Philippine oil refining company Petron Corp and Indonesian state owned oil and gas company Pertamina have sought amendments to covenants on their fundraisings. The nature of changes being proposed are different. The former is seeking to redefine leverage ratio to account for inventory loss and gain; the latter is seeking to give weight to its net worth as opposed to earnings.
The two credits are viewed totally differently, said bankers. One is a state owned, integrated oil and gas major and the other is a privately owned company which is already quite levered. That is also why the two companies are going about creating more elbow room in quite different ways.
Pertamina, which kickstarted the process earlier than Petron, got consent from a majority of its lenders last month. The changes would apply to the five year fundraising of $1.7475bn that it wound up in February.
Pertamina had proposed replacing the condition for debt service coverage ratio or consolidated Ebitda to debt services to a condition that requires it to maintain net debt-to-total net worth at less than 200%. The loan was originally raised with two covenants related to the debt service coverage ratio and debt-to-Ebitda ratio.
“They want to give less importance to their Ebitda and more to their equity,” said one banker on the trade. But he was not convinced falling oil prices were the major driver behind the move.
“Yes, that’s what they’re [Pertamina] saying — falling oil prices — but oil prices can go up as well as down, that won’t mean they will breach covenants. I think they are doing this to get headroom for more expansion in their refineries.”
Sure enough, Pertamina signed memoranda of understandings with JX Nippon Oil and Energy of Japan, Saudi Aramco and China Petroleum & Chemical Corporation, for investments worth $25bn to upgrade five of its refineries, Jakarta Globe reported on its website on December 10, 2014.
However, a second banker who lent to both Pertamina and Petron said the move was natural considering the oil price slide, and that revising covenants would help the next time the company raised money.
Oil prices have declined rapidly over the last year because of a rise in supply from fracking in the US, weakening demand from Europe and China and, most recently, an anticipated increase in supply from Iran. The front month contract for global oil benchmark Brent on the Intercontinental Exchange settled at $49.59 per barrel on August 5, more than 50% down since a year earlier.
“Industry-wide, the oil price is lower and for the years [that it is lower] companies need to review what kind of covenants govern debt so they can account for this shift while raising future debt,” he said.
Another lender on Pertamina felt that more could follow suit. “More oil companies seeking covenant changes? I think that could be the case,” he said. “But a lot of the covenants on these companies’ loans are already quite loose. It would be the oil producers that will be affected.”
Companies such as Petronas and PTT, which are strong market players, already enjoy favourable covenants, he said. Firms from India such as Indian Oil Corp have benefited from the lifting of a subsidy burden on their products, so he didn’t foresee them seeking changes.
Hedging inventory
Meanwhile, Petron is looking to considerably loosen its leverage ratio requirement and also tweak the composition of Ebitda on a $475m five year loan it wrapped up in September 2014.
The company has asked for the condition for consolidated net debt-to-Ebitda, which was to be lower than 2.5x, to be changed to consolidated net debt-to-normalised Ebitda. This is to be maintained at less than 6.5x until the first half of 2016, then less than 6x till 2017 and less than 5.5x thereafter.
The definition of normalised Ebitda is consolidated Ebitda plus inventory loss and realised loss from hedge and minus inventory gain.
“They are basically looking to neutralise the effect from hedging inventory loss,” said the first banker. “The value of their inventory may decline if prices keep falling.”
Petron needs the consent of all lenders on its $475m 2014 loan to implement the changes. The process is expected to be completed by mid-August. Bankers on the deal believe the changes will set the tone for future fundraising by the company as well.
It recently received a $550m refinancing loan from a mandated lead arranger and bookrunner group of seven banks. They are waiting for the covenant revisions to be concluded before launching the deal into general syndication. The margin on the new loan is based on its leverage, which is understood to be over 5.5x at present.
“I am not sure if it is something to do with oil companies or whether it is company specific,” said a banker on Petron’s latest facility. “There are a bunch of Indian oil companies that are actively raising loans but you haven’t seen them ask for amendments. Covenants depend on what is rational for a borrower and its lenders.
"One covenant change may be acceptable to one bank but not to another, each has its considerations.”
He said covenants were determined by factors such as ownership and the lines of business that contribute to profitability. “Different companies are in different parts of the capex cycle — some are seeing lower Ebitda, others are in the phase of capex spends.”
The loan Petron is seeking changes for swelled to $475m from its launch size of $300m on healthy demand. It paid a margin of 195bp over dollar Libor, with all-ins ranging from 216.54bp to 228.85bp.
Meanwhile, Pertamina’s $1.7475bn facility had 12 mandated lead arrangers and bookrunners and a total of 25 lenders formed the syndicate. It paid a margin of 140bp for the onshore and 130bp for offshore.
That term loan had an average life of 2.83 years and pays all-ins of 154.1bp-163.3bp for onshore and 144.1bp-153.3bp for offshore.