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. Last Updated: 07/27/2016

Gazprom Pipeline Flooded with Funds

A Gazprom effort has easily secured a $2.5 billion credit for construction of a pipeline to Western Europe, with the loan oversubscribed by $5 billion, deal manager Dresdner Bank of Germany announced Thursday.

Although such a huge credit deal is not unusual in the gas industry, it marks one of the largest commercial loans ever for a Russian enterprise. In accepting the purely commercial line of credit, Gazprom is guaranteeing it without support from export or multilateral agencies.

"The loan is secured by Gazprom, not by the success or profitability of the project," said MC Securities analyst Stephen O'Sullivan. "Investors will be paid back even if the project never makes money, and the success of the oversubscription shows Western banks view Gazprom as a very good credit risk."

Asked why Gazprom would rather raise money through a loan rather than issuing stock, another analyst was blunt.

"It's all about control and not giving more of the company away," said James Fenkner, head of research with CentreInvest.

Gazprom has been reluctant to allow outsiders any control of the company and severely limits trade in its stock, requiring board approval before stock can be sold.

The money will go toward construction of the 4,200-kilometer Yamal pipeline, which will serve as a second, crucial link between the Yamal Peninsula gas fields in Western Siberia and Western Europe.

Dresdner Bank AG was the lead underwriter, but the action had attracted a flood of other banks who have now offered a total of $7.5 billion in credits -- three times the amount sought by Gazprom.

Dresdner officials said the $400 million minimum commitment demanded of participating banks will likely be cut drastically as a result of the oversubscription, said Bernd Fahrholz, senior general manager at Dresdner Bank.

The deal is expected to be closed by the end of the month, with 50 to 60 banks participating, Fahrholz said.

The credit line has an eight-year maturity, a three-year grace period and is priced at 200 basis points -- or 2 percent -- over LIBOR, the London Interbank Offered Rate.

In addition to illustrating Gazprom's strong position in the eyes of foreign lenders, the $2.5 billion credit may also signal a growing awareness among Russian companies that corporate debt is a cheaper financing tool than equity, analysts said. Other projects likely will be financed this way, including the many oil projects in the Caspian Sea region.

"Anything with a revenue stream attached to it can get financing like this," said another analyst who asked not to be identified.

According to a Financial Times article, the structure of the deal allows the loan to be repaid from receivables under existing gas sales contracts between Gazprom and its current Western customers.

The pipeline is expected to be finished in 2002 and will carry about 50 billion cubic meters of gas annually. The Financial Times reported last month that construction would cost roughly $24 billion, although CentreInvest Securities estimates the total project cost at $35 billion to $36 billion.

Construction of the pipeline is starting at the Polish/German border through Belarus and then to Russia. The additional pipeline to Europe also reduces country risk, since the only other route goes through Ukraine, O'Sullivan said. Ukraine has repeatedly cut of the flow of Russian gas to Europe over disputes with Russia about transit charges.