Norwegian bonds: a welcome liquidity source for E&P companies
09 January 2015
Huw Thomas is a partner at Ashurst LLP and consulting editor of title Energy and Resources Financing: A Practical Handbook for Globe Law and Business.
Exploration and production (E&P) companies have benefited from the hunger for yield in the Norwegian bond market over the last couple of years. Norwegian bonds have been issued by a number of E&P companies which own assets ranging from the North Sea (Norwegian and UK) to onshore UK, Kurdistan and Southeast Asia. Issuers have included Sterling Resources, IGas Energy, Det norske, Kris Energy, Iona Energy, Salamander Energy, Gulf Keystone and Xcite Energy.
If you have not been involved in a Norwegian bond issue, you may be curious as to what is involved and how difficult the process may be. The answer is: not very. In fact, for borrowers that tick the right boxes, the process can be surprisingly fast and painless. I will break it down into its simple component parts so that you can judge for yourself.
Norwegian bonds may be secured or, for stronger credits (eg, Det norske and Salamander Energy), unsecured. They are usually denominated in Norwegian krone, US dollars or euros and governed by Norwegian law or, occasionally, by US or English law. They may be listed on the Oslo Bors or the Nordic ABM and registered and traded on the Norwegian Central Securities Depository (VPS) or on another recognised stock exchange such as the Luxembourg Stock Exchange and traded on the Luxembourg Euro MTF.
Deal team structure
• Manager – Pareto Securities has a strong market position for bringing small to medium-sized E&P companies to market. Among others, ABG Sundal Collier is also active; and with the growth in the market, international banks are becoming more interested in building a profile, at least as co-managers.
• Trustee – Nordic Trustee appears to have a dominant position as regards the role of bond trustee. For a secured bond, Nordic Trustee will also act as security agent.
• Counsel – the same Norwegian counsel can advise the manager and the trustee. Some US securities law advice will be required as to the selling restrictions applicable to the bonds; if it is proposed that the bonds be sold into other jurisdictions, local law advice in those jurisdictions on selling restrictions should also be taken. Counsel for an offshore issuer with an international portfolio of assets and other English law debt should be an international law firm, with input from a Norwegian law firm on specific questions of Norwegian law.
• For purposes of due diligence, local counsels in the jurisdictions of the key assets will need to be appointed and if the issue is secured, local counsel in the jurisdictions of the governing law of the security will be required to act for the Trustee.
Terms of the bonds
Once an outline term sheet with the headline commercial terms has been agreed between the issuer and the manager, the manager's counsel will prepare the long form term sheet. This document contains the full form terms (apart from a small number of additional standard provisions contained in the full form documentation), including issuer call options, a description of security (if applicable), a description of project accounts, conditions precedent, undertakings, financial covenants and events of default. The term sheet is negotiated over several weeks up to launch, with relevant findings from the due diligence process factored in.
While not as extensive or onerous as a typical bank financing covenant package, the covenants will be similar in scope, but with more leeway and headroom.
The project accounts on a secured issue look similar to project accounts on a bank financing and may include:
• an escrow account into which the bond proceeds are paid. The issuer makes withdrawals from the escrow account subject to satisfaction of withdrawal conditions precedent for application to stated bond purposes;
• earnings account(s) into which ‘project’ earnings will be paid. The issuer is typically free to withdraw amounts from the earnings account(s) in the absence of an event of default; and
• a debt service retention account, which is subject to a mechanism for build-up and retention of amounts sufficient to meet the next payment of interest and principal instalment.
If the issue is secured, the security package is likely to be similar to that which would be found in a bank financing.
The trustee will have some limited input into the term sheet and will need to approve it.
The manager will be keen for the issuer to sign up to the mandate agreement as early as possible in the process, but issuers may want to hold off signing at least until it is clear that the bond issuance is a realistic proposition.
• Investor presentation - this is a PowerPoint presentation which will be used in the roadshow, so in some respects it is the key selling document. The manager will assist in the preparation of the investor presentation, but it is the issuer's document. The investor presentation will contain a summarised version of the risk factors set out in the offering memorandum.
• Offering memorandum - the manager will assist in the preparation of the offering memorandum, but it is the issuer's document. It will contain:
o full form risk factors;
o a summary of the bonds (ie, a summary of the term sheet);
o an extensive description of the issuer group and its operations;
o a summary of relevant regulatory and tax regimes; and
o a statement as to disputes in which the group may be involved.
Appended will be the term sheet, application form, financial statements and reserves report. A preliminary offering memorandum is prepared for launch. Although extensive, an offering memorandum for a Norwegian bond issue would be viewed as lightweight by any self-respecting US high-yield lawyer.
• Marketing package - the investor presentation and preliminary offering memorandum (containing the term sheet) will be included in the sales materials distributed to investors at launch. The issuer must keep in mind that it takes responsibility for the accuracy of the selling materials. For instance, the issue will typically be marketed to institutional investors in the United States in reliance on the Rule 144A exemption from the registration requirements of the US Securities Act. There are some very unpleasant penalties under US securities laws in case of failure to meet the necessary (high) standards of disclosure. Accordingly, the issuer and its management have considerable interest in ensuring that proper disclosure is made.
The issuer and the manager should agree at the outset on the scope of due diligence. A selling point of the Norwegian bond market is the relatively light-touch and pragmatic approach to due diligence as compared to some other markets (in particular, the US high-yield bond market).
Technical due diligence will be conducted in parallel.
On the last business day before launch, the issuer and the manager will have a ‘bring down due diligence’ call, when management confirms the results of the due diligence and the chief executive of the issuer signs a statement of completeness on behalf of the issuer confirming the accuracy of the disclosure. There may be a confirmatory bring down due diligence call just before settlement. All of this does an effective job of focusing the minds of management.
An important factor which streamlines the process is that simultaneously with the above, the manager's research team will conduct credit research with a view to providing a ‘shadow rating’.
Roadshow and book build
To much excitement, the deal is announced and book build begins in conjunction with a one to two-week roadshow which may take in Scandinavia, London, New York and other relevant investor hubs, including in Asia. After launch, any changes in the term sheet or offering memorandum should ideally be only to complete pricing details, although sometimes adjustments may be made to the terms of the bonds as a result of investor feedback. Investors will conditionally subscribe for bonds using the application form as annexed to the offering memorandum. So for people wondering where the document called ‘subscription agreement’ is - there is not one. The application form, together with the term sheet, constitutes the subscription agreement. During this selling period there is no certainty that there is a deal (given that the bonds are not underwritten), and so there may be a judicious pause in further work on legal documentation until the book build has completed.
Pricing and allocation
Assuming that the roadshow is a roaring success, pricing and allocation to investors will occur after completion of the roadshow. Trade notes with payment instructions are sent from the manager's settlement department to each investor that is allocated bonds. The bonds will not be issued yet, but they will begin to trade.
Settlement and closing
The settlement date will be scheduled for perhaps two to three weeks after pricing and allocation (depending on the extent of the conditions precedent documentation, which itself is heavily dependent on whether the issue is secured or unsecured, as it may only be at this point that work will start in earnest on security documents). During this period there is frantic activity among the lawyers. The bond agreement will be agreed; it follows a standard format and is largely boilerplate, given that the term sheet includes all important terms; but there will also be intensive work on the conditions precedent to closing.
It should be possible to organise funds flow so that funds are received into the issuer's escrow account and the bonds are issued on the same day. If funds are to be applied towards refinancing with a release of security at closing, things are a bit more complex and this will involve some special mechanics due to the timing of receipt of funds from investors, issuance of the bonds and release of funds to the issuer; but this is a well-trodden path.
Listing of the bonds
Once the excitement of the issuance has died down, the more mundane process of listing the bonds will begin. In order for UK issuers to benefit from the quoted Eurobond exception allowing them to make payments of interest on the bonds free of withholding tax, it will be necessary for the bonds to be listed prior to the first payment of interest.
Compliance with listing requirements
The issuer will have an ongoing obligation to comply with the listing requirements of the selected stock exchange on which the bonds are listed. However, compliance with the listing requirements of the primary exchange on which the issuer’s shares are listed may largely suffice.
Amendments to bond terms
Some potential issuers are deterred from going to the bond markets due to concern that it will be considerably harder to amend the terms of the bonds or obtain a waiver than it would be to agree an amendment or waiver with banks. The trustee has a certain amount of discretion to agree to an amendment or waiver on the basis that, in its opinion, an amendment or waiver does not materially and adversely affect the rights or interests of the bondholders. Otherwise, a bondholders' resolution will be required to effect any amendment or waiver of the terms of the bonds.
The practicalities of obtaining a bondholders' resolution may appear challenging. Bonds will often be held in the VPS (or other clearing system) by a nominee on behalf of the beneficial owner, so it may be difficult to establish who the beneficial owner is. In practice, it should be possible to communicate with bondholders through the clearing system and the nominee, and in fact bondholders' meetings to amend terms and grant waivers are a fairly routine occurrence.
The Norwegian bond market has represented a welcome additional source of financing for small to medium-sized E&P companies at a time when other funding options have been somewhat constrained. Careful structuring is required to ensure that the bond sits happily within the capital structure of the issuer group and the terms do not unduly restrict the business of the group. The market has demonstrated its flexibility in accommodating the requirements of borrowers.