Executive Q&A With Steve Mills, Abbotwood: Financing Independent Oil & Gas Companies

In the first of our interviews on the financing scene for independent oil & gas companies, Ross Stewart Campbell (RSC) talks to Steve Mills (SM), Head of Oil & Gas at RBS until 2007 and since then a trainer in project finance and the CEO of Abbotwood Limited.

RSC: Steve, welcome and thanks for agreeing to talk to us. If my maths are right you had something like a 30-year career in banking before you left to establish Abbotwood.

SM: That’s right Ross. I worked first for the HSBC Group, had a spell of a few years in a corporate finance advisory “boutique”, which I helped to establish and then went to Sumitomo Bank as it was then. I then had a brief period with Commerzbank before moving to RBS where I became, as you know, Head of Oil & Gas Project Finance in London. The RBS job was definitely the most interesting and challenging role I have ever had.

RSC: So why leave the world of investment banking to pursue a career in business training?

SM: A work-life balance issue I suppose. I had always enjoyed training and mentoring and I wanted to see if I could make a second career out of it. I wanted to spend more time with my family too before the kids left home.

RSC: Where is your work coming from Steve and how significantly did the financial crises and market downturn affect your business?

SM: I suspect I’ll answer the first part of your question as we go along but let me address the second part first because I think it is probably of more interest to your readers. There has definitely been an impact because the raising of debt finance has become harder. As I’m sure many of your readers know the crisis caused a dramatic shrinkage in bank debt capacity. Some banks who were formerly big market players have been taken over by others so the number of sophisticated lenders has gone down. And there has been a degree of retrenchment on the part of some institutions to markets closer to home. Companies of course still need to raise finance but the banks are no longer beating on the doors of borrowers. We’ve witnessed bank credit processes slow down a bit and credit committees are more difficult to predict. For a couple of years now we’ve been out of the liquid debt market that borrowers enjoyed before the crunch and it’s now much more about getting the deal financed than about shaving the last few basis points off the margin. Borrowers want to know how to approach banks, how lenders do their risk assessment and what they can do to maximise their chances of raising the finance they need.

RSC: Does that mean that borrowers – both oil and gas companies and oilfield service companies – dominate your universe of trainees at the moment?

SM: Definitely not. We training and advising a lot of bankers too. I think there is a definitely a concern on the part of some lenders that there’s a need for a return to basics in terms of careful application of best practice in both loan origination and portfolio management. We’re getting quite a few front-office associates and managers coming in for the basic “toolkit” of risk evaluation, debt structuring and documentation skills. There’s a fair bit of focus too on making sure that the portfolio managers have the right level of training to be able to administer and actively manage limited- recourse oil and gas loan financing books. There’s also been a fair amount of interest among banks in the project documentation area – as opposed to finance documentation that is. While banks are reasonably good at arranging training for their staff on loan dox, I don’t think they are always so good on EPC contracts, sale and off-take agreements, insurance documentation and so on. We’ve developed some new products in that area. With some banks being less keen on emerging market risk we’ve also seen a resurgence of the export credit agencies. We’ve had a lot of ECA staff on our courses over the last year or so.

RSC: Just how tough do you think the market is for borrowers at the moment?

SM: Well you have to remember that I see the market at one remove, now that I’m no longer a lender day-to- day. So my feel for what is going on comes from conversations with our trainees and with lenders who are still active.
The sense that I get is that the market is definitely there for the well managed independent, but some things have changed. Spreads and fees have increased, perhaps not as sharply as in some other project financing areas, but they’re definitely up. Deals are being run more by the book too – in the sense that term-sheets are tightening up. Features that were relinquished by banks having to compete very hard pre-crunch are back in banks’ first-shot term sheets and actually I don’t get the sense that banks are particularly minded or required to negotiate them; for example 12 month debt service reserve accounts. You wouldn’t be surprised to see banks looking for pre-payment penalties either in a market where they will expect borrowers to refinance when margins and fees start to fall. For the moment though the impression that I get is that they are more talked about than used. I’d welcome other people’s comments on this. Some of the more leading-edge products we saw before the credit crunch have now disappeared, such as loans against undeveloped assets. I think banks are concentrating on good solid borrowing bases for more established players and where they do single field financings they want the deal to be fairly classic in structure

RSC: Classic in what sense Steve?

SM: Good quality sponsor, not too high a concentration in terms of field ownership, credible field partners, debt based on P90 reserves, loan value driven by Loan Life NPV of cash flow over 1.5, that sort of structure.

RSC: And on that basis you believe deals can get done?

SM: Absolutely. It means of course that there is more of an equity requirement than perhaps there was before the crisis. Probably the biggest issue still though is syndication. Smaller deals – say up to €150 million – can be done on the basis of a club of banks. It’s the bigger deals that pose the problems. Arranging banks are still extremely reluctant to underwrite transactions for fear of ending up with large unsyndicated exposures on their own balance sheets. Any underwrite will probably come with market flexibility clauses which allow the underwriters to adjust the pricing and indeed the structure of the deal if this is necessary for them to be able to sell down to their agreed net-take. There is a definite trend towards club transactions with joint underwrites.

RSC: Steve thanks for sharing your thoughts with us and we wish you continued success with Abbotwood. As this Finance Forum develops we plan to have input from other bankers, financial officers and advisors and look forward to this feature of The Oil Council becoming a very active forum for trading views and experiences.

SM: Well I would welcome that – particularly if we can have the experiences and views of a broad spectrum of lenders, borrowers and equity providers who are actively arranging transactions in the market right now.

Abbotwood Limited provides project finance training in the oil and gas, power, mining, infrastructure and PPP/PFI sectors. Its clients include world-scale banks and project sponsor companies, market-leading law firms active in limited-recourse finance and multilateral and development agencies. Steve Mills can be contacted at: Abbotwood Limited T: +44 118 9472166 / M: + 44 7515 660943