Rigging the costs
South Asia’s largest private sector offshore oil and gas drilling company purchased a rig through an innovative structured finance solution provided by JPMorgan Chase in May last year.
JPMorgan Chase is the sole provider of a US$104mn, 25-month construction period pre-delivery finance for the purchase of an oil rig by Aban Group, India, from PPL Shipyard, Singapore. The rig will be used in India.
Traditionally, such a purchase would have been financed using pre-export finance, project finance or asset finance – all of which would have increased the gearing ratios of either the buyer or the seller, as well as resulting in overall higher financing cost.
Aban did not want to establish a loan on its books prior to the delivery of the rig, which would take place in 2008. “The company wanted to establish the loan when the asset is delivered and the rental agreements are in place in order to obtain more favourable loan terms. PPL also rejected traditional pre-export financing methods in favour of a custom-made solution which would classify payments from Aban as advances against the contract,” says Astar Saleh, vice-president, global trade sales, JPMorgan Chase in Singapore.
“Additionally, Aban preferred not to use commercial LCs as operative instruments due to the restrictive terms. The structure also posed a further challenge as the payments are due when construction milestones are achieved and do not have fixed payment dates.”
JPMorgan Chase’s solution addressed these concerns and created an efficient mechanism for pre-export finance. The JPMC structured trade team worked with both buyer and seller, as well as the issuing bank, to provide financing guaranteed by Indian Overseas Bank (IOB).
IOB was willing to act as a guarantor for Aban, which is an important and long-time customer. Under this solution, the payments would not be a loan to Aban, although they would be classified as advance payments by PPL.
“JPMC’s structure was the preferred solution among competing ones presented by foreign and domestic (Indian) banks due to the benefits it provided to the key parties involved,” adds Saleh.
“The all-in costs in this structure provide total savings of 2.5% per year or approximately The transaction is a demonstration of the success of the JPMC network trade concept, in which ideas and information exchanged between banks in its global correspondent network are leveraged to facilitate trade flow risk mitigation and financing solutions.”
Borrower: Aban Group
Sole lender and arranger: JPMorgan Chase
Guarantor: Indian Overseas Bank
Tenor: 25 months
Date closed: May 2006