The feat would have been remarkable on any given day. But amidst the threat of a raging virus that has shuttered national economies, it was even more remarkable.
How a new company, ANOH Gas Processing Company (AGPC), secured financing during a pandemic – by sufficiently derisking the project through a solid governance structure and smart strategy – provides lessons for how to acquire debt.
In November 2020, Seplat, Nigeria’s leading indigenous oil company, announced that it secured financing for the construction of the $700m ANOH gas plant facility sited at Asaa, Ohaji/Egbema in Imo State.
ANOH Gas Processing Company (AGPC) is an incorporated joint venture owned 50:50 by Seplat Petroleum Development Company and the Nigerian Gas Company, a wholly-owned subsidiary of Nigerian National Petroleum Corporation (NNPC).
This facility was obtained primarily from Nigerian commercial banks who ruing their decision to lend to the oil sector.
“This means that there’s a lot of hope for financing gas and gas-related activities,” said Mele Kyari, NNPC GMD.
We distill lessons from this transaction for investors who are embarking on similar projects.
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Clarify your strategy
From the very beginning the company articulated a clear funding strategy. This usually entails developing a practical, working plan that specifies how you are going to raise money and the resources that it would deploy.
But it should not be just in your head. Seplat began communicating this plan over four years hinting the market that it would raise money through debt and equity.
“By the time they went to the lenders, they were well aware that this was coming and were prepared to meet with them This made the process smooth,” said Yetunde Taiwo, GM for new energy at Seplat during a presentation at the Nigerian Gas Association (NGA) virtual multilogues last week.
Have a great governance structure
One reason for the Nigeria LNG’s success is that it is an incorporated joint venture, unlike the traditional unincorporated joint ventures in the upstream oil and gas sector.
The incorporated joint venture is both the company and the business, unlike the traditional joint ventures where the companies are different from the joint venture.
This model gives the company a license to fund itself. It goes out to the financial and capital markets to raise funds for its operations, unlike the traditional joint ventures where equity contributions fund the business.
It is this model that was replicated by the APGC. It is the first domestic gas IJV with a simple equal shareholding structure, which gave the lenders some comfort and made the due diligence go smoothly, Taiwo said.
Investors are wary when they have to deal with governments in developing countries like Nigeria because of regulatory uncertainty. A study conducted by KPMG some years ago found that regulatory and political risks were the most pressing concern for investors.
“Any relationship that you have with the government that is perceived to be cordial, it gives the lenders a level of comfort that the partnership is solid and there isn’t the fear of interference coming from the side of government,” Taiwo said.
The Nigerian government is notorious for disrespecting contract terms but the odds are definitely stacked against you if certain elements in government express disapproval, and loudly against a deal where the government is a partner. Having the Federal Government support, on the other hand, is euphoric.
It is possible you may not incorporate a joint venture with the NNPC, but having a good corporate governance system assures investors of the sustainability of the business.
Reduce investor risk
Though APGC is partly owned by a credible company, Seplat Petroleum Development Company, listed on both the Nigerian and London stock exchanges, and the NGC, a subsidiary of a profitable national oil company, NNPC, with wild powers, yet more was required.
APGC significantly de-risked the project before the lenders came on board. Being a greenfield project, the shareholders had to inject about 60 percent of the project cost as equity.
“With that kind of leverage, the lenders didn’t have to take that much risk,” said Taiwo.
However not many businesses can finance 60 percent of the project cost, but this kind of commitment can often make the difference because that kind of facility was always going to be a hard sell.
How else, would a new company show that its brownfield project can be profitably, never mind sustainable, if it wasn’t going to have its skin in the game?
A strong team
When seeking a new facility, an experienced team is an asset.
“We had a strong and competent joint finance team from Seplat and NNPC that helped put the deal together,” said Taiwo. “There were top-notch and experienced individuals who knew their onions and were able to satisfy all that the lenders required.”
Swim against the tide
Sometimes the unconventional approach works. It would have been perfectly rational for Seplat and its partners to ride out the coronavirus storm and postpone the deal until the fog leaves the horizon.
Instead the company launched the debt during the pandemic. “The timing of the debt launch was also critical, we launched it during the peak of the COVID-19 pandemic because we sensed that there weren’t too many businesses looking for debt at that time,” Taiwo said.
“We took advantage of the liquidity in the Nigerian debt market “
Charity begins at home
The company was able to secure a debt of over $260million from primarily Nigerian banks. Stanbic IBTC Bank, United Bank for Africa, Zenith Bank, FirstRand Bank (London Branch) / RMB Nigeria, The Mauritius Commercial Bank, Union Bank of Nigeria and FCMB Capital Markets made up the banking consortium. Stanbic also served as an advisor.
The debt financing also provides for another $60mn accordion (an option that a company can buy that gives it the right to increase its line of credit with a lender) at the time of completion. This would be available to fund an equity balancing payment – if the company decides to take this route. Seplat had hoped to complete the funding process in 2020.
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