Nadine Amr and Nicole Hamill, Vinson & Elkins

Vinson & Elkins (V&E) advised the initial purchasers and super senior facility lenders in connection with Tullow Oil’s $2.38bn refinancing.

The Issuer was under scrutiny from its creditors for some time before this transaction. At the end of 2020, it had a market capitalisation of around $850m and net debt of around $2.4bn and was facing a potential cash crunch from reduced oil demand, a looming debt wall and public reports of declining oil reserves.

As V&E senior associate Nadine Amr explains: “This deal was incredibly important to the client due to it being under considerable scrutiny from its creditors. Compared to previous deals I have worked on, including prior financings involving Tullow, it was incredibly complicated, and the turnaround time had to be fast. It’s immensely satisfying to have successfully completed this transaction knowing what a difference it has made to the company, and I learnt more about finance and how to put a novel solution together.”

Against a challenging backdrop, V&E, JP Morgan, the Issuer and their counsel Latham & Watkins sought a solution. As part of the process existing creditors, with that heightened sense of concern and sensitivity, had to be convinced to continue to support the Issuer.

Added to that, V&E was working with a novel product. This was not a like-for-like replacement of the existing reserve-based facility / unsecured bond arrangements, which are common in the oil and gas industry. Instead, JP Morgan and the Issuer were looking for a much larger secured bond alongside a super senior secured revolving credit facility, which is unusual for the oil and gas industry, based and sized solely on 2P NPV reserves.

Amr’s colleague, senior associate Nicole Hamill says there was significant negotiation involved in the 2P-NPV Reserves Coverage Ratio calculation. “It was important for the banks that the guarantor coverage and collateral package was expanded given the increased flexibility for the Issuer. Our team proactively engaged in an education process with the RBL lenders to familiarise them with the more permissive mechanics of an SS RCF/bond structure, allowing us to foster continued support for the company and encourage participation in the face of a looming debt prepayment wall.”

The firm was central to this transaction not simply as a result of its existing relationship with the Issuer (having assisted the underwriters with the Issuer’s 2018 bond issuance), but because of its strength in and understanding of the energy arena, its ability to work with unusual financing products and to think outside the box and its relationship, both as a firm and as an office, with JP Morgan.

The V&E team was led by partners Noel Hughes, Lucy Jenkins and Jeff Eldredge with assistance from Amr and Hamill. Amr, part of the energy transactions and projects team, joined V&E in September 2012 as a trainee, qualifying into the energy transactions and projects practice. Hamill qualified at Ashurst in September 2014, joining V&E’s finance practice in May 2018.

“What stands out for me about this deal isn’t just the scale and how unique the solution was for the client, but how we managed the entire process to turn the deal around quickly. We successfully overcame the challenges posed by the pandemic, multiple time zones and a large diverse group of stakeholders and advisors. Plus, there was a relatively new leadership team at Tullow that we were working with and a new strategy to grasp,” says Amr.

“The requirement to create a unique ‘blended approach’ between a traditional super-senior revolver and the more prescriptive positions found in a traditional RBL – this was a tricky tightrope to walk, particularly in the accelerated timeframe. It was critical that we got the balance right to ensure that all the stakeholders remained motivated and on board,” Hamill adds.

V&E has a long history of acting as an adviser to JP Morgan, a relationship that has already endured for more than 40 years. Historically, the focus of its engagements with them has been oil and gas energy finance, but over time the relationship broadened, and V&E now work alongside them on a wide variety of financing products, from asset-backed loans, leveraged finance deals in the capital markets and bank lending space, renewables transactions and even private banking matters. JP Morgan is consistently within the firm’s top 20 global clients by revenue.

Given the need to refinance promptly, the buoyancy of the bond market and the uptick in oil prices at the time – factors which all parties were eager to capitalise on – JP Morgan and the Issuer targeted an exceptionally aggressive timeline to issuance.

The first stage was to work with the credit teams at JP Morgan to guide them through the novel capital structure, to understand their exact risk considerations and to negotiate documentation on the loan side and on the bond side which reflected a position which JP Morgan was comfortable with, and which the Issuer could also work within. There are significant benefits to the Issuer of the novel capital structure – a far reduced need for technical borrowing base analysis, no requirement for specific cash collateral accounts, reduced limitations on the movement of assets and liabilities around the group, more permissive incurrence-style covenants – but those benefits were also, obviously, a significant consideration for JP Morgan, for whom the underlying credit was still the same.

The second stage was to take that structure to the existing creditors of the Issuer. It rapidly became clear to V&E that a significant education process was required. Those creditors were familiar with the Issuer, familiar with the oil and gas industry, familiar with bonds and familiar with reserve-based lending. But they were not familiar with this new hybrid product that was presented to them. The firm had to guide the principally reserve-based lending teams through the novel structure, explaining their protections, provide them with further colour on specific topics such as incurrence covenants, guarantor coverage, ancillary facilities and leverage-style intercreditor arrangements, explain why there was no need for stringent bank account controls and get them comfortable without the multiple projection processes, maintenance covenants and the level of oversight that they had in the existing facilities. And it had to do that with multiple lenders, against the clock.

“When it comes to financing oil and gas companies and their assets, there tend to be a limited number of standard approaches and products regularly used in the market. We had to create a novel solution for the unique position that Tullow found itself in, which meant we had to clearly communicate the financing structure to all stakeholders to ensure buy-in from all parties. This was a great learning point for me, and I now feel well-placed to educate and create trust as we roll out unique solutions for clients,” says Amr.

Despite the innate complexity borne out of working with a novel and innovative structure, the timeline and the number of lenders involved, V&E was able to develop and negotiate a carefully calibrated set of general covenants and bespoke SS RCF covenants, all centred around a 2P NPV calculation.

As regards the SS RCF, V&E managed to achieve a unique “blended” approach between a traditional super senior revolver and the more fulsome and scripted lender protections found in a traditional reserve-based lending facility. Despite the shift to this hybrid structure, V&E managed to expand the collateral package beyond what was granted under the existing RBL and to largely maintain the RBL covenant protection for the SS RCF lenders. This was critical in ensuring that the deal was attractive enough to the existing RBL lenders to guarantee sufficient participation and a successful launch in line with the tight timeline.

The guarantor coverage which applies to the SS RCF and the Notes is also extremely robust, requiring subsidiaries that account for 95 per cent of 2P NPV to provide guarantees. This balances flexibility for the Issuer against credit risk for the lenders, since although the future guarantors provision is limited to guarantees of public indebtedness and doesn’t cover guarantees by non-guarantor subsidiaries of bank debt or privately placed notes, it is offset by the ongoing 95 per cent present value NPV guarantor coverage test.

For both Amr and Hamill the deal was an invaluable source of experience. “I hope having worked on this deal and the attention that it’s received will encourage companies to look for bespoke solutions to financing. I am looking forward to drawing on the experience and insight this deal has given me with other clients in the energy and infrastructure space,” Amr says.

Likewise Hamills says, it “was a great experience to work for the lenders on the SS RCF process, which was a unique situation where lateral thinking matched with a collaborative approach led to a bespoke product in a short timeframe. It’s always great to work on credit transactions and particularly one like this where we truly were able to demonstrate our genuine expertise across both the product and industry. We were able to really deepen our relationship with the banks involved, which has borne fruit in terms of further bank-side instructions.”