By Guilherme Forbes, Partner, Souza Cescon Advogados
Since Petrobras put together its first limited recourse financing to develop the Marlim field as part of its efforts to increase production beyond 1mbd, the company has more than doubled its crude oil production. Financing the construction and operation of the scores of drilling ships and floating production platforms that have made this expansion possible has been a challenge for Petrobras, lenders and their advisors and a learning process for all involved.
These assets are generally built and owned by foreign entities, which then lease them to Petrobras. In addition to the lease, a separate services agreement is established with the Brazilian affiliate of the owner which will operate the vessel once it is within Brazilian waters. This results in two separate payment flows: one cross border in US dollars, and a local flow in Brazilian reais, with the proportion between them varying from project to project.
The typical debt financing structure for the companies that win those contracts consists of a US dollar syndicated facility taken by the offshore owner of the asset, with comprehensive security on the vessel and on all receivables coming from the lease and services contracts with Petrobras.
The main issues that lenders have time and time again faced in these transactions surround the security. A first challenge involved getting banks comfortable with the terms of the lease and services contracts. Perhaps inevitably, when these were crafted by Petrobras they were designed to provide as much leverage as possible to Petrobras with very little in the way of remedies and protection in favor of the contractors. For example, they usually contain extensive indemnity and termination rights in favor of Petrobras without the usual conditions and qualifiers that would typically result from a thorough negotiation process. Indeed, because these contracts were offered through competitive bidding processes, prior to submitting their bids the leading contractors did not push to improve these terms lest their competitors be more flexible, and the winning bidder was then prevented under Brazilian law from requiring changes without becoming subject to challenges from the other bidders. As a result, the market eventually had to take these very unfavorable terms as a reality of this sector in Brazil, and rely on Petrobras’ track record in acting sensibly and in good faith when managing and enforcing the contracts. As a result, a lot of the time taken to implement theses transactions was spent in negotiations on the allocation of these risks between lenders and sponsors.
A second, and related, issue has been the negotiation of the direct agreement with Petrobras. Petrobras negotiates these documents on a case-by-case basis, and the outcome can vary significantly. Also, the duration of these negotiations can sometimes be inconsistent with the timing of the transaction itself, which puts additional pressures on lenders to settle for less than ideal documents.
A third and perhaps more sensitive issue relates to the security created on the asset itself. As noted above, title to the vessel is held outside of Brazil, so the mortgage is created under the laws of the jurisdiction where the vessel is registered. Thus, while foreclosure and the ensuing transfer of title may not be an issue, the physical removal of the asset would need to be sought in Brazil thorough an enforcement of the foreign foreclosure award. This raises the delicate issue of the treatment by local courts of competing possessory claims between Petrobras and the lenders or new owners. No dispute of this type has happened in Brazil so far, so there is no indication of how courts would react and the extent to which they would consider the strategic nature of the assets in their analysis.
It is a testament to the maturity of the Brazilian market that billions of dollars have been raised in past years notwithstanding these and other issues. Petrobras is now looking beyond these transactions as it is faced with the challenge of turning into reality the promise of the enormous reserves identified in the so-called “pre-salt” layers of the Brazilian sea basin. As an example of the magnitude of this enterprise, Souza Cescon have recently been retained by Santander to assist with a mandate to propose structures to finance the construction of 28 new drilling rigs, an investment in excess of US$22billion.
Souza Cescon Advogados
Guilherme Forbes
Tel: +55 11 3089-6647
Email: gforbes@scbf.com.br
Website: www.scbf.com.br