Bankers reckon the deal opens the door to more such borrowings by Indian commodity exporters, which will need credit enhancements in light of the adverse conditions in their sector.
The Essar Oil $180m loan is based on an advance payment contract between exporter Essar and buyer or offtaker Oil Bridge, from Quebec. The payment from Oil Bridge has to reach a collection account for the delivery to be made, said a banker. The proceeds from Oil Bridge will be used by Essar to meet the debt obligation.
Typically, an export performance bank guarantee (EPBG) only covers the exporter’s obligation to deliver, exposing lenders in case there is a dispute between the buyer and exporter that prevents money from the buyer from reaching the collection account.
“It definitely is a structure we are going to be seeing more of,” said a senior banker at an international lender not on the deal. “We saw a spate of SBLC [standby letter of credit] backed deals out of India but this EPBG is specific to exporters and offers them benefits.”
Companies most likely to benefit most from the structure are exporters of commodities, a sector which has been rocked by sharp falls in prices causing lenders to look for an extra level of comfort, said a banker.
“It’s going to be base metals or something like oil, which is very liquid and it’s got to be with an offtaker that needs to be able to trade or sell it.”
Loan structure
The Essar $180m 23 month loan is part of a contract with Oil Bridge. Under the 119 month programme, Essar will export an amount of oil, as specified under the agreement, every year, while Oil Bridge, the borrower of the loan, will make advance payment to Essar for 10 years.
Oil Bridge will raise a fresh loan every 23 months, after deducting the costs of the oil already exported and payment received by Essar.
If Essar fails to meet its obligation to export the amount agreed upon, or Oil Bridge fails to make the payment, the guarantee will kick in and SBI will step in to make those amounts to the lenders. Lending banks will then have recourse to the collection account.
“A key feature of the [prepayment] structure is that the loan is limited recourse against the offtaker,” said Jolyon Ellwood-Russell, a trade and commodity finance partner at Simmons & Simmons in Hong Kong.
“This has the effect that the payment risk of the offtaker is passed on to the performance risk of the producer. Not all banks can price that performance risk properly so we often see the need for a guarantee or standby that underpins the producer's performance obligations.”
Sure enough, with the guarantee behind it, the Essar loan has attracted interest from a whopping 50 lenders. Interested banks are a diverse mix of Asian, Middle Eastern, Taiwanese and European lenders, among others. The deal has already pulled in $100m worth of commitments from five lenders.
Another factor playing to Essar’s advantage is the thinning of returns on Indian assets, especially for state-owned companies. A banker said that, at a yield of 350bp, banks are essentially getting a 200bp pick-up on what they would receive for taking on SBI risk. The comfortable tenor of 23 months, typical in commodity export financings, also gives them an incentive to join.
India story
Bankers agreed that improved sentiment on India after the election of prime minister Narendra Modi, who enjoys a corporate-friendly image, played a big role in attracting the enthusiastic response to Essar Oil’s latest financing.
Another Essar Group company — Essar Steel — was not so lucky. It came out with a similarly structured loan in 2013, said a banker on that deal. However, drawing on liquidity of smaller banks at that time was harder given the lack of overall strong sentiment around India.
“We did this kind of deal for Essar Steel before,” said the banker. “This type of structure is a bit complicated and unlike plain vanilla SBLC type loans, its EPBG invocation depends on few conditions,” he said.
“We found when we were doing that transaction that smaller banks were not that comfortable as they did not understand,” he said. He noted that that multi-tranche transaction was significantly bigger than Essar Oil’s financing. He said lenders will be watching the syndication of the Essar Oil loan closely.
Essar Oil hit the market with a $1.25bn loan in December 2013. That had Axis Bank, Credit Suisse, ICICI Bank and SBI Capital Markets as leads. It came backed by guarantees from 11 Indian banks, each providing support to a different tranche.