Oil and gas financing – Q&A on Nordic bonds and RBLs
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Why are Nordic bonds considered "high-yield"?
Nordic bonds are quite high risk. There are no formal credit rating requirements for Nordic bonds, but they are not considered "investment grade".
More than half (52%) of the outstanding total volume of Norwegian high yield bonds (as of June 2020) are in oil services, shipping or (around 11%) in pure oil and gas. This means investors are highly exposed to the fossil fuels industry in some way, which enhances their risk but also reward potential.
From a pure oil and gas perspective, the type of issuers involved in the Nordic bond market (many of which are early-stage exploration companies and/or have projects in riskier jurisdictions) also increases the risk profile.
That said, with respect to oil and gas issuers, there are not many examples of distressed bonds in Norwegian market, or of enforcement, so the risk element should not be exaggerated.
What is the tax treatment of Nordic bonds?
It is best to consult a tax specialist about how the tax authorities in a particular jurisdiction will treat Nordic bonds, but it will largely depend of the circumstances of the issuer and/or the investor.
One general point to bear in mind is that there are no withholding taxes levied on Nordic bonds at present (as of June 2020), however this is being contemplated by the Norwegian parliament.
What is a maintenance covenant?
The main point about a maintenance covenant is that it is a financial ratio that needs to be maintained to avoid an event of default in the banking market.
By contrast, in the traditional high-yield market, that financial ratio does not need to be maintained.
However, the consequence of not maintaining that financial ratio would be that the business would not be able to operate as freely as it would otherwise be able to do.
Could a start-up or SME company issue Nordic bonds?
They can and they have; it requires more due diligence from the managers and they will face more scrutiny, but it is possible.
What stage on the risk curve to developers have to be at to qualify to issue Nordic bonds?
Companies can issue Nordic bonds at any stage of their project development, as long as the quality of the project supports a bond issue.
In the oil and gas sector, pure exploration companies have issued bonds, while some E&P companies have issued project finance bonds with just a development asset.
Producing companies can also issue bonds, so this market caters for the full range of development phases.
Are ESG requirements becoming more stringent for Nordic bond issues?
There has been lots of discussion about bond market investors' ESG requirements, but so far there has been no visible influence on terms.
However, ESG is expected to become a more relevant consideration in the Nordic bond market in the foreseeable future.
Can banks take over if an RBL borrower faces financial difficulties?
Lenders will look to take a broad security package for a loan, and therefore give themselves the broadest set of options when there is financial distress, or enforcement.
However, in practice, where there is financial distress, lenders are much more likely to look to restructure the debt in some form, or sell assets to recover on the loan, rather than stepping in to complete a development.
The factors influencing the options available to a lender include local considerations such as requirements for government consent to change of control or transfer of licences.
This Q&A is based on a webinar hosted by Fieldfisher and Schjødt entitled "Oil and gas financing in a period of sustained low commodity prices" (please follow the link to access a recording of this discussion on Youtube or read a summary of the discussion).
For more information on financing upstream oil and gas projects, download Fieldfisher's updated guidance paper "Financing Upstream: From the conventional to the alternative", visit the oil and gas pages on the Fieldfisher or Schjødt websites, or contact Paul Stockley (Fieldfisher – oil and gas) Oliver Abel Smith/Dougall Molson (Fieldfisher – finance) or Geir Evenshaug (Schjødt – Nordic bonds).