The 10th African Oil & Gas Trade and Finance Conference
& Exhibition Presentation to: Financing Upstream and Downstream
Assets April 4, 2006
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Table of Contents The 10th African Oil & Gas Trade and
Finance Conference Financing Upstream and Downstream Assets 1.
Introduction1 2. Financing Upstream Assets3 3. Financing Downstream
Assets10 4. Structural Enhancements15 5. Rating Agency
Considerations17 6. Appendices19 Case Study: Gazprom19 Case Study:
EGPC23 Merrill Lynch Commodities Credentials29 Merrill Lynch
Commodities Capabilities32
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Introduction
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A number of companies in the energy industry have used oil,
coal, gas and other commodity derivatives and contracted revenues
to subsidise the cost of their borrowing. This typically involves
monetising long term contracted sales to ensure lower credit risk
and taking advantage of the natural long position that energy
producers have in the underlying commodity to monetise this
commodity position By embedding a strategic hedge into the
financing, commodity producers are able to link debt repayment
obligations to discrete project economics or to the more
generalised returns of the underlying business This is particularly
attractive at times such as this year, when the underlying
commodity prices are high by historical standards and operating in
contango It is straightforward when commodity products are an
exchange-traded commodity with a transparent pricing mechanism In
less liquid markets, alternatives may be found if the pricing of
the underlying products are indexed to more liquid commodity
products or markets Various commodity producers have also used
financing techniques to raise debt on a limited or non-recourse
basis as a means to maximise the proceeds in an asset disposal
situation or to lower certain risks such as political and currency
Financing of Commodity Related Assets 1
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Introduction Legal jurisdiction of offtakers Local currency
laws Contract for offtake arrangements (EFET, specific contracts)
Negative pledge issues Tax issues Hedging requirements
Legal/security arrangements Political risk Ratings Feasibility of
more sophisticated credit derivative deals Key Considerations In
Executing Structured Transactions 2
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Financing Upstream Assets
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3 Reserve Based FinancingSummary DescriptionTransaction
Structure Advantages / Applicability Ease of execution Potential
for borrowing base or fixed term structure May be applied to single
field or entire portfolio Generally applicable to most
jurisdictions large emerging markets bank investor universe Market
capacity available in syndicated loans and high yield bonds Target
License Holder Fields OilCo Lenders Proceeds Interest &
principal Cash flow Restrictions (covenants to be met) Panther
Fields Security in Shares of subs and upstream guarantees OilCo
License Holder Fields OilCo Shareholders Lenders/ Investors
Proceeds Interest & Principal Cash flow Restrictions (covenants
to be met) Panther Security in Shares of subs and upstream
guarantees Fields Reserve Based Financing is amortizing
non-recourse debt that is repaid by the cash flows generated by
reserves: May have borrowing base feature to fund future
development (could be divided into a senior and subordinate
tranches) Typically requires hedging program covering life of loan
Waterfall provisions to ensure cash flows to equity are distributed
only after servicing of debt Secured by pledge of shares of in
operating companies and related production licenses and export
contracts Structure designed to allow lender to gain control of the
licences and assets in a default scenario and sell fields or
appoint an operator for recovery
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Focus on net cash flows available to service debt (CFADS) after
paying all opex, capex, taxes, and royalties: Net cash flows based
on 1P/P90 reserves and production only Mandatory hedging program
yield EV Generally lend up to 65-70% against EV over life of
financing Tenor/amortization structured as follows: Tenor up to 5
years Minimum annual debt service coverage ratio (DSCR) targets of
1.75x-2.00x Minimum Reserve Tail of 25-30% Senior secured 4
Financing Upstream Assets Reserve Based FinancingMarket Analysis
Sovereign risk must be layered into credit assessment for both
markets and may impact market capacity Syndicated Loan MarketHigh
Yield Bond Market High yield investors focus on 1P/P90 but give
additional credit to development reserves: Prefer to finance going
concern business with strong growth prospects Key credit metrics
drive ratings: Net Debt to EBITDA Net Debt to 1P reserves Reserve
Life High yield issuers typically require active hedging programs
Maturities of 5-7 years Senior unsecured
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1) A Special Purpose Vehicle (SPV) created for purposes of the
transaction issues Notes to Lenders/Investors in return for
Proceeds from financing 2) Offtaker uses Proceeds to make a
Prepayment to OilCogainst future deliveries of Product 3) Offtaker
takes delivery of an agreed volume of Product (potentially from
Designated Fields) for which it pays into Escrow Account held for
the benefit of Lenders/Investors 4) Hedge counterparty makes
payments to SPV under hedging agreements (if any) 5)
Investors/Lenders are paid Debt Service from the Escrow Account
Financing Upstream Assets Structure designed to achieve high
rating/credit quality above sovereign ceiling by being secured by
oil export contract Can include a AA or AAA surety bond from
monoline insurance companies enabling the debt to be priced at
lower levels Should be lowest cost funding source as generally
structured to achieve investment-grade ratings Commodity offtake
and hedge support rating and ensure maximum leverage against
dedicated oil export volumes Prepaid Forward/Export Securitisation
Structure 5 OilCo Hedge Payments (4) Proceeds (1) Prepayment (2)
Offtaker Investors / Lenders Notes (1) Debt Service (5) Designated
Fields Product (3) Product (2) Product (3) SPV SPV Escrow Account
Payment for Product (3) Hedge Counterparty Onshore Offshore
DescriptionTransaction Structure Advantages/Applicability
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6 Financing Upstream Assets Prepaid Forward/Export
Securitisation Case Study EGPC Transaction Structure Notes are
backed by Forward Sale of crude oil and naphtha to issuer, which is
then contracted to be sold via the Offtake Agreement subject to a
floor price in the Hedge Agreement Transaction raised a total of
$1.554 billion for EGPC at weighted average cost of borrowing of
approximately 5.00% Issuance was first the SEN by Egyptian issuer
and the largest international issuance by Egyptian corporate EGPC
Noteholders PEL Offtaker Hedge Counterparty Egypt Offshore Forward
Sale Agreement Offtake Agreement Hedge Agreement Indenture 1 2 3 4
Transaction Highlights Terms & Conditions
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7 Prepaid Forward Sale Case Study - YPF Description YPF
S.A.Structure 1 2 3 4 YPF sells forward to oil co, based on
reserves in Argentina Oil co enters take-or-pay contract with
highly rated oil trader and pledges contracts to investors SPV
funds purchase of forward purchase via notes issues and pays
proceeds to YPF Oil co meets desk service from proceed of sale of
oil deliveries to oil trader Financing Upstream Assets From 1995 to
1998, YPF executed two successive forward sales for $400m and $350m
respectively (a total value of $750m) In 1995 Oil co. SPV raised a
total of $400m from seven year amortizing notes rated BBB, four
notches above Argentinas foreign currency ceiling Under the sale,
YPF sold a total of approximately 26.5 million barrels over a
period of seven years YPF entered into a fixed price forward hedge
with Oil Co. Both price of commodity and interest rate were fixed
Between 1995 and 1998, YPF S.A. (based in Argentina) executed
accessible VPPs with Oil Co. a special purpose company based
off-shore Argentina. The total consideration for the VPPs was $750m
Oil co. funded the purchase of the sale by way of amortising bonds
placed in the international capital markets. The bonds were rated
BBB, three to four notches above the foreign currency rating of
Argentina Under the terms of the 1995 Sale, YPF sold approximately
26.5 million barrels of crude oil at a fixed price, over a period
of 7 years The Sale was treated as debt for tax purposes and
deferred revenue (non debt) for accounting purposes YPFs all in
cost for the transaction was approximately 150bps lower than its
unsecured shorter term cost of borrowing YPF registered an
immediate reduction in its reserves In 2001, Merrill Lynch
structured a similar transaction between Repsol S.A. and its
subsidiary YPF Repsol for a consideration of $50m Pledge of
Contracts Notes Issue 32 Cash Proceeds 3 VPP Contract 1 $400m 3 VPP
Deliveries 4 YPF US Investors Oil CoAAA Oil Trader 2 Take or Pay
Contracts 4 Production Payments
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8 VPP Case Study - Brasoil Description 1 2 3 4 Brasoil enters
VPP contracts with SPV Petroleum Funding Corp, based on reserves in
Angola, Colombia, and Brazil SPV enters back-to-back take-or-pay
contracts with highly rated oil trader and pledges contracts to
investors SPV funds purchase of VPP via anotes issue and pays
Brasoil upfront SPV meets debt service from sale of VPP deliveries
by oil trader Financing Upstream Assets In 1996, Brasoil, the
international arm of Petrobras executed a VPP with Petroleum
Funding Corp a special purpose company based off-shore Brazil Under
the VPP, Brasoil sold $123m worth of production from designated
properties in Angola and Colombia The VPP raised $90m in fixed
seven year amortising notes rated BBB- in the international capital
markets, three notches above Brazils foreign currency rating The
VPP was a fixed value contract where commodity price was assumed by
Brazil and production/reserve risk was assumed by investors Under
the terms of the VPP, Brasoil sold approximately $123 million
barrels of oil equivalent from properties in Colombia and Angola
Which the terms of the VPP, Brasoil could deliver oil from back-up
fields in Brazil Brasoils consideration was $90m, which was funded
from proceeds of a 7-year amortising note issued in the
international capital markets by PFC The notes were rated BBB-,
four notches above the foreign currency rating of Brazil Brasoil
executed a fixed value VPP pursuant to which it assumed price risk
and PFC assumed production and reserve risk Brasoils all-in-cost
for the transaction was approximately 175bps lower than its
corporate cost of debt servicing Brasoil registered a reduction in
reserves which was recognised over time Structure Colombian
Reserves Pledge of VPP and T.O.P Note Issue 32 Cash Proceeds 3 VPP
Contract 1 $90m 3 VPP Deliveries 4 Brasoil US Investors PFCAAA Oil
Trader 2 Take or Pay Contracts 4 Angola Reserves Brazil Reserves
Production Payments
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9 Financing Upstream Assets Examples of Public Style
Transactions
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Financing Downstream Assets
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10 Financing Downstream Assets Overview Merrill Lynch has been
an active advisor in the most recent sales of downstream assets,
from which we have determined that: Spending on downstream assets
always carries the risk that refining margins/gas prices will
decline below assumptions used in the initial investment decision
Given price levels of recent asset sales, increasingly large
amounts of capital are required to fund acquisitions, upgrades, or
new construction of downstream assets Downstream producers can use
risk management techniques to lock in margins and reduce volatility
Strategic commodity hedging may be embedded in financings to reduce
volatility, improve pricing, and increase debt capacity
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11 Financing Downstream Assets Using Hedging To Finance
Refinery Capex Investments in refining assets always carry the risk
that refining margins will decline below the assumptions used in
the investment case Refinery capital expenditures have a lag time
of 3-5 years before production can come on stream Given the
uncertainty around new build capacity in the refining sector and
prevailing refining margins at the time of completion, it is
prudent to use financing techniques that align the economics of
upgrade programs with the cost of financing Commodity Linked
Financing can help manage refining volatility and therefore: Lock
in a portion of the value spent on upgrading assets Lower cost of
funding Reduce volatility in the overall economics of the refining
assets Benefit from improved accounting treatment for financial
instruments with embedded derivatives (IFRS does not require mark
to market for derivatives embedded within a financing) Merrill
Lynch can create highly customised solutions to fit a refinerys
specific operating and financial objectives Merrill Lynch can act
as a credit enhancer to the financing by way of its physical and
financial commodities capabilities
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Financing Downstream Assets Refining Margin Linked Bonds
Refining Margin Linked BondIllustration Refinery raises debt in
market through issuance of a bond linked to refining margins:
Investors have two options with the refining margin indexed bond:
Investor receives refining margin participation Investor receives
standard coupons by swapping the refining margin risk with ML Bond
has either a fixed or floating coupon and either an amortisation
schedule or bullet repayment, with a variety of potential refining
margin indexation features Refinery continues to buy crude and sell
refined products in the market at spot Refinery receives dividends
from refinery that are proportional to the refining margin
economics Refinery has achieved a refining margin hedge indirectly
via the refining margin bond to secure minimum dividend performance
on the refinery asset 12 Refining Margin Hedge Oil Cash Payments
Export Buyers Refinery Oil Supplier Bond Investors Regular Bond
Merrill Lynch Bond Investors Refinery Bond Product Cash Payments
Crude Oil Refined Products Refining Margin Linked Bond
Issuance
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13 Financing Downstream Assets Margin / Spread Indexed Bonds
IllustrationDescription Benefits Borrower issues USD debt for which
repayment will be linked to its refining margin: Borrower pays more
when margins are higher and less when margins are lower Debt can be
either structured as: Bullet repayment = Coupon linked to Margin,
in which the Coupon owed fluctuates as Margins rise/fall Amortizing
= Principal repayment linked to Margin, in which the Coupon stays
flat but Amortization fluctuates as Margins rise/fall Repayment is
closely linked to ability to pay, which improves the overall credit
profile of the borrower Interest rate will be lower than current
borrowing as investor has opportunity to benefit from increased
margin levels If principal indexed to margin, more substantive
hedge on production and downside exposure is capped Refinery sells
up-front a portion of production margin Standard RepaymentMargin
RepaymentMarginStandard SpreadMargin Indexed SpreadMargin Coupon
Linked to Margin Principal Linked to Margin
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14 Financing Downstream Assets Project Finance Considerations
The success of the financing will depend on the following factors
Credit Risk: Security: What security will be available for the
financing? What are the legal parameters in the relevant
jurisdiction for perfection over that security? Recourse v.
Non-Recourse: Will lenders/investors have access to the parent
companys balance sheet for the transaction or only to the project
company? Completion Risk: Investors/lenders are unlikely to be
comfortable with completion risk: Turnkey contract from
creditworthy contractor Guarantee from creditworthy sponsor
Sovereign Risk: Many project finance transactions have included
some measure of sovereign risk Political Risk Insurance (PRI) may
be used for projects in high-risk countries Market Risk:
Traditional project finance lenders are not always willing to take
market risk New investors (i.e., infrastructure funds, hedge funds,
project bond investors) have emerged that are more willing to take
market risk for appropriate rates of return
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Structural Enhancements
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15 Third Party Guarantees Surety Bond Structural Enhancements
It may be possible to incorporate a double-A or triple-A surety
bond from Monoline insurance companies (the Insurer) enabling the
debt to be priced at lower levels In such a structure, the Insurer
would guarantee the timely payment of principal and interest to
investors and would assume the performance risk of the exporter,
the credit risk of the buyer and the sovereign interference risk
Exporter Investors Designated Customer(s) Trust Insurer Guarantee
US$ Debt ServiceUS$ Exports Surety Bond Agreement
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16 Contractual Agreements Back-up Buyer/Supplier Structural
Enhancements The incorporation of a long-term purchase and/or
supply contract with or a highly rated third party serves as a
structural enhancement to mitigate the credit risk of the Export
Customers and non-performance by the Exporter $ debt service Notes
Russia Collection Account Cayman Islands Trust U.S.$ $ Payments for
Oil Offshore Export Customers Investors Third Party (the "Back-up
Buyer/ Supplier") Exporter (The "Issuer") Exports Back-up Purchase/
Supply Contract $ Payments for Oil
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Rating Agency Considerations
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17 Rating Agency Considerations Key Credit Criteria Credit Risk
Payment Risk Supply Risk Price Risk Sovereign Risk Exporter
operating performance Established export markets (Designated
Buyers) High quality Buyer Exporter track record
Overcollateralization will help mitigate $ risk Sovereign (e.g.
product re-direction) risk mitigated by buyer consent agreements
Growing importance of certain exports to emerging market economies
ConsiderationsMitigants Ratings Methodology for Structured
Financings
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18 Rating Agency Considerations The Concept IssuerInvestor
Trust Foreign buyer(s) Good track record Decent credit Export
contract Long-term Binding and enforceable Take and/or pay Strong
credit(s) Good name(s) U.S. $ payments Debt service OnshoreOffshore
Transaction Rating AAA AA A BBB BB B CCC CC C Foreign Currency
Local Currency Piercing the Sovereign Ceiling
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Appendices
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Case Study: Gazprom
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19 Flow of Funds (1) Case Study: Gazprom Transaction Overview
Gas Sales Contracts USD Payments under Gas Sales Contracts going
into Collections Account Provided there is no Holding Event and the
minimum Debt Service Reserve balance is met, cash is distributed to
Gazprom from the Collections Account Gazprom makes debt service
payment under the Loan Agreement Gazprom International S.A. uses
payments under the Loan to make principal and interest payments on
Notes 1 2 4 5 3 Noteholders (Trustee) Designated Buyers Gazprom
International S.A. Luxembourg Fiduciary (Collection Account,
Reserve Account) Gazprom/ Gazexport Debt Service Under the Loan
Distribution of proceeds from Gas Supply Debt Service on the Notes
Payment for Gas Supply Distribution of proceeds under the event of
default Payment in USD Natural Gas Flow 5 4 2 3 1 Gas Supply
Offshore Russia ____________________ (1)For a detailed description
see Appendix A
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20 Breakdown by Investor TypeBreakdown by Investor Location
Allocation Concentration Analysis Allocation Case Study: Gazprom
High Quality and Broad Distribution (Europe and Asia)
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21 Breakdown by Investor TypeBreakdown by Investor Location
High Quality and Broad Distribution (U.S.) Allocation Concentration
Analysis Allocation Case Study: Gazprom
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22 On the US$1.25bn size Gazprom saves circa US$15m in interest
cost per annum Gazproms spreads have tightened significantly since
the SEN was issued Access to the investment grade market has
materially improved Gazproms borrowing costs Reduced Borrowing
Costs Gazprom Bond Yields (2) ____________________ (1) Source:
Bloomberg (2)Gazprom 2003 9 5/8% Matures 1 March 2013, Gazprom SEN,
Russian Sovereign Debt 1996 3.0% Matures 14 May 2011 Case Study:
Gazprom Russian SovereignGazprom SENGazprom Unsecured YTM Trading
Levels vs. Benchmark (1) Trading Levels Over Swaps (1)
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Case Study: EGPC
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23 Case Study: EGPC Transaction Summary
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24 Case Study: EGPC Pre-Paid Forward: Contractual Agreements
Contractual Agreements EGPC sells forward to PEL under the Forward
Sale Agreement (FSA) and commits to deliver fixed volumes of crude
and naphtha PEL and Off-taker enter into an Offtake Agreement (OTA)
where Off-taker commits to buy at market price the volumes of crude
and naphtha delivered by EGPC to PEL Off-taker is highly rated
entity (Aa3/A+) PEL enters into a Hedge Agreement (HA) with
Off-taker providing a floor price for the crude and naphtha Hedge
payments are guaranteed by Off-taker (Aa3/A+) Indenture governing
the issuance of Notes EGPC Noteholders PEL Off-take Hedge Egypt
Offshore Forward Sale Agreement Offtake Agreement Hedge Agreement
Indenture 1 2 3 4
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25 Case Study: EGPC Pre-Paid Forward Sale: Flow of Funds Flow
of Funds PEL issues notes to investors and uses proceeds to pay
EGPC for the FSA EGPC delivers fixed volumes of crude and naphtha
to PEL on a monthly basis Off-taker purchases crude and naphtha
from PEL at market prices MSCG makes hedge payments if crude or
naphtha market prices fall below the floor prices PEL uses payments
received from OTA and HA to pay debt service on a quarterly basis
Cash flow from OTA and HA provide a min 1.11x DSCR After payment of
all obligations, PEL pays excess cash, if any, to EGPC EGPC
Noteholders PELOff-take Crude & Naphtha Hedge Payment Market
Price Debt Service 1 2 3 5 Fixed Volume Up-front Payment 6 Price
Balance 1 Proceeds from Notes 4 Cash $ Physical bbl/mt
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26 Case Study: EGPC FSA: Core Commercial Agreement
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27 Case Study: EGPC Hedge Agreement Protects Against Price
Exposure
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28 Case Study: EGPC Robust Debt Service Profile Principal &
Interest Payments No basis risk between Offtake and Hedge Based on
the same index monthly average EGPC is obligated to deliver
commodity products at a minimum DSCR of 1.11x eliminating any
possible basis risk US$ mm 1.8x (At Current price) 1.11x
InterestPrincipal
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Merrill Lynch Commodities Credentials
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Structured Transactions Executed by Team Members YPF executed a
US$400 million Forward Sale of Oil with a 7-year maturity and a
4.4-year average life. The Notes were issued by a SPE, offshore
Argentina, and were backed by a Forward Sale Agreement between the
SPE and YPF as well at a Commodity Hedge Agreement. The financing
was able to achieve an investment grade rating of BBB/Baa3 from
both S&P and Moodys, respectively, and was priced at a spread
of 143bps over U.S. Treasuries. The Notes issued by the SPE were
"wrapped" by a "AAA" monoline insurance company, enabling YPF to
realize significant savings on its cost of debt. Braspetro executed
a US$90 million Forward Sale of Oil with a 7-year maturity and a
4.4-year average life. The Notes were issued by a SPE and were
backed by a Forward Sale Agreement between the SPE and Braspetro (a
fully owned subsidiary of Petrobrs, the Brazilian state oil
company) which provided for oil deliveries from Petrobrs offshore
oil fields in Angola and Colombia to meet debt service payments to
the new Noteholders. The financing was able to achieve an
investment grade rating of BBB- and was priced at a spread of
215bps over U.S. Treasuries. Merrill Lynch structured and placed a
$1.25 billion structured-export bond for Gazprom. The issue was
backed by proceeds of long term export contracts between Gazprom
and both Gasunie and ENI. The bonds had a maturity of 15 years and
were rated BBB-/BBB from both S&P and Fitch, respectively. The
bonds were placed in the US and Europe pursuant to a Reg 144a and
RegS placement. Merrill Lynch structured and executed a US$1.5
billion Forward Sale of Oil for the Egyptian General Petroleum
Corporation. The Notes were issued by a SPE and were backed by a
Forward Sale Agreement between the SPE and EGPC as well as a
Commodity Hedge Agreement. The financing was able to achieve an
investment grade rating of AAA/Aaa from both S&P and Moodys,
respectively, for the class A-1 and A-2 notes and a rating of
BBB/Baa1 for the class A-3. Commodity Finance Experience Structured
Transactions 29
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Merrill Lynch arranged for the structuring and placement of a
C$75 million 3-year Crude Product Storage Program for the Ultramar
Corporation. The transaction was designed to reduce inefficient
working capital and achieve off-balance sheet debt treatment while
maintaining product ownership with Ultramar. Ultramar monetized its
refined products inventory by selling the product to a special
purpose vehicle and retained the right to repurchase the product at
maturity. A back-to-back swap hedge converted the fixed price sale
into floating. Merrill Lynch structured and sole managed a US$100
million 5-year Oil-Linked loan for Rafineria Gdanska, a Polish
refiner and Brent consumer. The fund provided financing for the
expansion and upgrading of a "hydroskimming" refinery at Gdansk.
The loan was offered in conjunction with an asset swap package
converting the companys variable oil-linked interest payments into
U.S. dollars. Interest payments were indexed to Brent and increased
linearly with any dollar decrease in oil prices below $15/bbl.
Triton Oil executed a US$125 million Forward Sale of Oil with a
5-year maturity and a 3.8-year average life. The Notes were issued
by a special purpose entity (SPE) located offshore Colombia and
were backed by as Forward Sale Agreement between the SPE and Triton
Colombia (a fully owned subsidiary of Triton Energy based in the
U.S.) as well as a Commodity Hedge Agreement. The financing was
able to achieve an investment grade rating of BBB from Duff and
Phelps and was priced at a spread of 220bps over U.S. Treasuries.
Structured Transactions Executed by Team Members Merrill Lynch sole
managed a US$50 million Oil-Linked Loan for Slovnaft, a Slovakian
refinery. The oil-linked facility has raised a total of US$175
million for the Company since 1994 with maturities ranging from 1.5
to 7 years. The financing enabled the Company to receive a subsidy
on its interest cost by allowing investors to participate in a
portion of the companys improved profitability, which results from
low Brent oil prices. Commodity Finance Experience Structured
Transactions 30
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Merrill Lynch sole managed a US$250 million Aluminum Indexed
Loan to fund Dubals expansion of an aluminum smelter. Debt service
payments under the five-year facility were indexed to the price of
aluminum, thereby providing guaranteed economics on the project.
The company was able to realize an issuing spread of LIBOR plus
0.50% through the aluminum price hedge. The loan was neither
guaranteed by the government nor was the company rated. The
financing was awarded Deal of the Year by International Financing
Review. Merrill Lynch placed and structured a non-recourse
securitization of existing Coal Contract Receivables to facilitate
the tax-efficient sale of the operating coal company. The
US$193million issue was placed in the 144A market in two tranches
of 16- and 21-year maturities with a Baa2/BBB rating and were
issued at a spread of 160 and 210 basis points over U.S.
Treasuries. The Notes, issued via a special purpose entity, were
secured by proceeds of the coal contract and acquirers (RTZ)
undertaking to deliver coal in accordance with the contract terms.
Merrill Lynch sole managed a 500,000 troy ounce Gold Denominated
Bond (US$200million) with a 10- year maturity and 5-year call and
put structure with a Baa3/BBB rating. The bonds were offered in
conjunction with an asset swap package which converted fixed gold
ounces into a fixed US$ price. Due to low gold interest rates when
compared to U.S. dollar rates, Poseidon realized significant cost
savings on its debt. Structured Transactions Executed by Team
Members Merrill Lynch structured and lead managed an offering of
US$200 million Rule 144A Eurobond Secured Export Notes with a
10-year final and a 6.3-year average life. The Notes were issued by
a special purpose entity located offshore Brazil and were backed by
the Companys exports of certain soybean based commodities via an
Export Contract and a Resale Contract. The remittance of payments
to an offshore trust enabled the transaction to achieve a BBB- from
S&P and execution as a public style 144A. Commodity Finance
Experience Structured Transactions 31
Slide 43
Merrill Lynch Commodities Capabilities
Slide 44
32 Global Presence Houston Energy Trading - Gas, Power, Oil,
Coal, Weather New York Calgary Toronto Mexico Sao Paulo The
Americas London Energy Trading - Gas, Power, Oil, Coal, Emissions,
Weather Madrid Paris Johannesburg Europe & Africa Singapore Oil
& Products Trading Tokyo Mumbai Sydney Hong Kong Asia Pacific
Energy Trading Platform IBK, Energy & Power Team IBK, Metals
& Mining Team Merrill Lynch Commodities Capabilities
Slide 45
European Trading and Risk Management (MLCE) Merrill Lynch
acquired Entergy- Koch Trading (now Merrill Lynch Global
Commodities MLCE) from Entergy and Koch Industries on 1 November
2004 to become one of the leading energy firms in the world.
Portfolio of products and services include risk management, trading
of gas, power, oil, refined products, emissions and weather.
Merrill Lynch offer a comprehensive range of customisable wholesale
market solutions which includes: Risk Management: we help clients
mitigate risk associated with fluctuating prices Structured
Products: we help clients capture value by creating opportunities
to identify and offset risk Asset optimisation: we assist firms in
managing and extracting the most value from their assets Present in
11 European Power Markets 33 Merrill Lynch Commodities
Capabilities
Slide 46
MLCs European Activities Merrill Lynch Commodities Capabilities
____________________ (1)Available during 2005 34 London Based
Operations UK Belgium Netherlands France Spain Germany Nordic
Denmark Austria Global (excluding N.America) Merrill Lynch
GasWeatherPower UK NBP Zeebrugge TTF (Netherlands/ Germany)
CoalOil/ProductsEmissions Brent Gasoil Fuel oil Oil products API 2
(ARA) API 4(RBCT) EU ETS MetalsCommodityIndices Exotics and Hybrids
(1) GSCI GSCI sub-indices MLCI Others Precious Metals (1 st stage)
Base metals (2 nd stage) Baskets Exotics Cross- commodity Cross
asset- classes
Slide 47
MLCI North America: Delivers, markets and trades natural gas,
power, weather derivatives and other energy-related commodities.
Leverages base assets, wholesale trading capabilities and industry
relationships to capture higher-margin opportunities Maintains
long-term growth through expansion of existing business and
continued new product development Trade 57.5 BCF/day (50 financial,
7.5 physical) Financial volume accounts for 5-8% of market on a
typical trading day Manage over 150 BCF of gas storage throughout
US Manage 2.5 BCF of transport across major US pipelines Trade over
182 TWh annually Significant trading presence in each NERC region
across the US Over 5,000 MW of generation capacity under management
Leading trader and developer of weather linked products
Temperature/weather linked products to manage risk associated with
power, gas, hydro and other weather driven commodities A leading
risk manager for Utilities, hedge funds producers and other owners
of energy infrastructure Products include futures, caps, floors,
and other combinations Natural Gas (Physical & Financial) Power
(Physical & Financial) Weather Risk Management Northern Cal
SoCal San Juan Station 65 Chicag o Leidy Zone 6 M3 Rockies Mid Con
Permian Basin Katy Henry Hub AECO All Major US Gas Markets US
Trading & Risk Management (MLCI) 35 Merrill Lynch Commodities
Capabilities
Slide 48
Tailored Risk and Liability Management Solutions A Broad Array
of Risk Management Products Risk Management Tools Managing
concentrated balance sheet credit exposures Forward credit spread
hedges (issuance and repurchase) Credit Risk Management Managing
long-dated FX exposures Financing transactions Transactional versus
strategic hedging Cross-border acquisition hedging Foreign Currency
Risk Management ALM analysis Pension Risk Tax solutions Strategic
Risk Management Hedging an anticipated debt issuance (e.g. bonds
private placement) Hedging existing floating rate debt (e.g. bank
loans, CP) Managing fixed/floating exposures - ongoing asset-
liability management Hedging debt repurchase Hedging hybrid
instruments Tailored financing solutions Fixed Income Risk
Management Exotic currency exposure hedging Cross-border financing
Hedging Country Risk Emerging Market Risk Management Managing
commodity price risk can be done in combination or separately from
these various risk management tools Commodity Risk Management
Merrill Lynchs Risk Management teams specialise in developing and
executing Risk Management solutions for its clients The teams aim
to identify the key risks embedded within our clients businesses
and create strategies in conjunction with management which seek to
optimally hedge risks inherent in daily operations, as well as in
more specific situations, such as raising new debt or completing an
acquisition 36 Merrill Lynch Commodities Capabilities
Slide 49
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specific price target, or offering to change such rating or price
target, as consideration or inducement for the receipt of business
or for compensation, and (b) Research Analysts from being
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except to the extent that such participation is intended to benefit
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you (and each of your employees, representatives or other agents)
may disclose to any and all persons, without limitation of any
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structure. For purposes of the preceding sentence, tax refers to
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