p. 1

24th November 2014

Project Bonds

Myth Or The New Reality?

Martin McAspurn-Lohmann, Head of Oil & Gas

Alejandro Ciruelos, Head of Project Finance

Santander Global Banking & Markets

p. 2

Searching for

Illiquidity

Premium

Long Term

AppetitePortfolio

DiversificationSpecialisation

Project Bonds – A Rising Funding Alternative?

Deleverage Tenor

Restrictions

Capital

Requirements

Despite their appetite for assets,

banks are facing some limitations

Capital markets are

becoming more prepared and

show high level of liquidity

Banks’ appetite for assets mean they may be ready to offer longer tenors, but capital markets are gradually

becoming a compelling alternative

p. 3

Indicators show strong level of liquidity in the market, although IG spreads are tight

Current Market Conditions – Investment Grade

EUR Senior IG Corporate – Total Maturities 2009 – 2018

iBoxx Non-Financials (benchmark/MS spread in bps)

Source: Bloomberg, EFAMA, www.efama.org.Monthly Industry Facts, published on 15 October 2014

(1) Undertakings for Collective Investment in Transferable Securities (UCITS) in the sense of publicly offered open-ended funds; non-UCITS include other nationally regulated funds

(2) Long-term UCITS Funds include Bonds, Equity, Balanced and other UCITS Funds

(3) Excluding Ireland due to lack of breakdown per type for this country

0

50

100

150

200

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EU

Rb

n

USD Senior IG Corporate – Total Maturities 2009 – 2018

0

100

200

300

400

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US

Db

n-30

-20

-10

0

10

20

30

40

Jan

-12

Feb

-12

Mar-

12

Ap

r-1

2M

ay

-12

Jun

-12

Jul-

12

Aug

-12

Sep

-12

Oct-

12

Nov

-12

Dec

-12

Jan

-13

Feb

-13

Mar-

13

Ap

r-1

3M

ay

-13

Jun

-13

Jul-

13

Aug

-13

Sep

-13

Oct-

13

Nov

-13

Dec

-13

Jan

-14

Feb

-14

Mar-

14

Ap

r-1

4M

ay

-14

Jun

-14

Jul-

14

Aug

-14

Net Inflows to Long-term Bond UCITS Funds(1) (3)(EUR bn)

-

200

400

06-May-10 06-May-11 06-May-12 06-May-13 06-May-14

$ Non-Financials vs UST

-

200

400

17-Jun-10 17-Jun-11 17-Jun-12 17-Jun-13 17-Jun-14

€ Non-Financials vs MS

p. 4

The Search For Yield is Also Evident in Riskier Asset Classes

Current Market Conditions – High Yield

Oil & Gas High Yield deals: Europe vs North America

European O&G High Yield Deals – 2014YTD(1)Bloomberg High Yield Corporate Bond Index (spread in bps)

Investors who need to lock-in long term fixed interest rates may find value in the illiquidity premium of IG

structured bonds such as project bonds

Source: Bloomberg

Company Deal Value (USDm) Tenor Coupon

North Atlantic Drilling 600.0 5 6.25

SeaDrill 232.8 5 3-mth Other +325bp

DOF 113.9 4 3-mth Other +475bp

EnQuest 650.0 8 7

Tullow Oil 650.0 8 6.25

Gulf Keystone Petroleum 343.0 3 13

CGG 555.4 6 5.875

CGG 500.0 8 6.875

Hellenic Petroleum Finance 400.0 2 4.625

Motor Oil Finance 481.6 5 5.125

Global Rig Company 120.0 5 9

St1 Nordic 136.3 5 4.125

Genel Energy Finance 500.0 5 7.5

Prospector Finance II 100.0 5 7.75

Norshore Atlantic 150.0 4 12

Veritas Petroleum Services 70.0 5 7

Hellenic Petroleum Finance 442.1 5 5.25

Solstad Offshore 167.9 5 3-mth Other +350bp

Xcite Energy 135.0 2 12

Polarcus 57.3 5 3-mth Other +725bp

Prosafe 113.3 5 3-mth Other +310bp

600

233

114

650

650

343

555

500

400

482

120

136

500

100

150

70

442

168

135

57

113

-

100

200

300

400

500

600

700

800

900

Jan-10Jul-10 Jan-11Jul-11 Jan-12 Jul-12 Jan-13Jul-13 Jan-14Jul-14

-

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-

10

20

30

40

50

60

70

2011 2012 2013 2014E

US

Dm

Europe North America European Deals - Oil & Gas %

p. 5

Crude tankers, natural

gas pipelines and above

ground storage

Older vessels, LNG

tankers, subsurface

storage, liquids pipelines

LNG regasification, gas

processing

Refineries, complex

petrochemical plants,

LNG liquefaction, drill

ships

Tanks Storage

Standard oil and natural

gas pipelines

Underground storage,

LNG regasification, gas

processing, oil tankers,

and complex pipelines

LNG liquefaction, simple

oil refineries, and drill

ships

Complex refineries and

petrochemical plants

Infrastructure Projects – Key Rating Considerations

Rating agencies use different approaches to assess the risk of infrastructure projects

Risks are typically assessed by looking at the following fundamental factors: commercial viability, stability of cash flows, exposure to event risk and naturally

financial metrics

A number of additional aspects specific to project structures are also considered; these usually include liquidity, project financing features, refinancing risk and loss

given default

Some rating agencies look specifically at risks associated to infrastructure projects in the O&G sector – in this case, the construction and operations phases of the

projects are separately assessed

Construction Phase Operations Phase

Technology/Design

RiskConstruction Risk Project Management Financial Risk Performance Risk Market Risk

Technology risk entails

two components:

Track record in similar

application

Suitability for the

project's contract

requirements

Usually expected to be

assessed positive since

designs must in the

course of business be

reviewed to assure

compliance

EPC mitigates

construction cost and

risk of delays to the

project

However, project may

retain some risk linked

to force majeure,

delays in receiving

permits, or change

orders

Agencies typically

make provisions for the

above risks

Typically divided into:

Market exposure:

generally high for

refining and drill ships,

moderate for

LNG/processing plants

and pipelines, low to

moderate for storage

and vessels

Competitive position:

aspects such as

customer mix, location,

scale and demand

outlook

Lower

Ris

k

Higher

p. 6

Where Are The Infrastructure Opportunities In The O&G Sector?

E&P PIPELINES TANKERS

STORAGE LNG PLANTS/

GAS PROCESSING

REFINING/

PETROCHEMICALS

OIL FIELD SERVICES GAS

STATIONS

UPSTREAM MIDSTREAM DOWNSTREAM

Drill ships

Offshore/onshore rigs

Offshore platforms

Extended Well Test (EWT)

facilities

Gas pipelines

Oil / liquid pipelines

Crude tankers

LNG tankers

Product tankers

Storage tanks

Subsurface storage

Liquefaction / regasification

plants

Gas processing plants

GTL plants

Gas to chemicals plants

Refineries

p. 7

Outlook for the European Project Bond Market

Lessons From Experience

• Confirmed• Most of interest from insurance companies

and pension fundsInvestors

• Target A- for insurance companies • BBB/BBB+ can workRatings

• Benchmark bonds below 10 years. There is

a space for long term assets in EUR though• ConfirmedMaturity

• Uncertainty on the capacity to digest big

transactions• Up to EUR 1.4 Billion proven in SpainSize

• Confirmed• Not common in Europe. Would it be

acceptable?Amortizing

• This has changed - peripherals may

become more relevant• Focus on core countiesCountry Risk

• Confirmed• Although many investors still demand

liquidity, some love the illiquidity premiumLiquidity

• Depends on the Jurisdiction. Might require

structural protection• Major concernRegulatory Risk

• Improving, but still selective acceptance

• Delayed draw structures• Major concernConstruction

Past Present

p. 8

Closing Thoughts

Markets are flooded with liquidity and are increasingly becoming a funding alternative for sponsors

Banks have strong appetite for infrastructure finance despite some limitations, but may have to retreat

back to long term funding to become more competitive

This tension may create a favourable situation for Oil & Gas infrastructure financing, at a time when

Oil & Gas companies are facing greater oil price volatility and higher focus on shareholders‟ returns

and capital discipline

The O&G sector offers plenty of opportunities for infrastructure financing and we would expect that the

demand for this type of projects will continue to remain strong

p. 9

US$1,500 MM 5.625% notes due 2021

Case Study #1 - Sabine Pass Liquefaction

1 At Issuance

SPL was seeking to upsize existing US$3.6bn construction / term loan to finance

the development and construction of 4 liquefaction trains in Louisiana. SPL

completed bank financing for trains 1 & 2 on „12 and has completed 18% of

construction by Dec „12 with 1st cargo expected in „15

SPL will receive US$2.3bn per year in fixed, take-or-pay style fees for 4 LNG sale

and purchase agreements

Santander acted as a joint lead manager for a US$1.5bn 6.625% secured notes

due 2021 from Sabine Pass Liquefaction, LLC

The project consists of two liquefaction trains, Trains 1 and 2, which together will

provide approx. 9.0 million metric tons per annum (“mmtpa”) of liquefaction

production capacity

The project has two 20-year LNG Sale and Purchase Agreements (“SPA”) with BG

Group plc and Gas Natural SDG contracted to sell approx. 7.0 mmtpa (3.5 Mmtpa /

train) of the 9.0 mmtpa of total capacity of liquefied natural gas on a free-on-board

(FOB) basis

The incremental production above the contracted volumes will be sold on either a

merchant or short term basis. The base case bank model will not include any

incremental volumes

Project background and main characteristics

Issuer Sabine Pass Liquiefaction, LLC

Amount US$1.5bn Senior Secured Notes

Type of bonds Bullet / Amortizing

Expected Rating Ba3 (Moody‟s) / BB+ (S&P)

Pricing Date 1st February, 2013

Maturity 1st February, 2021

WAL 8yrs

Coupon 5.625%

Spread to

TreasuryUST 3 ⅝ + 406 bps

Issue Price 100%

Market Issued 144A / Reg-S Senior Secured Notes

Docs Standalone / €100k+€1k / Luxembourg

Terms & Conditions

Asset Manager

55%

Fund Manager

34%

Hedge Fund4%

Bank3%

Insurance1%

Other1%

Pension Fund

1%

Private Bank1%

USA95%

LatAm2%

Europe3%

Demand Breakdown (by Region & Investor Type)

p. 10

US$ 580 million of 6.625% Notes due October 2022

Case Study #2 - Odebrecht Offshore Drilling

Demand Breakdown (by Region & Investor Type)

USA56%

Europe32%

Asia7%

LatAm5%

Fund Manager

47%

Private Bank25%

Hedge Fund12%

Bank7%

Insurance5%

Pension Fund3%

Other1%

On Feb „14, Odebrehct Offshore Drilling Finance Limited (OOG), a subsidiary of

Odebrehct Group, priced a US$580MM series of senior secured bond due Oct ‟22

(following US$1,690MM original series in „13 and US$1,500MM Norbe VIII/IX in ‟10

both managed by SAN)

The notes are guaranteed by the direct parent companies of the issuer, ODN I GmbH

(ODN I), Odebrecht Drilling Norbe Six GmbH (Norbe VI) and ODN Tay IV GmbH (ODN

Tay IV) and secured by all of the assets and revenues of ODN I, Norbe VI and ODN

Tay IV, which comprise two deepwater drillships (in the case of ODN I) and two

deepwater semisubmersible drilling platforms (in the case of each of Norbe VI and

ODN Tay IV)

The drillships and drilling platforms are chartered to Petrobras

Perfectly timed transaction as took advantage of scare competing O&G LatAm supply

beginning 2014. Roadshow was announced on Feb 12 in Houston, NYC, Boston and

London. Initial price thoughts was launched on 20th Feb and within 5 hours, books

were already in excess of US$800MM

Participation of real money accounts let syndicates reduce pricing to below guidance

and to launch the transaction at 6.625%. Books closed at US5.1bn, an

oversubscription by 8 folds and more than 330 accounts

Transaction was officially priced at 6.625%, at a lower coupon than the original series,

implying a new issue premium of approximately 8bps over original series

Project background and main characteristics

Issuer Odebrecht Offshore Drilling Finance Limited

Amount US$580MM

Type of bonds Secured Secured, 144A / Reg S

Expected Rating Baaa3 (Moody‟s) / BBB (S&P) / BBB (Fitch)

Pricing Date 25-Feb-2014

Maturity 1-Oct-2022

WAL 8yrs

Coupon 6.625%

Project

companies

ODN Tay IV GmbH, ODN GmbH and Odebrecht

Drilling Norbe Six GmbH

Issue Price 99.99%

Use of proceedsPrimarily to release ODN Tay IV GmbH from its

existing project finance obligations

Listing Luxembourg / Euro MTF

Terms & Conditions

p. 11

Alejandro CiruelosHead of Project Finance

2 Triton Square, Regent’s Place, London NW1 3AN

Tel: +44 (0) 20 7756 6335 Mobile: +44 (0) 7765 250528Email: alejandro.ciruelos@santandergbm.com

Santander‟s Contact Details

Martin McAspurn-LohmannHead of Oil & Gas

2 Triton Square, Regent’s Place, London NW1 3ANTel: +44 (0) 20 7756 4865 Mobile: +44 (0) 7418 708791Email: martin.mcaspurn-lohmann@santandergbm.com

p. 12

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