Michael Crosland has an unrivalled record in the project finance energy advisory arena, with a string of notable deals. Since joining RBS in 1997 he has advised on 14 financings that have raised US$45bn. By Rod Morrison.
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The respect the RBS energy advisory team has built up in the market over the years is easy to gauge. For sponsors, the team is a go-to advisory house and appointing it gives a project the seal of approval even before work on the project financing has started. However, Michael Crosland is not, of course, universally popular. He himself points out that a few years ago, some lawyers suggested that his team was commoditising project finance. The house style is to do a lot, if not all, the credit work as part of the financial advisory mandate and then send out a completed package to potential funders – who then have to decide whether to join the deal and at what price.
“It is one thing which has changed over the years,” says Crosland. “In the old days a group of say six banks would be appointed on a deal as lead arrangers and would do a lot of the structuring work. These days – with bank groups as big as 22 on some deals and with banks having smaller project finance teams – this is not possible.”
To take on this structuring work does involve a huge amount of effort. “A lot of the work of a financial adviser is drudgery,” he says, “simply hard work.” The work ties up a lot of resource and time. The team is well-known for working 24/7. “Sunday is a working day for us, as that is when some of our clients work,” he says.
But while successful financial advisory, for Crosland, involves on the one hand taking on the structuring work – on the other it involves having a small team. While his team has taken on structuring work, at the same time it needs to be small to survive in the current banking environment. Advisory fee income is lumpy – not hourly paid as it is for the law firms – and much of it is back-ended, ie, paid when a project reaches financial close. Having a larger team could make the endeavour uneconomical and Crosland points out that other banks have struggled with this dynamic.
The RBS energy advisory has four team members – himself, long-time colleague Paul Fairburn, Olivier Allen, who has been on the team for 10 years, and one other. In addition, this small team can call on the modelling resource inside the bank’s secured debt markets team. The team’s differing skills are obviously complementary but Fairburn is well-known in the market for his detailed knowledge of all the documents on a deal – a key when the packages offered to potential funders are presented as being comprehensive.
Allen has vital modelling skills. “Much of the financial advisory work is modelling,” says Crosland. The Sadara scheme in Saudi Arabia is perhaps an extreme example. The Aramco/Dow project will have 24 operating units when built and the project financing, due to reach financial close this year, has multiple tranches. The financial model, as a result, is said to be huge.
Crosland started off as a banking lawyer at Allen & Overy. He joined Industrial Bank of Japan (IBJ) in 1992 and moved to RBS and its predecessor banks Greenwich NatWest and NatWest Markets in 1997.
A key to the team’s continued success has been its ability to manage the lumpy fee income curve. This means maintaining an active pipeline of new projects that need financing and to ensure that the projects in the pipeline are genuine deals that will get to financial close within a reasonable time. “The worse thing is to have a deal that drags on for a long time,” he says. Even worse, is to work on one that does not reach close.
Currently, the team has the Emal 2 and Sadara financings in the final stages. Coming up this year are the Cameron LNG scheme in the US and the Tahrir Petrochemical project in Egypt. On the horizon are the Qatar Petroleum/Shell petrochemical deal and Tengizchevroil. There must be some sort of art to picking the right deals to follow. Crosland says the team is very selective and has sometimes made mistakes. Having a good reputation in the market helps to select the best deals. At one time, the team was best known for a string of deals with Qatar Petroleum but clearly in the recent past the client list has been diversified.
Sourcing the right funding mix and structuring the optimum risk allocation for the client is the key to any successful deal.
The list of funding sources on a deal, any deal, has not changed over the years – export credit agencies (ECAs), commercial banks and the debt capital markets. Indeed, on one of Crosland’s early deals at IBJ he advised Japanese contractor JGC on its contractor financing involvement in RasGas LNG. By 2005, the RasGas LNG expansion project had a mix of bank and bonds while in 2009 the Dolphin refinancing had a full house – ECA, bank and bond.
Sourcing the optimum mix between the three, however, is key, particularly in the uncertain times at the moment. The RBS approach is to seek out all three early on in the financial advisory process and then decide which ones to pick later.
This involves approaching the ECAs first. The reason is that these state-backed institutions take longer to analyse and approve a deal. The ECAs are, by their nature, conservative institutions. They are, after all, spending taxpayers’ money. Crosland has worked with them all and particularly admires US Ex-Im. The one benefit of going to the ECAs early is that by the time it gets to the commercial banks, it has been through one set of lenders. However, Crosland does not make too much of that, it is simply a timing issue.
The deal is sent to the banks fully cooked and to the rating agencies. Not surprisingly, Crosland believes the financial adviser should be the rating adviser. In recent times, the process has been to appoint mandated lead arrangers (MLAs) from the banks and to allow those with the bigger tickets to bid for the fees on the joint lead manager (JLM) role on the bond. Having all three funding sources lined up allows the sponsor to pick the best option and even to have some competition between funding sources in these credit-crunched times.
The approach does raise issues. At a time when banks are constrained, ECAs are the logical way forward. But structuring a deal linked to export credits and equipment supplies creates “its own challenges”, says Crosland, particularly if the equipment supplier had yet to be selected. And the MLA/JLM approach is open to criticism if the bond issue never arrives or is dropped.
Crosland believes the time of the project bond is coming. As adviser, in the short term, he points out that on recent deals “it simply has not been needed, despite all the talk about bonds and the problems in the bank market”. On Emal 2 earlier this year, nearly US$4bn was raised in commercial bank debt with a further US$475m from the Islamic market and US$500m from the ECAs. The bond would have to come on top but the deal is only for US$4bn.
Notwithstanding, Crosland believes the capital markets will come, saying: “If they are needed, they will come in.” Crosland has had his mix of bond deals – but he still points out that the bond option can be subject to short-term market fluctuations. As for the banks? “There is less talk about tenor than there was a year ago,” he suggests, “but that said, one can’t assume they will be there forever.”
Risk allocation is another key, assessing what risks the sponsor needs to take and what risks it can give out to the debt funding markets. Judging this comes from experience and from knowing the deals and the players involved.
“On Qatargas 2, people said we could not get the lenders to take gas price risk and on Australia Pacific LNG, it was said we could not take the banks to take unconventional gas reserve risk,” says Crosland. “We were able to do that. In many cases it is simply as question of educating people about the risks.”
The art of financial advisory? “It is about managing the process and keeping on top of a host of moving pieces,” he says.