Going out on a limb

Category: North American energy

Winner: NET Mexico Pipeline Partners

Nominated by: BBVA (joint lead arranger)

Other participants included: NET Midstream (transaction sponsor, 90%); MGI Enterprises (Pemex) (transaction sponsor, 10%); Pemex-Gas y Petroquimica Basica (off-taker); The Bank of Tokyo-Mitsubishi (joint lead arranger); ING (joint lead arranger); Credit Agricole (joint lead arranger); Natixis (joint lead arranger); NordLB (joint lead arranger); RBC (joint lead arranger); Grupo Santander (joint lead arranger)

Date of transaction: 6th December 2013

Size of transaction: $728m

For Mexico, the building of the NET Mexico pipeline (scheduled to begin service in December 2014) is enormously significant. The 124-mile pipeline, after all, gives the country access to the US’ huge shale energy reserves – linking as it does to the Eagle Ford shale oil field in Texas.

But for the project finance market also, the transaction could be a seminal development. Certainly, in the North American context, a huge number of pipelines need to be built to take shale gas and oil from the production sites to the end consumers (whether the whole way or part of the way). NET Mexico showed that project finance may have a big role to play in this process.

In making its submission, joint lead arranging bank BBVA said: “The majority of pipelines built in North America are not project financed so the NET Mexico transaction has shown that, with the proper contractual structure in place, it is a viable alternative to on-balance sheet financing of the nation’s pipeline infrastructure by industry sponsors.”

But, given that it was a breakthrough deal, how was it achieved? In a nutshell: by taking risk that lenders would not normally take at the construction phase. For one thing, the project – unusually – does not have a single fixed-price date-certain EPC [engineering, procurement, construction] wrap. Moreover, some of the contracts were to be executed post-financial close for equipment or services relating to later stages of the project.

In addition, not all rights of way necessary for laying the pipeline were secured at financial close. Instead, the lenders relied on asset operator NET Midstream’s experience of local laws and regulations governing procurement of rights of way to achieve completion of the project on time and within budget.

By BBVA’s own admission, using a short-term solution to bridge a construction project to the operational phase and eventual capital markets refinancing is not new. But to take construction risk without a standard EPC contract is a rare (and bold) step.

In taking that step, BBVA and other banks involved in the project received a round of applause from the judging panel. In their view, the way to a fully revived project finance market lies in just this kind of leading from the front.

What the judges said:

“It’s interesting what was not in place – no fully fixed price contracts, no full rights of way etc. This was brave; it showed open-mindedness for the banks to take more of the risk of the project rather than laying everything off.”

“This has opened up the non-traditional market by the banks showing flexibility when it comes to risk. If banks are prepared to take more risk, they can do more of these types of deals.”

Honourable mentions in this category:

NET Mexico was seen as the clear winner. “Many of the other contenders appear to be fairly standard, ‘off the peg’ solutions,” said one judge. “Whereas NET Mexico could lead to replications, most others are themselves replications of what others have done.”