1

Refinancing: Where is the money going to come from?

Henrik Hagberg / Andreas Fjærvoll-Larsen

23 September 2015

2

Capital requirement – existing units

• Difficult market conditions make scheduled payments of instalments and interest challenging – in turn a need for amendments or refinancing

• Typical "Events of Default"‒ "Material adverse effect"‒ Minimum value‒ General covenant breach ‒ Financial covenant breach‒ Non-payment‒ Insolvency

• Final maturity date – balloon payment / refinancing requirement

3

Capital requirement – bond market "maturity wall"

2015, rest of year 2016 2017 2018 2019 20200.0

10.0

20.0

30.0

40.0

50.0

60.0

E&PShippingOil service

Maturity Year

NOKbn

Source:

4

Capital requirement – newbuildingsSource: Upstream 11 September 2015

5

Capital requirement – newbuildings

0

10

20

30

40

50

60

70

Contracted Warm Stacked Cold Stacked Newbuilds

# of rigs

50

100

150

200

250

300

jul.9

9

mar

.00

no

v.00

jul.0

1

mar

.02

no

v.02

jul.0

3

mar

.04

no

v.04

jul.0

5

mar

.06

no

v.06

jul.0

7

mar

.08

no

v.08

jul.0

9

mar

.10

no

v.10

jul.1

1

mar

.12

no

v.12

jul.1

3

mar

.14

no

v.14

jul.1

5

KFELS/PPL Premium 350-400ft. Jackup Estimated newbuild cost

USDm

180

134

4

1516

12

0

50

100

150

200

Newbuildcost

Stackingcost*

Reactivationcost

Incr. Capitalcost**

Assetdepr.***

Value today

Jackup newbuild cost: Expected to drop from ~USD 230m to USD 180m all-in:

Current second hand prices will likely consider stacking cost:

Age profile and contract status of jackup fleet (incl. new units):

Source:

6

Capital requirement - OSV market

Source:

7

Capital sources

Owner

Bank FinancingSponsors / Existing Shareholders

Bond Financing

Seller's Credit

IPO / Public offering

Private Equity

Sale & Leaseback

8

Bank financing – amendment and refinancing

• Bank may be pragmatic in finding solutions ‒ Knowledgeable and experienced with

cyclical industry ‒ Interested in avoiding "fire sale"‒ Relationship banks

• Flexible process ‒ No procedural rules for meetings / notice

periods etc. ‒ Advisable to initiate dialogue early‒ One-to-one negotiations

9

Bank financing – new facilities

• May be a source of (fleet) financing for established companies, but limited availability for single project finance

• Typical requirements for new financing in tough market

‒ Contract backlog and counterparty risk‒ Equity ratio‒ Enforceable securities

10

Bond financing – amendments and refinancing

• Bondholder's reactions may be difficult to predict, with several "unknowns" of the bondholders

‒ Identity ‒ Numbers ‒ Motivations ‒ Various degree of industry knowledge

• Formalistic process / less flexibility‒ Involvement of brokers ‒ Voting undertakings – 2/3 majority ‒ Bondholder meetings (or written resolutions)‒ Inside information

• "Buy-back" of Issuer's own bonds‒ No voting rights‒ Restrictions under senior financing?

11

Bond financing – new issues

• High-yield bond market has been an important source for capital for shipping / offshore projects in recent years, but more or less closed for the sectors in H2 2014 / 2015

• Advantage of "established structures" when market window re-opens

12

Sale & leaseback

Previous Owner(Seller / Charterer)

New Owner(Buyer / Owner)

MOA / Sale Agreement

Bareboat Charter

New LoanNew Lender

BBCP - Security:

Assignment of insurances

Assignment of management agreements

Assignment of earnings (contracts >12 months)

Parent Guarantee

New Loan - Security:

Unit Mortgage

Assignment of BBCP + BBCP Security

Fixed/floating charge from New Owner

Pledge of shares in New Owner

Parent

Call / Put Option

13

Sale & leaseback (cont.)

Previous Owner

(Seller / Charterer)

New Owner

(Buyer / Owner)

MOA / Sale Agreement

Bareboat Charter

BBCP - Security

Parent

Call / Put Option

• Type of transaction‒ "Classical" free up liquidity / balance sheet‒ "Lease and sale" of new unit from yard‒ "Distressed" acquisition of asset by creditors –

with subsequent leaseback to previous debtor

• Covenant structure and security package‒ Typically only operational covenants / security

directly related to the unit‒ Special requirements of "ring-fencing",

financial covenants related to balance of Charterer / Charterer Parent and "catch all security"

14

Sale & leaseback (cont.)

Previous Owner

(Seller / Charterer)

New Owner

(Buyer / Owner)

MOA / Sale Agreement

Bareboat Charter

BBCP - Security

Parent

Call / Put Option

• Purchase Option – right to "re-take" ownership / residual value

‒ Fixed purchase price‒ Clear notice requirements ‒ Flexible acquisition process‒ Registration in ship registry

• Put Option – shifting risk of residual value

• Termination and enforcement ‒ Notice of termination ‒ Claim for damages ‒ Arrest unit to retake possession‒ Flexibility in use of unit (re-letting before sale

etc.)

15

Equity

• Existing shareholders – equity injection: ‒ Participate with injection in high risk company‒ Not participate and have existing equity position

diluted

• Existing shareholders – shareholder loans: Requirement of subordination

• New shareholders / Private Equity / M&A – From refinancing to restructuring

16

Existing lenders

Senior Bank Loan

Junior Bond Loan

Equity

New Senior Loan

Equity

Funding gap?

17

18

Renegotiation – the harsh reality

Christian James-Olsen and Birgitte Karlsen

Bergen/Oslo – 22/23 September 2015

19

The harsh market reality

20

No right to renegotiate due to market fluctuations – oil companies still seem to find a way

Offshore Driller Receives 6 Termination Notices - Is Rig Contract Sanctity Crumbling?

http://www.offshoreenergytoday.com/bp-terminates-another-rig-contract/

Is Paragon Offshore Next In Petrobras' Bucket List?

Brazil fleet to shrink again as Petrobras 'cuts to bone'

Low Oil Prices Throw North Sea Oil Into A State Of Crisis

Seadrill delays rig deliveries as profit drops

21

Norwegian Drilling – September 2015

2010

2013

1986

NCS/Statoil

Brazil/Petrobras

Nigeria/Ind oilco

Mexico/Pemex

495

475

SafeHaven

Samba Exotic

African Adventure

Taco I

Burrito

385

175

Lottery One

22

Safe Haven – Statoil notice of suspension

Contractual position

− OilCo may temporarily suspend performance − Notice shall state the effective time period of

the suspension− Suspension shall have no impact on the

agreed schedule− Occupation of the rig is Rigowner's risk

− The intention of suspension clause is for the OilCo to stop activity due to "operational

like" issues

Commercial reality

− The rigs with lowest suspension rate were suspended

− Statoil (still) the dominant player in Norway− Long term relationship considerations− No other short (or medium) term alternative

engagement of the rig – stacking?− Suspension clause used to save cost and as

alternative to terminate for convenience

Contracts operate with up to 50 % reduced day rate

3 years firm - suspension no Schedule impact

Termination for convenience

23

Samba Exotic – Petrobras notice of termination

Contractual position

− No explanation of alleged breach in notice − Potential basis:

irregular compliance with contractual conditions

breach of confidentiality clause change of control at parent level

resulting from recent restructuring of the group – despite no impact on performance

− No contractual right for Petrobras to reduce the day rate

− If deemed for termination convenience – termination fee will be payable

Commercial reality

− Petrobras (still) the dominant player in Brazil

− Dispute risk/enforcement risk− No other short (or medium) term alternative

engagement of the rig – stacking?− Loan Agreement – covenants - any solution

will require waivers or amendments from the banks and the bondholders

30 % reduced day rate 15 months firm contract, 2 x 1 year option, subject to rate

Right to revise if the oil price increases

24

African Adventure – non-payment by OilCo

Contractual position

− No right to suspend services for non-payment or any contractual right to terminate

− No PCG or other form of guarantee or

security for payment

− English law contract: Repudiatory breach vs

"vesentlig mislighold"

Commercial reality

− Independent, medium size OilCo

− OilCo under restructuring – a number of stakeholders

− Dispute risk/enforcement risk

− No other short (or medium) term alternative engagement of the rig

Amended compensation format – larger degree of shared market risk, outstanding rate converted to short term (secured) loan

Right to terminate for 30 days non-payment

Early termination fee, secured on second priority over certain assets of the OilCo

25

• Customers will always look for ways to shift the market risk to its suppliers

• Proof read contract terms – do not take anything for granted

• Clear and undisputed right to payment - and clearly defined sanctions against non-payment - are among the most essential risk elements to consider in each contract

‒ right to payment at delayed start up ‒ right to payment during the charter except for situations specifically

stated in the contract‒ right to payment at suspension of work‒ right to suspend and/or terminate in the event of material OilCo default‒ right to full payment at termination for convenience and OilCo default‒ right to payment at termination for material Rig Owner default – total

cap and sole remedy

• "Bankable" contract – often different requirements for newbuild and second hand

• Counterparty and political risks remain ‒ industry standards differs between regions

The commercial reality - Conclusions

26

• Only the best will succeed – the survival of the fittest

• Expect the worst, and unexpected – also on market development

• The contract is the starting point for any risk analysis – but not sufficient

• Major difference between having right and achieve right

• Avoid also minor defaults and potential misuse of the contract

• Know your customer and your commercial position‒ long term relationship and future tenders‒ understand their position and drivers ‒ understand their need for your asset‒ your alternatives and financial exposure‒ risks in legal proceedings and enforcement

• Dispute should always be the last resort - look for win-win solutions

• Learning curve for the oil majors – act opposite of the market - use opportunity of lower rate to actively secure rig fleet for the coming years!

Tenders and future contracts – success criteria

27

28

New opportunities - changing position on sanctions

Tim Stephenson

Bergen/Oslo – 22/23 September 2015

29

1. A contrast;

2. Russia/Ukraine - recent and specific sanctions, with no change in prospect;

3. Iran - long-standing and very wide sanctions, some lifted (for now) and maybe great change soon.

Russia/Ukraine – Iran – the JCPOA – what now?

30

1. National

2. International

3. Above national

4. Geopolitical

Sanctions are ….

31

• From Spring 2014 the US, the EU and Norway imposed sanctions to address Russian agitation in Ukraine.

• There is no change in sight.

Russia/Ukraine – from 2014

32

• Travel bans and asset freezes;• Import restrictions (e.g. into EU/Norway);• Investment bans;• Restrictions on export of technology (including dual-use, deep-water

exploration, arctic and shale oil) and related technical assistance;• Financing, securities, related services – Sectoral Sanctions

Identifications (SSI) List;• OFAC Specially Designated Nationals/EU Designated Persons;• Entities indirectly owned/controlled by listed person/entities;• Consequences of breach: fines and/or prison;• Even if not …..

Targeted sanctions, e.g.

33

• Norwegian/EU citizens;• entities established or incorporated in

accordance with Norwegian law/in the EU;

• entities with business operated wholly/partly from Norway/the EU;

• vessels and aircraft within Norway/the EU;

• persons/entities within Norway/the EU

Application – Norway and EU

34

• Persons in the US;• US citizens/US Green Card holders

globally;• Involving the US financial system

(payments in US$);• Partnerships, associations, trusts, joint

ventures, corporations, groups, subgroups or other organisations;

• U.S. incorporated entities and their foreign branches or subsidiaries owned or controlled by U.S. entities;

• "US persons" – NB as to Iran/JCPOA, see below

Application - US

35

• Due diligence – wide variety of actions/databases;• Contractual terms

Protective measures

36

• Loans/other financing agreements;• Cefor Sanction Limitation and Exclusion Clause (September

2014);• Charterparties, e.g. BIMCO designated entities clause;• Both/all agree that none is sanctioned …

For example …

37

• Even the very best terms are just that;

• Merely part of due diligence;

• They are not a "hold harmless" from the EU/OFAC

But remember ….

38

• Oil, gas and minerals reserves – top end, in proven reserves

• Population – young, and with ready cash?

Iran - background

39

• Very wide sanctions;• Some suspension after 24.11.13 JPOA, and continuing,

currently to 14.1.16; • But great care is needed, e.g. • - no general lifting;• - US persons;• - OFAC SDNs/EU DPs;• But are we now near significant change?

Iran : 1979 - 2013

40

• Decided?

• Timetable : 14.7.15, then 20.7.15 (UNSC Resolution 2231) + 90 days = "Adoption Day", likely 18 October, then parties are legally bound;

• What could go wrong? Iran's Majlis (early October?) : US Congress/Veto/Senate : the IAEA;

• But if all well - "Implementation Day", possibly Spring 2016, and most nuclear-related sanctions go - but others remain

2015 – the JCPOA

41

• Are precautionary terms still needed? • - Yes, they are.• Do they need amending?• - Probably no, not as such; but …• A possible "snap-back" must be addressed

In that case …..

42

• The immediate return of sanctions if Iran breaks the JCPOA;• How "immediate"? • JCPOA resolution mechanism – minimum 35 days?

"Snap-back"

43

• Loans, insurance policies, charterparties, build contracts, others;

• No retrospective effect, so no breach/punishment; but

• What if renewed sanctions impede/prevent future performance?

• Are subcontracts still to be placed? • What is the position during the JCPOA

resolution mechanism?

What then?

44

• Much will depend on:• (a) the nature and scope of the contract; and perhaps• (b) the presently unknown EU/US action wording under the

JCPOA

Clausing

45

"Neither party shall be under any liability for any failure to perform any part of this contract if that failure is due to reinstatement of any sanction, prohibition, designation or other restriction following any process under the Joint Comprehensive Plan Of Action dated 14 July 2015."

And maybe suspension, during the JCPOA resolution mechanism?

One possibility

46

• "US persons" – still prohibited (NB Schlumberger), due to enduring terrorism and human rights sanctions, and very explicit JCPOA Annex II footnote;

• Not all OFAC SDNs and EU DPs will lose that status;

• EU/US ownership/control rules; so• Due diligence, always

Beware, also

47

• Sanctions present a difficult and dangerous area;• Sanction lifting usually offers opportunities; but• It can carry risks: matters unknown, misunderstood, or

simply not understood – perhaps by anyone;• Do seek advice, early.

Summary

48

49

Petrobras scandal- where will it end?

Oddbjørn Slinning

Bergen/Oslo 22/23 September 2015

50

Topics and introduction

1. Operação Lava Jato

2. Who is involved?

3. Consequences for Petrobras

4. Consequences for other involved parties

5. Where will it end?

51

• Originally an operation targeting money laundering through car wash stations

• Investigation discovered corruption with links to top Petrobras management and deep into the political elite

‒ "If I speak the republic is going to fall." – Alberto Youssef

• On-going since March 2014; Petrobras now the centre of the investigation

• Modus operandi: ‒ Typical use of agents/intermediaries for securing

contracts – Unusually high commission ‒ Agents paid through offshore accounts‒ Little accountability for the services actually

provided by agents

Operação Lava Jato / Operation Car Wash

52

Operação Lava Jato / Operation Car Wash (cont.)

• Almost 500 individuals and more than 230 companies under investigation

• 75 people arrested, latest former president Lula's chief of staff José Dirceu on 3 August

• Almost 50 high ranked politicians under investigation.

• 12 plea bargain agreements entered into

• Estimated USD 3 billion paid in bribes since 2004

53

Who is involved?

• Judge Sérgio Moro

• Team of 9 prosecutors led by 35 year old Deltan Dallagnol

• Petrobras and former Petrobras management

• Political elite

• Several Brazilian and international contractors

54

Consequences for Petrobras

• Estimated USD 16 billion losses for Petrobras

• New top management

• New compliance regime

• Less expensive contracts?

• Termination or renegotiation of existing contracts?

55

Consequences for other involved parties

• Blacklisting; currently 23 companies blacklisted with Petrobras

• Termination of contracts

‒ Schahin Engenharia ‒ Vantage Drilling

• Potentially huge fines

• Potentially banned from future public and private tenders

• Costly internal investigations

56

Where will it end?

• Will the investigation result in convictions?

• Less corruption in Brazil and Petrobras?

• Increased need for proper due diligence and compliance checks

‒ M&A‒ Joint ventures or partnerships

• Opportunity for Norwegian contractors?

‒ Norway perceived to have a cleaner business environment and fairer competition

‒ Compliance and ethics as a new market advantage

57

Contact details

Legal disclaimer: This presentation comprises a general description of certain rules of Norwegian law. It does not constitute legal advice, and should not form the basis for any commercial decisions.

OSLOTel +47 22 82 75 00 Fax +47 22 82 75 01 oslo@wr.no

BERGENTel +47 55 21 52 00Fax +47 55 21 52 01 bergen@wr.no

LONDONTel +44 20 7367 0300Fax +44 20 7367 0301london@wr.no

SINGAPORETel +65 6438 4498Fax +65 6438 4496singapore@wr.no

www.wr.no

KOBE Tel +81 78 272 1777Fax +81 78 272 1788kobe@wr.no

SHANGHAI Tel +86 21 6339 0101Fax +86 21 6339 0606shanghai@wr.no

58