material OilCo
default ‒ right to full payment at termination for convenience and OilCo
default ‒ right to payment at termination for material Rig Owner default –
total cap and sole remedy
• "Bankable" contract – often different requirements for newbuild and second hand
• Counterparty and political risks remain
‒ industry standards differs between regions
The commercial reality - Conclusions
25
• Only the best will succeed – the survival of the fittest
• Expect the worst, and unexpected – also on market development • The contract is the starting point for any risk analysis – but not sufficient
• Major difference between having right and achieve right
• Avoid also minor defaults and potential misuse of the contract
• Know your customer and your commercial position
‒ long term relationship and future tenders ‒ understand their position and drivers ‒ understand their need for your asset ‒ your alternatives and financial exposure ‒ risks in legal proceedings and enforcement
• Dispute should always be the last resort - look for win-win solutions
• Learning curve for the oil majors – act opposite of the market - use
opportunity of lower rate to actively secure rig fleet for the coming years!
Tenders and future contracts – success criteria
26
27
New opportunities - changing position on sanctions
Tim Stephenson Bergen/Oslo – 22/23 September 2015
28
1. A contrast; 2. Russia/Ukraine - recent and specific sanctions, with no
change in prospect; 3. Iran - long-standing and very wide sanctions, some lifted (for
now) and maybe great change soon.
Russia/Ukraine – Iran – the JCPOA – what now?
29
1. National 2. International 3. Above national 4. Geopolitical
Sanctions are ….
30
• From Spring 2014 the US, the EU and Norway imposed sanctions to address Russian agitation in Ukraine.
• There is no change in sight.
Russia/Ukraine – from 2014
31
• Travel bans and asset freezes; • Import restrictions (e.g. into EU/Norway); • Investment bans; • Restrictions on export of technology (including dual-use, deep-water
exploration, arctic and shale oil) and related technical assistance; • Financing, securities, related services – Sectoral Sanctions
Identifications (SSI) List; • OFAC Specially Designated Nationals/EU Designated Persons; • Entities indirectly owned/controlled by listed person/entities; • Consequences of breach: fines and/or prison; • Even if not …..
Targeted sanctions, e.g.
32
• Norwegian/EU citizens; • entities established or incorporated in
accordance with Norwegian law/in the EU;
• entities with business operated wholly/partly from Norway/the EU;
• vessels and aircraft within Norway/the EU;
• persons/entities within Norway/the EU
Application – Norway and EU
33
• Persons in the US; • US citizens/US Green Card holders
globally; • Involving the US financial system
(payments in US$); • Partnerships, associations, trusts, joint
ventures, corporations, groups, subgroups or other organisations;
• U.S. incorporated entities and their foreign branches or subsidiaries owned or controlled by U.S. entities;
• "US persons" – NB as to Iran/JCPOA, see below
Application - US
34
• Due diligence – wide variety of actions/databases; • Contractual terms
Protective measures
35
• Loans/other financing agreements; • Cefor Sanction Limitation and Exclusion Clause (September
2014); • Charterparties, e.g. BIMCO designated entities clause; • Both/all agree that none is sanctioned …
For example …
36
• Even the very best terms are just that;
• Merely part of due diligence;
• They are not a "hold harmless" from the
EU/OFAC
But remember ….
37
• Oil, gas and minerals reserves – top end, in proven reserves
• Population – young, and with ready cash?
Iran - background
38
• Very wide sanctions; • Some suspension after 24.11.13 JPOA, and continuing,
currently to 14.1.16; • But great care is needed, e.g. • - no general lifting; • - US persons; • - OFAC SDNs/EU DPs; • But are we now near significant change?
Iran : 1979 - 2013
39
• Decided?
• Timetable : 14.7.15, then 20.7.15 (UNSC Resolution 2231) + 90 days = "Adoption Day", likely 18 October, then parties are legally bound;
• What could go wrong? Iran's Majlis (early October?) : US Congress/Veto/Senate : the IAEA;
• But if all well - "Implementation Day", possibly Spring 2016, and most nuclear-related sanctions go - but others remain
2015 – the JCPOA
40
• Are precautionary terms still needed? • - Yes, they are. • Do they need amending? • - Probably no, not as such; but … • A possible "snap-back" must be addressed
In that case …..
41
• The immediate return of sanctions if Iran breaks the JCPOA; • How "immediate"? • JCPOA resolution mechanism – minimum 35 days?
"Snap-back"
42
• Loans, insurance policies, charterparties, build contracts, others;
• No retrospective effect, so no breach/punishment; but
• What if renewed sanctions impede/prevent future performance?
• Are subcontracts still to be placed? • What is the position during the JCPOA
resolution mechanism?
What then?
43
• Much will depend on: • (a) the nature and scope of the contract; and perhaps • (b) the presently unknown EU/US action wording under the
JCPOA
Clausing
44
"Neither party shall be under any liability for any failure to perform any part of this contract if that failure is due to reinstatement of any sanction, prohibition, designation or other restriction following any process under the Joint Comprehensive Plan Of Action dated 14 July 2015." And maybe suspension, during the JCPOA resolution mechanism?
One possibility
45
• "US persons" – still prohibited (NB Schlumberger), due to enduring terrorism and human rights sanctions, and very explicit JCPOA Annex II footnote;
• Not all OFAC SDNs and EU DPs will lose that status;
• EU/US ownership/control rules; so • Due diligence, always
Beware, also
46
• Sanctions present a difficult and dangerous area; • Sanction lifting usually offers opportunities; but • It can carry risks: matters unknown, misunderstood, or
simply not understood – perhaps by anyone; • Do seek advice, early.
Summary
47
48
Petrobras scandal - where will it end?
Oddbjørn Slinning Bergen/Oslo 22/23 September 2015
49
Topics and introduction
1. Operação Lava Jato
2. Who is involved?
3. Consequences for Petrobras
4. Consequences for other involved parties
5. Where will it end?
50
• Originally an operation targeting money laundering through car wash stations
• Investigation discovered corruption with links to top Petrobras management and deep into the political elite
‒ "If I speak the republic is going to fall." – Alberto Youssef
• On-going since March 2014; Petrobras now the centre of the investigation
• Modus operandi: ‒ Typical use of agents/intermediaries for securing
contracts – Unusually high commission ‒ Agents paid through offshore accounts ‒ Little accountability for the services actually provided by
agents
Operação Lava Jato / Operation Car Wash
51
Operação Lava Jato / Operation Car Wash (cont.)
• Almost 500 individuals and more than 230 companies under investigation
• 75 people arrested, latest former president Lula's chief of staff José Dirceu on 3 August
• Almost 50 high ranked politicians under investigation.
• 12 plea bargain agreements entered into
• Estimated USD 3 billion paid in bribes since 2004
52
Who is involved?
• Judge Sérgio Moro
• Team of 9 prosecutors led by 35 year old Deltan Dallagnol
• Petrobras and former Petrobras management
• Political elite
• Several Brazilian and international contractors
53
Consequences for Petrobras
• Estimated USD 16 billion losses for Petrobras
• New top management
• New compliance regime
• Less expensive contracts?
• Termination or renegotiation of existing contracts?
54
Consequences for other involved parties
• Blacklisting; currently 23 companies blacklisted with Petrobras
• Termination of contracts ‒ Schahin Engenharia ‒ Vantage Drilling
• Potentially huge fines
• Potentially banned from future public and private tenders
• Costly internal investigations
55
Where will it end?
• Will the investigation result in convictions?
• Less corruption in Brazil and Petrobras?
• Increased need for proper due diligence and compliance checks ‒ M&A ‒ Joint ventures or partnerships
• Opportunity for Norwegian contractors? ‒ Norway perceived to have a cleaner business
environment and fairer competition ‒ Compliance and ethics as a new market advantage
56
Contact details
Legal disclaimer: This presentation comprises a general description of certain rules of Norwegian law. It does not constitute legal advice, and should not form the basis for any commercial decisions.
OSLO Tel +47 22 82 75 00 Fax +47 22 82 75 01 [email protected] BERGEN Tel +47 55 21 52 00 Fax +47 55 21 52 01 [email protected]
LONDON Tel +44 20 7367 0300 Fax +44 20 7367 0301 [email protected] SINGAPORE Tel +65 6438 4498 Fax +65 6438 4496 [email protected]
www.wr.no
KOBE Tel +81 78 272 1777 Fax +81 78 272 1788 [email protected] SHANGHAI Tel +86 21 6339 0101 Fax +86 21 6339 0606 [email protected]
57