Nicholas Ross-McCall, Huw Thomas

4.4 Other features of borrowing base facilities

Other features of borrowing base facilities may include those set out next:
As the borrowing base amount is recalculated periodically during the life of
the facility (see Section 3.2), it will be a revolving facility (as opposed to a
term loan), but usually with the lenders commitment reduced on six-
monthly reduction dates. On a reduction date, the loan will need to be paid
down to the lower of:
the reduced commitment amount; and
the borrowing base amount, but possibly only to the extent that the
borrower has available free cash flow (as a nod to limited recourse project
financing techniques).
A letter of credit facility might be included for the purposes of providing
security for the borrowers obligations in respect of decommissioning
liabilities.
Secured collection accounts might be set up into which all project revenues
are received and out of which payments are to be made in the order set out
in an agreed cash waterfall.
Requirements for hedging petroleum prices in respect of a certain proportion
of projected production might exist. In times of strong petroleum prices,
borrowers have been largely successful in resisting specific requirements, such
that there is only a high-level agreed hedging policy in the documentation.

4.5 Senior stretch

Occasionally, senior debt in a borrowing base facility will be divided into base senior
and senior stretch (or conforming and non-conforming) tranches, the stretch
tranche being lent against a higher percentage of the net present value, with the
excess being in effect the size of the stretch tranche. A higher margin will apply.
Usually only lenders with in-house technical skills tend to be able to lend over and
above the base senior debt, as they have the know-how to assess which assets can
support the extra debt.

4.6 Hybrid borrowing base facility/project financing for development assets

The classical borrowing base facility is based on a portfolio of mainly producing
assets, with net present values attributed to development assets possibly composing
a relatively small part of the total borrowing base net present value. This is fine for a
company with significant producing assets, but what if the companys portfolio still
largely consists of development assets?
As the market has developed, banks have been willing to finance such portfolios
using a hybrid project finance and borrowing base structure. Key features of such a
hybrid facility may include the following:
Strict control over facility drawdowns with a project finance style of accounts
structure. Drawdowns may only be allowed for expenditures within the
projection approved by the majority lenders and when regular testing
demonstrates that the borrower has sufficient funding available to it from
committed sources to achieve completion on key development assets.

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