LNG Vessel Finance post Bergesen

Transcription

1 LNG Vessel Finance post Bergesen In late October, 2005, Bergesen Worldwide Gas ASA marketed a 40 percent stake, in an shares offering of approximately NOK 10.6 Billion (worth approximately US $1.65 Billion ) equity to be traded in Oslo. These levels are well in excess of the $770 Million approximate market capitalization of Teekay LNG Partners LP (TGP)- a partnership that saw a Spring 2005 IPO, and the shipping s first LNG pure play- Golar LNG (GLNG) now worth around $690 Million. Bergesen Worldwide s entity combines LNG shipping (6 currently trading, with 5 on order) with shipping of LPG. LNG has been a growth area in the energy business, becoming even more attractive as oil prices have moved higher. The Bergesen prospectus projects seaborne trade growth of 5.9% to 7.0% annualyl, over the next fifteen years. Prices for typical vessels, which saw a nadir three years ago around $150 Million, are now in excess of $200 Million. At any price, the LNG assets have always been the province of deep-pocketed entities. Financing in the LNG transport sector spans a spectrum from ships that are tied to specific LNG supply chains- funded through project finance, to those that are financed by very large shipping companies, through corporate type credit. Vinson & Elkins partner Mr. Jay Cuclis, presenting at the 2004 Africa Oil and Gas Forum, suggested that within complex financings, Different asset classes draw on different financing sources, e.g., banks with ship financing tradition and expertise. Traditionally, LNG deals involve big Projects that must stand on their own- with limited financial recourse to sometimes deep pocketed project backers. Depending on the commercial terms, the charterer is set up as a Special Purpose Company (SPC)- that will enter into a time charter contract with an owner. Historically, shipping was contracted mainly to tonnage owned by oil companies, energy producers, or consortia of owners tied to large industrial conglomerates. A recent wrinkle in the market is the recent elimination of U.K. Tax Lease treatment on shipping this past summer. Lord Robin Byron, a Partner at Holman Fenwick & Willan, whose specialties include energy and transport, indicated: There was consternation among

2 those who had not signed term sheets when the U.K Revenue suddenly announced the end of the current regime on July 21. But, tax leases in other jurisdictions are alive and well- Bergesen Worldwide recently announced a transaction with a large French institution. Recent Bergesen Worldwide accounting statements provide additional insights into the financing of LNG vessels. Its 2004 Annual report describes: Instalments on newbuilding contracts are capitalised as vessels under construction as they are paid. Capitalised value is reclassified as vessels upon delivery from yard. The acquisition cost reported is the sum of the instalments paid plus costs incurred during the construction period, including imputed interest. It goes on to mention: The company has entered into interest hedging contracts with varying maturity for a total of USD 650 million related to its LNG newbuilding programme, of which USD 125 million relates to the construction phase and USD 525 million to the subsequent operation phase. Increasingly, independent shipowners not traditionally associated with LNG, including OSG, Teekay and others (such as Tsakos Energy and the Maran companies- tied to Angelicoussis interests) are playing a role in the gas trades. A recent feature of the market has been the massive fleet being assembled by Qatar, where established ship operators, albeit without LNG experience, such as Teekay, OSG and others build ships to be chartered to a QatarGas or RasGas, at the same time allowing a special shipowning entity, QatarGas Transport Company (Nakilat) to take a stake in the equity. A section of the Teekay LNG prospectus frames the bigger picture nicely: We believe that the increasing ownership of the world LNG fleet by independent owners is attributable in part to the desire of some major energy companies to limit their commitment to: the marine transportation business, which is non-core to their operations, and the cost of financing new LNG carriers in addition to the high construction costs of LNG facilities. The Bergesen Worldwide prospectus, citing I.E.A./ O.E.C.D. analysis, suggests that shipping is not insignificant, accounting for 29% to 32% of LNG supply chain costs. Various market rumblings suggest that independent owners desirous of entering these burgeoning LNG trades must pay to play, meaning that charter rates in big projects offer returns that may be lower than corporate return on equity targets. The situation is analogous to oil company moves out out of shipping, and is eerily reminiscent of the early 1990 s, when non oilco owners of double hull tankers lamented the unwillingness of charterers to pay for quality. JTF s conversations with finance experts suggested that charter agreements with the most credit-worthy projects contain provisions favoring the charterers. Holman Fenwick s Lord Byron, noted that still, even with the perception of lower rates and with tougher terms (concerning, for example, force majeur and step in

3 rights of the charterer), there is still a queue of banks lining up to provide the finance. A year ago, another new member joined the LNG club. Overseas Shipholding Group (OSG) announced that it would be building four large LNG vessels (in a joint venture with Nakilat) that would deliver into 25 year charters to Qatar Gas Transport charters in 2007 and 2008, with an intended trade into the UK. The joint venture, which is 49.9% owned by OSG and 50.1% owned by QGTC, will purchase the four newbuild vessels for an aggregate price in excess of $900 million. All four vessels will be built in Korea- two at Hyundai and two at Samsung. OSG s 2Q 2005 Form 10Q, in a section on Off Balance Sheet Arrangements, said: The aggregate construction cost for such newbuildings of $908,000,000 will be financed by the joint venture through long-term bank financing and partner contributions. OSG has advanced $90,635,000 to such joint venture as of June 30, 2005, representing its share of working capital and the first installment under the construction contracts. The aggregate unpaid contract costs of $726,500,000 will be funded through bank financing that will be nonrecourse to the partners. The report also indicates that the joint venture swapped out LIBOR related debt into $827 Million of notional debt fixed at 4.91% %. Teekay LNG Partners, spun out of Teekay Shipping earlier this year, is structured as a Master Limited Partnership (MLP), where distributions of excess cash are paramount. The cash drain from progress payments and interest on three newbuilding vessels under construction in Korea (at a cost of nearly $200 Million each), to be delivered into RasGas II related charters in October 2006 through April 2007 would be deleterious to the MLP s cash flow statement. Financial engineers have solved the problem through a structure where Teekay Shipping (not among the high dividend paying shipping stocks and therefore with more flexibility on uses of cash) makes yard payments and maintains the vessels on its balance sheet. At the time of the first vessel delivery, Teekay LNG Partners will then assume the debt financing of the vessels and take over the remaining construction installment payments. Golar LNG, with management in the U.K, has financed its vessels using UK tax leases. In an unaudited balance sheet reflecting the 2Q 2005, Golar showed $718 Million of restricted cash and $836 Million of Long Term Capital Lease obligations. The development of a spot market in LNG vessels is intertwined with commercial activity in the underlying gas. Commercial deals in the crude oil and products trades rely heavily on well developed spot markets, mirrored, in turn, by shipping practice. LNG has traditionally been a business of long contracts, often fully paying out a ship. For example, the existing Teekay Gas vessels are chartered to Spanish entities for 20 year terms, and three vessels for delivery will

4 enter into 20 year charters with RasGas II companies. The Bergesen Worldwide and OSG vessels described elsewhere in this article will be entering into 20 and 25 year charters, respectively. Bergesen Worldwide intends to be a conservative player, having recently announced that it will enter into 20 year charters with Suez Energy for two 156,100 M 3 newbuildings coming out of Daewoo. The vessels, aggregately priced at US $427 Million, are to be delivered in 2009, will trade from the Bal Haf facility in Yemen, into the United States. According to Bergesen Worldwide, the vessels will be financed through a leasing agreement provided by SG Corporate & Investment Banking. The charterer has options to participate with 49% in the lessee company under the tax lease arrangement, declarable at the latest a year in advance of delivery, by May Invariably, some pockets of the LNG trades are more likely to give rise to spot movements. V &E s Mr. Cuclis commented, in his presentation, that In <the> U.S., gas is typically purchased under shorter term contracts. Spot market rate information is closely guarded, but conversations with various market participants suggest that the current spot LNG freight market is depressed compared to levels of two year or three ago, when ships were outnumbered by cargoes, in the words of Robin Byron. Newbuilding vessels financed specifically for spot trades is another matter. According to ship finance specialists Stephenson Harwood, in London, There have been reports in the Press that LNG's vessels have been ordered on a speculative basis. However, banks are inherently risk averse and financing a vessel specifically on the basis of spot trade with no guaranteed income presents a vendor with considerable risk issues that would need substantial credit support to be approved by bank credit committees. In one signal of a more institutionalized spot venue, Holman Fenwick s Robin Byron told JTF that his firm had assisted Shell in drafting a new charter party, Shell LNG Time 1 which will be launched in early November. Byron said, it is intended to be an off the shelf document based on the well known tanker charter party Shelltime 4- but modified specially for the LNG trades where vessels might be doing short or medium term business. Norton Rose s Mr. Howley put it succinctly, saying At these high prices, circa $200 Million and above, for LNG newbuildings, only an energy major could really afford to contract ships that did not have future employment attached. Howley suggested that among the older vessels, ships have been able to move into the spot market after being fully or substantially paid off. Most notably, Golar LNG, in combination with Belgian stocklisted player Exmar, have been trading vessels on short term charters. An August 2005 Golar LNG presentation indicates that there are Very few cargoes available for spot ships, with approximately 12 vessels <out of a fleet of 182 trading> available for spot

5 cargo. In breaking down the surplus, five vessels (including several of its own) are described as uncommitted, while another five are trading spot because of mismatched timing where a ship is delivered before the infrastructure for its intended supply chain has been completed. Bergesen s 2004 Annual Report offers a prediction that an economically viable spot market may be several years off. The entry of many new aggressive players into LNG shipping has raised competition for long-term charters and reduced the available rates of return. The tonnage overhang could last until 2007/2008. Before then there is unlikely to be sufficient spot trade to employ uncommitted vessels. The recent spate of hurricanes in the U.S. Gulf has had dramatic impacts on product tanker shipping, and may impact the gas carrier segment, as well. One rating agency, Standard and Poors, recently suggested that recent hurricane activity in the U.S. Gulf may cause some re-thinking on decisions for future LNG import terminal/ regas sites. JTF queried several energy and finance lawyers as to the specification of terminal locations in LNG financings. Norton Rose banking partner Richard Howley, who specializes in ship finance, distinguished among upstream financings, tied to a production train very likely with multiple off-takers, downstream facilities (such as a particular import facility), and corporate finance of vessels by shipowners. Upstream projects, such as those in Qatar or Nigeria, will likely specify a very wide range of discharging areas- and the financing documents tied to shipowner financings may be less concerned with specific trades and offtake arrangements. Downstream projects, where the driving force in the finance is a particular regasification/ import terminal, may be more restrictive. According to Norton Rose s Mr. Howley, who cited that example of a vessel completed before its intended downstream facility, financiers know that vessels need flexibility- ideally worldwide, for trading. More important than a change in terminals, according to Howley, is the issue of Material Adverse Change (MAC); if the terminal unavailability is not accompanied by an MAC event regarding the charterer s financial performance, short term problems can be worked out. As a practical matter, vessels intended for projects that have been delayed have found their ways into the spot market. Maritime security is another topic of possible concern to maritime financiers. Norton Rose s Mr. Howley said that in the LNG trades, you are dealing with the best operators in the world, operating according to the highest common denominator- which is compliance with U.S. Coast Guard regulations.