Azerbaijan opens up to structured lending

by Simon Pirani

The Azeri state oil company SOCAR’s $750 million five-year syndicated loan – a hybrid commodity finance, project finance and reserves-based lending deal – highlights the potential for banks in Azerbaijan particularly, and central Asia generally. High oil prices, and the western drive to diversify away from Middle Eastern energy, have thrown the market open. The loan to Azerbaijan (ACG) Ltd, a SOCAR subsidiary, is the largest ever syndicated financing for an Azeri-controlled company, and the first sizeable deal for the country not backed by a state guarantee or an export credit agency.

“This is the first pre-export finance facility of this magnitude for an Azeri-owned borrower and it opens doors for SOCAR and for Azerbaijan as a whole”, Francois-Xavier Reignier, transaction manager at BNP Paribas’s commodity structured finance desk in Geneva, says. “The big oil companies were involved in the implementation of the Baku-Tbilisi-Ceyhan pipeline financing as sponsors, but this deal has been negotiated solely with the Azeris.

“In terms of access to syndicated loans, Kazakhstan has been, and remains, in front. But Azerbaijan is catching up.”

Previous reported deals for state-owned Azeri corporates have been ECA-backed transactions, including BNP Paribas’s Hermes-backed €300 million deal for the 500 MW Sumgait power station (see Trade Finance, March 2006, page 25) and ABN Amro’s $180 million highway reconstruction deal (see Trade Finance, October 2005, page 42).

The bank loan market is also in its infancy, the largest reported transaction being the $56 million, 12-month loan, with a Libor + 2% interest rate, arranged by Citigroup and Commerzbank in August last year for the International Bank of Azerbaijan.

All these deals are dwarfed by the SOCAR loan, proceeds from which will refinance the company’s 10% stake in the Azeri-Chirag-Guneshli (ACG) offshore oil project operated by BP. The project comprises a first (central Azeri), second (west and east Azeri) and third (deepwater Gunashli) phase; the start-up of second-phase oil production was announced on 5 January this year.

When the third phase of the 30-year project comes on stream in 2008-09, output is expected to rise from the current level of 400,000 barrels per day (bpd), to 1 million bpd. The parties to the PSA are SOCAR (10%), BP (34.1%, operator), Unocal (10.3%), Inpex (10%), Statoil (8.6%), ExxonMobil (8%), TPAO (6.8%), Devon (5.6%), Itochu (3.9%) and Amerada Hess (2.6%).

SOCAR’s capital expenditure commitments in the project had been financed by loans from other partners – an affiliate of Exxon Azerbaijan Ltd, an Exxon subsidiary, and Turkiye Petrolleri – at Libor + 4% per annum. These loans have been paid off with the money borrowed from BNP Paribas, reducing the interest rates paid by SOCAR to between Libor + 1.7% and Libor + 2%.

Reignier at BNP Paribas says: “Construction at ACG fields is not completed, and so there is an element of construction and completion risk in the loan facility. We had to structure a deal that would enable Azerbaijan (ACG) Ltd to fund its ongoing cash calls, and would also give participating banks security from the production already underway. We devised a hybrid structure with elements of project finance, reserves-based lending and pure commodity structured finance.”

It is high oil prices that have made Azerbaijan a significant target for bankers. Cecile Advani of BNP Paribas’s Europe (export finance) team, which worked on the Sumgait power station ECA transaction, said: “Azerbaijan is now rebuilding its economy after a long period in which there has been insufficient investment in infrastructure.

“Everything from roads, water provision and hospitals, to telecoms, needs investment. In the Azeri government, people are looking at new ideas and solutions. We will see much more of Azerbaijan, not only in the market for bank loans of various kinds but also in the international capital markets.”

Advani adds that BNP Paribas has recently done the first reported medium-sized ECA-backed deal for a corporate in Armenia, Azerbaijan’s neighbour: a €21 million financing for the telecoms company Armentel, backed by OND, the Belgian ECA.

Julian Lee, senior energy analyst at the Centre for Global Energy Studies, says there is an industry and political context to the SOCAR deal, too: “In both Kazakhstan and Azerbaijan, the state-owned energy companies, and the ministries that stand behind them, are taking a more aggressive, active role than in the past.

“They are maturing, and have a greater sense of their own importance. The oil industry is beating a path to their doors and western governments are talking about moving away from reliance on the Middle East. The Baku-Ceyhan pipeline has opened up an important export route. All this has given both countries a sense of self-assurance that has been strengthened by high oil prices.

“SOCAR expects that the output from its 10% of the project will rise from 13,000 bpd to 100,000, giving it ample resources to pay off the loan.”

The deal will take SOCAR’s share of the project through to being self-financing, Azeri oil minister Natig Aliyev emphasised at the signing ceremony for the deal in Baku last month. “The amount borrowed from the banks is fully sufficient for the project to begin to be self-financing”, he told reporters. “At the current high oil prices, all capital spending will be paid out in 2006-07, and only current operating expenses for the project will remain.”

The BNP Paribas syndicate will be repaid from proceeds from SOCAR’s rights to ACG oil production, contracted under long-term offtake agreements to traders Glencore and SET Select Energy.

ABN Amro, Societe Generale, ING, Natexis, West LB, Bank of Tokyo-Mitsubishi, Calyon and Standard Bank (South Africa) joined at senior syndication phase. Citibank, Commerzbank, Sumitomo, HVB, KFC, and Royal Bank of Scotland joined the general syndication.

Kazakh bank deals

High oil prices and strong macro-economic fundamentals have brought the second tier of Kazakh banks into the market for substantial trade-related loans, which has until now been dominated by the big three banks (Turan Alem, Kazkommertsbank and Halyk bank).

Caspian Bank, Kazakhstan’s no. 7 by assets, on 13 March signed a $130 million one-year loan deal, with a one-year extension option, with a syndicate headed by ING, HVB and Bank Austria Creditanstalt. The proceeds of the loan will be used to finance trade transactions by Caspian’s clients.

The margin of Libor + 175 bps, the growth of the loan from $70 million in syndication, and the widely-representative 33-bank syndicate, is an indication of the high level of confidence in Kazakh borrowers.

The margin was down from the Libor + 230 bps that Caspian paid to a syndicate headed by Citigroup and Standard Bank in September last year for a $65 million, one-year loan. The bank started its international borrowing programme in 2004 with a $40 million deal.

Aigul Djailaubekova, ING’s country representative in Kazakhstan, tells Trade Finance: “There was a big show of confidence in Caspian Bank from the lenders. The amount is double what they borrowed a year ago. The timing was largely determined by the bank’s financing plans, and it was decided not to wait until after audited financials were published. But even so, there was a strong response.

On 6 April, Deutsche Bank signed a $100 million Schuldscheindarlehen loan agreement with Bank CenterCredit, Kazakhstan’s no. 6 by assets. The proceeds will be used to finance trade transaction by specific clients of the bank. The margin is 1.6%. The deal was launched at $50 million, raised more than $150 million and was scaled back to meet CenterCredit’s lending requirements; there are 38 banks in the syndicate.

A further measure of the market’s appetite will be the response to the syndication, which was getting underway as we went to press, of a $65 million, two-year trade-related facility arranged by Deutsche and RZB for Nur Bank, Kazakhstan’s no. 8 by assets.

The largest Kazakh banks also report a steady growth of their trade finance business.

Bank Turan Alem in September last year achieved the lowest margin in the Kazakh market – Libor + 70 bps – on a $777 million, one-year loan from a syndicate of 73 banks in 20 countries, a significant part of which is for clients’ trade-related purposes. The syndication had been launched at $300 million and was three times oversubscribed; the mandated lead arrangers were Bank of Tokyo-Mitsubishi, HVB, JP Morgan and San Paolo IMI.

That deal followed another groundbreaking transaction: a $110 million, three-year deal, arranged by Sumitomo Mitsui Banking Corporation with a syndicate of 21 banks, the Libor + 130 bps interest rate on which established a new benchmark for the Kazakh market. part of the proceeds from which were for trade-related purposes

Timur Sabyrbaev, deputy head of correspondent banking and global trade finance at Turan Alem, tells Trade Finance that, in the wide variety of trade finance transactions supported by the proceeds of the loans, the export of oil products to the European Union, and the import of equipment from CIS countries and from China, account for significant proportions. “The export of grain, cotton, metals and other commodities is also important,” he adds.

The bank’s ECA-backed business is growing rapidly. “We did our first ECA-backed deal in 1999, with Euler Hermes, for $18 million. Every year since then the volume has increased, to about $100 million last year,” says Sabyrbaev. The aggregate volume of the bank’s ECA transactions now stands at $380 million. (Some examples of Turan Alem’s wide variety of ECA-backed financings are given below.)

Turan Alem made a concerted drive to sign framework agreements last year. These include deals with Fortis Bank (for €200 million), BNP Paribas (€200 million), Mediabanca ($50 million). A $15.6 million framework deal with John Deere came ready with guarantees from US Exim bank, and a $10 million deal with CO Bank was made under the US Foreign Agricultural Service’s GSM-102 export credit guarantee programme.

There were framework agreements signed with ECAs, too, including Export Development Canada ($25 million), the Croatian Bank for Reconstruction and Development (€11 million) and the Export-Import Bank of China-Taiwan ($1 million). That brought the total of framework agreements with ECAs to 18.

Turan Alem also signed a $75 million framework term loan facility agreement with ABN Amro for the pre-export financing of commodity exporters.

Kazkommertsbank in November concluded a $1.3 billion deal – a Kazakh record in terms of volume – with a syndicate headed by Bank of Tokyo-Mitsubishi, Calyon, Commerzbank and Deutsche (see Trade Finance, February 2006, page 17), with one- and three-year tranches.

“The proceeds are to be used for financing trade-related contracts and the working capital needs of our clients”, Maral Amrina, a spokeswoman for Kazkommertsbank, says. “Trade finance contracts include, mainly, import financing of construction materials, cars, consumer goods and food. These are the categories that comprise most of Kazakhstan’s non-energy imports.

“The expansion of this trade is being driven by the growth in real estate development, and in consumer spending, corresponding to overall economic growth.”

Kazkommertsbank has also teamed up with Citibank to do agricultural sector financing, with a $10 million loan to APK-Invest Corporation in December 2005. The proceeds of the loan will be used to buy store grain from small and medium-sized agricultural producers, for sale on the domestic and export markets, Kazkommertsbank explains. The loan will be repaid in October.

Pravin Advani, director trade services and finance (CIS) at Citigroup, says: “Kazakhstan’s export of high-protein grains, particularly to Europe, is a significant business and we hope there will be more deals in that sector.” He added that agriculture financing is aided by Kazakh legislation, under which it is deemed easier than in Russia to realise pledges of warehouse receipts, on which such deals are typically structured.

Turan Alem’s export finance business

A selection of export finance deals arranged in 2005 by Turan Alem bank for Kazakh corporate clients

*  A Canadian $9 million, seven-year buyer credit from Export Development Canada, at six-month Libor + 65 bps, signed in February 2005, for the purchase of agricultural equipment by Astana Finance from Agri-Tec International of Canada.

*  A $14 million, five-year buyer credit from Deere Credit, backed by US Eximbank, at Libor + 33 bps, signed in March 2005, for the purchase of agricultural equipment by Basco of Kazakhstan from Deere and Co. of the USA.

*  A €12 million, five-year LC with post-financing arrangement, with a loan from Sumitomo-Mitsui banking corporation and an EBRD guarantee, with a graded interest rate between Euribor + 225 bps and Euribor + 350 bps, signed in February 2005, under which Vyborg shipyard in north-west Russia builds and delivers oil tankers to Mobilex Energy of Kazakhstan.

*  A $4.6 million, five-and-a-half year loan from Societe Generale, with no ECA backing, at Libor + 250 bps, to finance the purchase of a drilling unit by Zhan Ross-2 from China Petroleum Technology and Development Corporation.


This article first appeared in Trade Finance, April 2006.
Posted June 2006; © 2006 Simon Pirani

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