April 9, 2018 / 2:24 AM / a year ago

Santos buyout preps jumbo debt

* Loans: APAC’s largest LBO loan primed for US sell-down

By Sharon Klyne

April 9 (TRLPC) - JP Morgan and Morgan Stanley are underwriting a US$7.75bn senior debt financing backing the leveraged buyout of Australian oil and gas producer Santos Ltd that will set a record for LBO and related debt financing in Asia Pacific.

The deal dwarfs Asia’s previous LBO record, a US$4.1bn buyout loan backing the acquisition of Singapore-based Global Logistic Properties Ltd last July, and is also the largest private equity buyout in the oil and gas sector globally.

Santos announced on April 3 it had received a US$10.4bn takeover bid from US private equity firm Harbour Energy and agreed to grant the bidder access to due diligence. If the bid is successful, the private equity sponsor will own a low-cost energy producer with stakes in several large liquefied natural gas (LNG) projects in Asia.

The financing, which will be targeted mainly at the US institutional market, will consist of leveraged loans and high-yield bonds with various tenors. Investor demand is expected to be strong, given the appeal of the assets, location and growing demand for gas.

“There’s enough appetite for an oil and gas deal of this size. It’s an industrialised nation and the company has a well-diversified asset-base,” a banking source in New York said.

A data room is expected to open this week for six weeks. Santos revealed in November that it had rebuffed a A$9.5bn (US$7.29bn) takeover approach from Harbour Energy in August, which it said undervalued the company.

The new borrowing will also refinance all of Santos’s debt. Santos, rated BBB− (S&P), had total balance sheet debt of US$3.95bn, including US$800m of medium-term notes, and US$1.23bn of cash as of December 2017.

The company also has US$960m in off-balance sheet operating lease liabilities and asset retirement costs, according to Deutsche Bank estimates. However, there will be no need to refinance any of the project debt at the asset level if Harbour Energy succeeds in the acquisition, other banking sources familiar with the deals said.

Santos has stakes in projects including the prized Papua New Guinea LNG project operated by Exxon Mobil Corp, Gladstone LNG project in Queensland, Darwin LNG, and Cooper Basin, Australia’s largest onshore oil and gas development.

The company significantly lowered production costs and de-leveraged in the aftermath of the 2008 financial crisis. Its average oil production cost is just over US$32 a barrel, compared to around US$66 a barrel for Brent crude, according to Reuters data.

The jumbo deal comes as steadily rising US interest rates are calling time on years of benign credit conditions, which could make it harder for the company to service the debt. Three-month Libor rates touched 2.325% this week, the highest since November 2008, at the height of the global financial crisis.

The total enterprise value of the transaction will swell to around US$15bn, including the costs of swaps and break fees, with the US$7.75bn debt accounting for around 51% of total capitalisation. Harbour Energy’s bid is broadly geared over 5x calculated over Santos’ earnings before interest, tax, depreciation, depletion, exploration, evaluation and impairment (Ebitdax) of US$1.43bn in 2017.

Harbour Energy needs shareholder approval as well as the green light from Australia’s Foreign Investment Review Board, which may be difficult given the strategic importance of the assets to a country with a chronic energy supply shortage, Reuters reported.

Harbour Energy’s advisers are JP Morgan, Highbury Partnership, Morgan Stanley and EIG Capital Markets, while Santos has retained Rothschild, JB North & Co and Deutsche Bank. (Reporting By Sharon Klyne; additional reporting by Andrew Berlin; editing by Tessa Walsh and Vincent Baby)

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