Ratio Oil Exploration (1992) LP (TASE:RATI.L), the smallest partner in the Leviathan natural gas reservoir, has begun raising capital to finance its share of the development of the reservoir. The total cost of Leviathan's initial development is estimated at $3.5-4 billion, with Ratio's share amounting to $600 million.
The investment by Ratio, which is controlled by Yigal Landau and Ligad Rotlevy, is planned to come from two sources: bank financing (70% of the investment, amounting to $420 million) and $180 million from its own resources. The company currently has $100 million in cash, and has begun to raise the rest of the amount it needs through a bond issue.
Bank financing
It took Ratio a long time to close its financing deal with the banks. A deal of this magnitude requires precision in the details, chielfy concerning the ability to repay debt and the collateral.
Sources informed about the particulars of Ratio's bank financing told "Globes" in recent days that the banking system had been waiting for two main events before closing the deal: a strategic contract with an anchor customer, and the raising of capital.
Champagne bottles were brought out in recent weeks when the strategic customer, Jordan Electric Power Company (JEPCO), signed a long-term contract with the partnership. The capital requirement is getting underway; through the underwriters for the offering (Leader Underwriters and Discount Underwriting and Investment), Ratio has sent a deed of trusteeship for comments by the investors. The deadline for comments is the end of the month, which means that, barring something extraordinary, Ratio will complete a NIS 300 million bond issue in November, providing it with the capital it needs to develop the reservoir.
The banking system
A foreign banking consortium is leading the bank financing. The identity of the consortium partners is still unknown, but it will include at least two banks: HSBC and Deutsche Bank. It appears that initially Israel banks will not take part in the bank financing. The foreign consortium, however, is experienced in financing infrastructure projects on this scale, and its experience with financing the Tamar reservoir has been good.
Sources told "Globes" that, in the second stage, the Israeli banks will enter the picture, and will nogotiate mainly through a dialogue with the foreign banks on coming in as secondary financers.
One noteworthy point about the closing of the bank financing is the role in the deal played by Deutsche Bank, which is currently in the midst of difficult proceedings with the US regulator involving the anticipated payment of a fine ($14 billion as of now). It is not clear whether the bank can take part in financing projects on the scale of Leviathan in this situation. Deutsche Bank is actually the weakest link in the banking consortium that is to finance Ratio's share of the process.
The sources also told "Globes" that they were aware of Deutsche Bank's situation, but were not too concerned about it, because Deutsche Bank is Germany's largest bank and one of the largest in the world. The bank has great expertise in financing infrastructure projects, and it appears that it will be able to steer its way between its current troubles and Leviathan's continued development. In any case, the sources asserted that Deutsche Bank's share of the bank financing was "not central," so that it could be replaced by another bank in an emergency.
Equity
As mentioned, Ratio currently has just over $100 million cash, from a bond series issued by its subsidiary, Ratio Oil Explorations (Finance), which has a current balance of $94 million, and a series of warrants issued in June, some of which have already been exercised, producing $28 million for the company.
Assuming that Ratio is successful in raising the remaining capital of slightly more than $100 million in November, it will complete the capital needed in order to obtain the bank financing.
It should be noted that while Ratio's share of the required capital is $180 million in the first stage, its cash burn rate averages NIS 25 million a year, so a crude calculation shows that it will need more than $180 million. To this amount should be added the interest payments the company must make by 2019, mostly on the bond series in circulation.
"Not an easy deal"
Informed sources told "Globes" in recent days that Ratio will not have an easy time with its bond issue in November. They noted that the issue would be complicated by rather weak collateral; furthermore, the issue is being conducted through the Ratio Oil Explorations (Finance) subsidiary on a non-recourse format for Ratio itself.
The collateral for the bonds is actually 1.5% of the Ratio's cash flow upon completion of the drilling and the beginning of sales to customers. At the same time, Leviathan is currently commonly regarded as a proven reservoir, which shifts the risk to the timetables for gas extraction and the customers meeting their gas purchasing targets. In contrast to the Tamar drilling, the main customer for Leviathan is not Israel Electric Corporation (IEC) (TASE: ELEC.B22), but JEPCO, which is considered less stable.
In another extreme case scenario, in which Ratio collapses and the banks take control of Ratio's share of Leviathan, the parties providing the financing (the banks and the bondholders) will take Ratio's place, and development by Noble Energy will continue. Under such a scenario, the collateral is not worthless. It is unclear how much it will be worth, but it is certainly not worthless.
Since the fact that the issue is taking place through the Ratio Oil Explorations (Finance) subsidiary makes it more difficult, why is Ratio not raising the capital directly itself? The company is a limited partnership, so that if it issues bonds directly, its partners are liable to be exposed to personal lawsuits, which the partners wish to avoid. A capital market sources told "Globes" in this context, "If the partners are so confident, why are they afraid of legal exposure?"
On the other hand, sources informed about the particulars of the company's financing noted that the measure was a fairly routine one for infrastructure ventures on this scale. "It is true that the collateral for the bonds is inferior to the collateral for the banks, but it exists, and the fact that the issue is through a subsidiary, not directly by the company, is essentially a technical legal matter," the sources said.
Ratio did not respond to the report.
Published by Globes [online], Israel business news - www.globes-online.com - on October 13, 2016
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