More Nonsense from Gulf News About the Qatar Crisis

Here’s another gem from the Gulf News re the Qatar crisis under the headline:  “Qatar’s defence of Iran drives further wedge with neighbours”  with the subheading “Comments by defence minister prove Qatar’s arrogant position when it comes to solving year-long crisis”.  

Just what did Qatar’s Defense Minister ("QDM") say to prompt such criticism?  

Let’s read GN's charges.  Words in quotes are verbatim from the GN article cited above. 

First, the Qatari Defense Minister “defended the Iranian nuclear deal despite criticisms from Arab states that the deal has empowered Tehran to wreak havoc in the region.”   

As AA reads the GN’s charge, it’s clear that the QDM did not defend Iran but defended the JCPOA, a position shared with the former President of the United States, Australia, Canada, China, the EU, France, Germany, Ireland, Japan, the Netherlands, Norway, Russia, Sweden, and the UK – all no doubt as arrogant and intransigent as Qatar at least in the eyes of the GN.  Citations here and here.  

Interestingly, neither Kuwait nor Oman have adopted the “Quartet”'s position. 

Also Tehran’s influence/actions in the region pre-date the 2015 JCPOA, e.g., the Huthis seized Sana in 2014, Tehran has been supporting the Syrian Government since before  the JCPOA, and its influence in Iraq also predates the JCPOA.  While JPCOA's negotiations concluded in 2015,  the agreement came into effect in January 2016 (“Implementation Day”). I suppose one, perhaps the GN, would argue that actions before 2015 or 2016 did not consist in wreaking havoc.

Second, the QDM said that “Qatar would not ‘go and fuel a war’ in the region and called for engaging in talks with Iran” and that a war with Iran would be “very dangerous”.  

That seems an eminently sensible position on general terms.   

But for a region that has seen the sad consequences of wars in Iraq, Libya, and Syria a bit more caution on war would seem to be in order.  

Finally there is the lesson of 1967.  If you’re bogged down in a war in Yemen, best to keep your head down with regard to further military adventures, particularly if the potential new adversary’s power is a multiple of the current adversary in Yemen.  

GN had another article earlier "Lack of Wisdom Prolonging Qatar Crisis".  The article referred to above is perhaps an exemplar of the headline.  

Expect more to come as I clear out from under a rather busy past three months.

Venues for 2010 and 2011 Gulf Cup Football Championship Announced

Announcement here:  Yemen 2010 and Iraq 2011.

I think I will miss both though I suppose a loss might be easier to take in Yemen.  Wonder if there are qat vendors in the stands?  Both sites in Yemen are in the south of the country, if you're wondering.

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".

Trackback to previous related post.

Yemen LNG Makes First Shipment

A bit of good news for this beleaguered country - which is desperately in need of hard currency earnings, not to mention water, peace, progress .....

Most estimates are that over its 20 year or so life the Yemen LNG project will generate US$20 billion for Yemen.  The Yemeni Government's own "conservative projections" estimate US$30 to US$50 billion.

Much needed because oil exports, Yemen's current major source of FX revenues (roughly 90%),  are rapidly running out.  Estimates are for 10 years more production, though the Yemeni Government disputes these figures.

Anyways a few random data points to illustrate the importance of Yemen LNG to the country:

1. In 2003 Yemen exported 450,000 barrels of oil per day.  In January 2009 the total was down to 280,000 bpd.
2. During the first six months of 2009, FX earnings from oil exports were down 75% from the same period in 2008.  Most of that is due to the decline in oil prices, but a worrying 25% drop in volumes exported was also a major cause.
   

So Yemen LNG's first shipment is good news for Yemen.  A substitute for dwindling oil exports.

For those interested in more on Yemen LNG, here's a link to their website.

The project has been "kicking around" since the 1990's.  As one might expect, putting a deal of this magnitude together in Yemen is not an easy task.  The shareholders' group has been a bit of a revolving door - ExxonMobil withdrew after the 1994 civil war.  Enron sniffed around a bit but declined. At one point Hunt Oil (an old Yemeni hand) was rumored to be contemplating withdrawing from the project.  Competition from Qatargas and Dolphin in which Total (the major shareholder in Yemen LNG) has interests also were obstacles.

For those interested in a bit more information on Yemen, two suggestions:

1. Christopher Boucek's "Yemen Avoiding a Downward Spiral" at Carnegie.
2. The IMF's Public Information Notice ("PIN") on  Article IV Consultations with Yemen released this March.
   

Boucek's piece is an overall analysis of all factors - political, economic, and social.   It is also written to promote a particular policy response so factor into your evaluation how that goal may affect his diagnosis and conclusions.

The IMF PIN is focused on economics only.

Some background on the Article IV process and PINs.

Each country that has joined the IMF  (there are 186 or so) undertakes certain obligations with respect to the conduct of its affairs.  A key part of those are reflected in Article IV.   Each year the IMF "consults" with countries about their obligations focusing on Article IV. Member countries have the right to decide how much detail is released to the public about the results of those consultations.

Two other things are relevant to Article IV consultations.

1. Diplomatic Speak:  The position of the IMF is couched in diplomatic language.  Criticisms come in the form of "encouragements" or "strong encouragements".  Issues are described in similar gentle language.  Instead of stating that a member country's economic statistics are deficient, the PIN will speak about improving the timeliness and accuracy of statistics. 
2. Mathhab:  The IMF holds more or less to a certain economic philosophy.  It's important to understand this when reading both their diagnosis and prescriptions. 
   

A second post will follow to hopefully shed some light on the intriguing story of how US$2.8 billion in long term financing was raised for a project finance in a country in Yemen's situation.