Summary: the assignment of export receivables made it possible for
QGPC to obtain, for the issue, a rating one notch higher than its own rating (BBB+ rather than BBB). This rating is constrained because of exposure to oil price volatility and the risk of competition by new NGL facilities, a lack of long-term forward contracts, an optimistic schedule for the construction of a plant which will generate much of the expected revenue (if ready in time), and some legal risks (including with respect to untested Qatari law on insolvency and bankruptcy -
QGPC falls under local law and with respect to New York State Law, if in the case of a general default, Qatar has to enter into a Paris Club restructuring and the transaction is not seen as a sale and purchase, but as a loan).
Qatar state oil company QGPC raised 1.2 billion US$, including 800 million US$ from institutional investors to fund new Natural Gas Liquids processing facilities and to cover some of its working capital needs.
The 800 million US$ capital markets issue was structured through a Special
Purpose Vehicle set up in the Cayman Islands. QGPC sold all of its current and future receivables from all of its NGL processing facilities: two facilities which already exist, and one which is to be constructed with the funds raised. In case this does not generate sufficient funds, QGPC has the obligation to immediately make up for any shortfalls.
US$ syndicated bank loan
Assignment of export receivables
800 million US$
Issuance of 10-year
Upgrade of recycling & gas plants
New 100 km pipeline
New fractionation plant
QGPC 1999 operating revenues: crude oil 58%
Refined products 7%
Hydrocarbons account for 60-70% of Qatar budget revenues, and 75-
80% of exports.
NGL helps to valorize crude oil and
LNG production, and provides inputs to industry (including the local power and water desalination plants).
Associated & NGL recovery NGL fractionation ethane, propane domestic use
Non-associated gas plant plant butane, condensate export
The receivables from the existing NGL plants were not sufficient to support a rating at the BBB+ level. Thus, the rating depends partly on the
performance risks of QGPC, that is, the risk that the planned new NGL plant will not be operational in time. This risk was mitigated by due diligence and through the manner in which the pre-construction and construction phase were handled (including constructor warranties and penalties).
Apart from that, it was necessary to evaluate the risk that even if the new plant would become operational in time, earnings would fall short of expectations. For this, the risk of “distress cargoes” (not being able to sell products) was evaluated and a “distress price scenario” (oil prices at US$
10 for a multi-year period) calculated.
Then, as the transaction was mainly structured around the receivables (rather than on the basis of a title on producing assets) it was necessary first:
• to evaluate what risk there was of a fund diversion or of the investors losing their first title, and to ensure that such risks were kept to the minimum; and second
• to ensure that even when prices are low for a prolonged period, there are enough funds to ensure debt service.
• Proven technology already used in other plants in Qatar.
Engineering & design done by experienced contractor.
Siting plans, permits etc.
• Independent consultant thinks this will not be a problem.
Right of way of new pipeline: no problem, as it will follow route of existing pipeline.
• Date-certain, lump-sum, turnkey engineering, procurement, and construction
(EPC) contract with experienced international consortium.
Phillips Petroleum will manage the construction process on behalf of QGPC.
QGPC will be the operator, and has good and consistent 20-year history in operating NGL facilities.
The EPC contract as well as the contract with the project manager (Phillips
Petroleum) contain penalty clauses. Insurance requirements are also set.
30% of the payments are milestone payments
• Liquidated damages of one-ninth of 1% of the lump sum price for every calendar day the the project runs over the scheduled handover date, with a maximum of 10%.
Liquidated damages of 350,000 to 500,000 Qatar riyal (a person, depending on seniority) for removal of key personnel without QGPC’s approval.
• Third-party liability, worker’s compensation and all-risk hull and machinery insurance.
Construction management contract
• Delay damages up to 10 million US$.
QGPC carries a project management insurance programme (construction allrisk).
Will gas supply be sufficient?
Qatar has the world’s third largest natural gas reserves. An independent reserves consultant has concluded that these are more than sufficient.
NGL products can always be sold easily (there are liquid spot markets), but with a price risk. To deal with this risk, a financial forecast has been made by an independent market consultant. Noteholders will be protected even if prices are low for a long time, while QGPC has an incentive to continue producing because variable costs are only some 10% of 1999 prices.
Under a “Receivables Purchase Agreement” (RPA), QGPC sold to QGPC
Finance (Caymans) Ltd. All its existing and future receivables arising from
GGPC’s sale of ethane, propane, butane and NGL condensate produced at the
Mesaieed NGL complex.
If insufficient receivables are generated, noteholders have full recourse to
The receivables are sold as follows:
• long-term Feedstock Agreement with Q-Chem (Qatar, to become operational mid-2002) for ethane sales
• long-term Butane and Gas Feedstock Sales and Purchase
Agreement with QAFAC (Qatar), for butane sales
Free market sales on a short- to medium-term contract basis.
25% of total expected revenue until
• long-term Feedstock Agreement with Q-Chem (51% GGPC, 49% Phillips
Petroleum Co, USA, A-).
A 25-year arrangement starting in 2002, with pre-set prices which escalate at a fixed rate.
In addition, Q-Chem will pay a bonus for each year that the annual FOB price for polyethylene sold by Q-Chem exceeds a certain price per tonne. QGPC must deliver enough ethane gas to enable Q-Chem to produce 500,000 tonnes per year of ethylene.
• long-term Butane and Gas Feedstock Sales and Purchase Agreement with
QAFAC (50% QGPC, 50% other investors).
A 1997-2024 arrangement for 495,333 tonnes of butane a year. Sales price is the monthly price per tonne FOB declared by Saudi Arabia for like butane, as quoted by Platt’s LP
GasWire. Payment of butane prices in excess of US$ 120 a tonne could have been deferred if, before early 2000, QAFAC would have had revenue problems.
• Free market sales
QGPC has a good market reputation, and is considered a reliable supplier.
Product sales agreement, payment instructions
Receivables purchase agreement
US$ minus debt service reserves
Payments on behalf of QGPC
5% charitable trust,
Product sales agreement, payment instructions
To perfect the SPV’s ownership interest and lien in the receivables under New
York and Qatari law:
1. QNPC has to obtain from all customers under sales contracts of over one year consents to the sale of the receivables and the lien thereon, and their consent to pay to the offshore collection account.
2. For short-term and spot sales, QGPC can simply send notices.
BUT: even with this, the full recourse to
QGPC may mean that under New York
State Law, there was no “true sale” of receivables. In case of insolvency, priority rights may therefore be difficult to enforce.
Payments on behalf of QGPC
533 million US$ is reserved to make the payments for the construction of the NGL plant
Priority for payments from collection account:
1. Pay SPV taxes and structure expenses
2. Fund debt service payments
3. Make debt service reserves meet targets
4. Any remaining funds can be distributed to QGPC
Six months of interest funded up-front
Reserves to increase to 6 months of principal
In case of revenue shortfalls, automatic increase
This transaction has hybrid features, partly resembling traditional receivables financing, partly project financing.
It is different from project financing in that there is no “step-in” right to operate the NGL facilities that are to generate the receivables in case of a default; instead, there is only a general recourse to QGPC (a recourse that may be difficult to enforce under Qatari law). Also, only part of the funds generated are used to construct a new facility.
It is different from a pure receivables financing in that measures are taken to ensure that the new plant is indeed constructed in time - the financing is partly based on expected receivables from a new facility, rather than on an existing revenue stream.
The structurers of the transaction evidently had difficulty eliminating legal risk. This may well have been due to the fact that QGPC did not want to give “step-in” rights, while for the investors, in the absence of such step-in rights they needed some other form of recourse. The resulting full recourse to QGPC meant that legally, the transaction may well be classified as a loan rather than as a receivables purchase.