Arab Trade Finance Program - Union National Bank US$40 Million Line

An announcement on the ADX re ATFP's US$40 million line for Union National Bank.

I presume the $638 million is a cumulative total over some period and doesn't represent current outstandings as indicated in my earlier analysis.

Arab Trade Finance Program - Role in Providing Liquidity for Arab Banks

There's an article in Kuwait Times in which Dr. Jassim Al Mannai, Chairman and CEO, of ATFP is quoted as stating that banks particularly in the UAE were borrowing from the ATFP to supplement their liquidity and take advantage of the lower cost.  A rate of Libor with a small margin to cover administrative costs was cited without apparently too much detail.  Dr. Al Mannai is also  Director General (Chairman of the Board) of the Arab Monetary Fund.

A bit of context.

Eligibility Criteria

ATFP loans are tied to the financing of Arab trade.  Like similar government programs, there are national content requirements (minimum 40% Arab) and mandated tenors.  Money cannot be borrowed to fund, say, a wise investment in Austin Martin.

Financial Capacity

How much financing can ATFP provide?  Let's turn to their 2008 financials (the last issued).

1. At 31 December 2008, ATFP had total assets of approximately US$772 million funded almost exclusively by equity of US$769 million.  
   
2. Total loans were only US$416 million (2007: US$485 million).
3. Turning to Note 5, in 2008 there were new drawdowns of  US$774 million in loans (2007:  US$729 million) against repayments of US$844 million (2007: US$683 million). 

Even at 100% of shareholders' funds, this amount is unlikely to be significant on a macro level, though it might be significant for an individual institution.

That being said, the program is a worthy initiative particularly in supporting interArab trade.

Emirates Airlines US$1.3 Billion Financing

The press is reporting that Emirates has raised US$1.3 billion in financing for six A380 aircraft from Citibank and Doric Finance UK.

A couple of observations:

1. The financing is supported by guarantees from the export credit agencies of France, Germany and the UK.  In effect the lenders are not taking financial risk on Emirates or Dubai.
   
2. In most cases, the ECAs require that the loan be structured as a finance lease.  A special purpose entity ("SPE") is the owner of the aircraft and it leases it to the airline.  This is designed to give the ECAs a greater ability to repossess the plane if the airline doesn't pay.  To that end there is a special convention under Unidroit (the so-called Cape Town Convention) which embodies international agreement on this security structure.  More on the Cape Town Convention here.  The UAE is a signatory to the Convention.  The ECAs generally only lend to borrowers from a country that has signed the convention.  And the SPE has to be incorporated in such a country.
3. Also it's important to note that ECAs will often extend credit to borrowers that the free market will not support, either because of concerns about their creditworthiness or the terms of financing (tenors, rates and other conditions).  As government agencies, the ECAs are in the business of promoting their nation's exports through the provision of financing.
   

All this is not to say that Emirates is a bad risk.  But portraying access to ECA finance as a sign of robust financial health is a bit of an overstatement.  

Yemen LNG US$2.8 Billion Financing in Yemen - How'd They Ever Pull That Off?

When you read my earlier post about the first LNG shipment from Yemen, did you wonder how the project was able to raise its financing?

Yemen LNG posed some difficult financing challenges:

1. Size:  US$ 5 billion dollars with a high percentage of foreign costs which can't be financed in local currency.   So quite sizable foreign currency loans are required.  Raising a loan 1% this amount would be a challenge.
   
2. Tenor:  A project like this requires long tenors.  To compound matters bankers aren't keen to even make short term loans in the country. 
   
3. Yemen:  Lots of problems - economic, political, social.  A weak country = a weak sovereign credit.  Not exactly a prime target for bankers.
   

Standard and Poor's, Moody's and Fitch do not bother to issue a credit rating for Yemen.  There really isn't any demand.   Other ratings agencies do.  But the ratings are not good.   Capital Intelligence assigns Yemen a "B" and the Economist Intelligence Unit "CCC".   Unlike the academic world, a  credit rating of "B" is not a passing grade.  Except perhaps in the sense that bankers usually  "pass" on the opportunities to extend credit to borrowers with that grade.

Putting aside the project finance structuring issues (upon which I'm sure you can imagine I could wax, if not eloquently, at least profusely), there are two answers to how the deal got done - both of which gladden the heart of flinty-eyed bankers:

1. Equity - To provide a cushion to lenders: project cashflow pays lenders first before it pays shareholders.   The more equity the less risky the project.   If you were a lender, which of two identical US$1 billion projects (except for equity) would you prefer to lend  to?  The one with  $500 million in equity?  Or the one with  $100 million?  But there's more to equity.  It's not just the quantum of equity provided up front but also the credit quality of the shareholders that comforts lenders.  Having parties with both a significant monetary interest in the project (something to protect) and the capacity ("deep pockets") to lend a helping hand if the project hits a rough spot is very good.   Securing this kind of quality shareholder is a common goal in project finance everywhere.  In Yemen it was, no doubt, even more important.  Both  to the commercial lenders and the export credit agencies ("ECAs") involved in the transaction.
   
2. Guarantees - There's nothing that makes a banker's life easier than someone else taking the difficult bits of risk.  In this case 100%.   Especially if the guarantors are major sovereigns  acting through their ECAs or a major MNC like Total. 

Yemen LNG reports that the project has 40% equity (US$2 billion) and 60% debt (roughly US$3 billion).

Let's look at the equity first.

Shareholders are:

1. Total France - 39.6% (International oil and gas major, active in the ME since 1924 and Yemen since 1987.  Other LNG projects in the GCC - Qatargas, Dolphin).
2. Hunt Oil USA - 17.2% (Founded by HL Hunt.  Ray Hunt supposedly is on a first name basis with the President of Yemen.  Active in the country since 1981.  Hunt Oil, that is, not Ali).
3. Korea "Inc" - 21.5%   (SK at 9.6%, Korea Gas at 6.0% and Hyundai at 5.9%)
4. Yemen Gas Company - 16.7%. (Yemeni Government company).
   
5. GASSP (Yemen) - 5% - Yemen's General Authority for Social Security and Pensions.

More details on these entities here.

The majority foreign ownership involving oil companies like Total and Hunt would give lenders  and ECAs comfort.  Why?  They have demonstrated technical competence with similar projects from discovery through successful commercial operation as well as marketing of the offtake -the project product, LNG.  If something goes wrong (and bankers should always worry about that), these shareholders should be able to fix the problem if indeed the problem can be fixed.

Kogas is a major buyer of LNG.  Having it as a shareholder, gives it incentive to continue to buy from the project.  If suddenly it needs less LNG, instead of canceling its contract with Yemen LNG, it could cancel its contract with another seller (unless of course it's a shareholder there as well).   In the case of a problem with another offtaker, Kogas might step up to buy more to protect its equity in this project.  (As an aside, the offtakers are:  Kogas at 31%. of planned project production.  Total 31%.  And Suez 38%.  Twenty year contracts with highly credit worthy parties -- another comfort to those holding project risk).

The other two Korean parties were involved in the construction.  By buying equity they have reinvested part of their profit into the company.  If the project fails, they lose all or part of their profit margin - an incentive for them to help to make the project work if it has problems.

The Yemen government agencies mean the government has a direct stake in the project's success.  It's not just in their country.  They're owners.

Turning to the project debt, US$2.8 billion was raised.

1. US$1.3 billion in senior limited recourse project finance facilities extended by a group of international banks but bearing comprehensive risk cover (both political and commercial). This  cover is being provided by the official export promotion programs of France (Coface for US$648 million), Japan (Nexi for US$80 million), Korea (KEXIM for US$160 million).  The lead banks involved are Bank of Tokyo Mitsubishi, BNP Paribas, Citigroup, ING, Royal Bank of Scotland, Societe Generale, Lloyds TSB, and SMBC (Japan).  They make  and administer loans to the project.  In the event of project non payment, they can call upon the ECAs to repay their loans.
   
2. US$240 million direct loan to the project from KEXIM (the Korean Government ECA).
3. US$120 million direct loan to Yemen LNG from JBIC (the Japanese ECA).
4. US$1.1 billion commercial facility guaranteed by Total France. Same banks as in #1 above.  I'll comment a bit later about an interesting feature of this guarantee.
   

It's clear that Total did the heavy lifting necessary to make the project a success:  contributing the majority of the equity and guaranteeing the US$1.1 billion loan.  

Most reviews of this transaction - at least the ones I have seen - don't  discuss the fact that Total has counterguarantees in its favor for roughly 32% of its US$1.1 billion guarantee from other equity partners in the deal.  One alternative would be for all the parties to give guarantees to the lenders:  Total for 68% of the amount and the other shareholders for 32%.

But that would pose some problems.  First, some of the shareholders are not acceptable to lenders for any amount or tenor.  That would mean a loan for less than US$1.1 billion (and remember the project needs US$1.1 billion not less).  Second, Total's credit rating is easily higher than the other shareholders.  It can get the best terms - the best interest rate and the longest tenor.

By giving its guarantee for 100% of the loan, Total substitutes its credit for its partners.   In effect Total is intermediating credit risk .  It accepts the relatively weaker credit risk of its partners (the 32% counterguarantee) so the lenders don't have to. If Total's guarantee is called by the lenders, it is obligated to pay whether or not the other shareholders honor their counterguarantee to it.

And one final comment.  The Yemen LNG financing won several awards in 2008 for "Deal of the Year".  Since bankers like to give themselves awards (and who doesn't),  there are a large variety of contests and awards, though as of yet I don't believe Donald Trump is hosting any of them.  Besides that bankers also devote their creative talents to designing titles for participants in a deal.  Having a fancy title and a good position on the deal "tombstone" (on the left at the top of the list of the banks is preferred in case you're wondering) is very important.  Some of the most intense discussions in a deal are not with the borrower or issuer but among the banks.  On one deal we contented one bank with the title "Technical Modeling Bank".

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