Executive Summery

The Ras Laffan Liquefied Natural Gas Co. Ltd. was formed to exploit natural gas fields in Qatar. It was a joint venture among Mobil Corp., (26.5 per cent ownership interest), Qatar General Petroleum Corp. (QGPC) (66.5 per cent) and two Japanese corporations: Nissho Iwai (three per cent) and Itochu (four percent). Ras Lafan wanted to sell two series of project finance bonds with $400 million maturing in 2006 carrying a coupon of 7.6 per cent, and $800 million maturing in 2014 with an interest rate of around 8.3%. Now the question is why Broadway should invest in the Rass laffan project finance, Non-recourse bonds. Stterthwaite began reviewing the risk inherent in the project and notes on how each risk was being handled so as to satisfy bondholders.Here, in this report we have conducted the economic analysis of Qatar,PESTEL anlysis, Porters Five Forces analysis for LNG Industry.We ahve also analyse the internal and external strength and weakness (Swot) analysis. This project involes different types of risk. These are Foreign Exchange Risk, Reliance on Single Customer, Energy Commodity Price, Construction Risk, Credit Risk/ Default Risk etc. Ras Laffan takes different measures to mitigate these risk. Some of the measures are Long term Supply-Purchase Agreement, well control insurance during the drilling phase, construction risk insurance, operating insurance and $200 million business interruption insurance. There are also guarantee from the sponsors to repay the lenders if project was not completed on schedule and as designed.Project has been evaluated using NPV and IRR method under three different scenarios. Three scenarios are Base Case, Worst Case, And Best Case Scenario. In worst case scenario, the project gives negative NPV and lower IRR than required rate of return. Both in the Base Case and Best Case, NPVs are positive and IRR is high.Therefore it can be recommendated that Broadway should invest in the bond in the Rass laffan project finance, Non-recourse bonds. It should invest both in $400 million maturing in 2006 carrying a coupon of 7.6 per cent, and $800 million maturing in 2014 with an interest rate of around 8.3%.

Case overview

The Ras Laffan Liquefied Natural Gas Co. Ltd. was formed to exploit natural gas fields in Qatar. Ras Laffan Liquefied Natural Gas Company Limited (RasGas), Qatars second LNG company, was established by Emiri decree in 1993 as an incorporated joint ventur ebetween Qatar General Petroleum Corporation (QGPC) and Mobil Corporation. On September 13, 1997, the founding shareholders were joined by Itochu Corporation and Nissho Iwai Corporation of Japan. Discussions are currently ongoing to include a Koreanentity as a further shareholder The government of the State of Qatar has granted RasGas the right to drill for and produce natural gas within a specified location in Qatars principal gas field (the NorthField) and to sell a specified quantity of LNG and additional quantities of related hydrocarbon products for a period of not less than 25 years.The $3.5 billion RasGas project is well underway. Two drilling rigs are currently working on a 15 well program and the construction of the offshore facilities and the onshore plant is on schedule and within budget. This is largely due to the success of the contracting strategy and project financing, which were innovative and introduced new concepts in the LNG industry.The RasGas partnership is strong, combining host country commitment, technical expertise, project management and financing skills and marketing presence in the two principal established world markets for LNG (Japan and Korea).Of the 3.35 billion in funds to be raised externally in the estimated project budget, $1 billion consisted of equity contribution from Mobil and the state of qatar, another $1.15 billion in loan commitment which secured from Export Credit Agencies and commercial banks.

QGPCQGPC is wholly owned by the State of Qatar and operates in all sectors of the countrys oil and gas industry. It has responsibility for exploration, drilling, production, marketing, refining, transport and storage of oil and gas, their derivatives and by-products. In addition, QGPC has joint ventures with industries engaged in manufacturing and marketing of petrochemicals and fertilizers. QGPC is also the majority shareholder in the Qatargas LNG project, with a 65% interest.Mobil CorporationMobil is one of the worlds largest integrated international oil and gas companies. Mobil has over 20 years experience in every phase of the LNG business and is the second largest producer and marketer of condensate in the world. Mobil also holds a 10% interestin the Qatargas LNG project.Korea Gas Corporation (KOGAS)KOGAS was the sole customer for Rass Laffans output. It would purchase LNG under a 25 year SPA, with LNG deliveries beginning in August 1999. KOGAS is owned 50% by the Republic of Korea, 34.7% by the state owned Korea Electric Power Corporation and 15.3% by regional Korean governments. KOGAS has been importing LNG since 1986 and is currently the sole importer of LNG into Korea. Supply & Purchase Agreement includes: LNG prices linked to JCC index 4.8 million metric tons of LNG annually A take-or-pay clause Estimated start price: $3.88 per MMBTU Kogas responsible for transportation of LNGQatari Government has provided 12 year tax holiday to the Ras Laffan project.Mobil corporation has agreed to provide $200 million fund for debt servicing shortfalls

On June 30, 1997 RasGas and KOGAS agreed to an amendment to the SPA entered into in 1995, thereby doubling the annual quantity of LNG to be delivered from 2.4MMTA to 4.8MMTA. Contractual deliveries will commence in July 1999. The contract term runs until 2024, with an option to extend beyond this.RasGas drilled and tested a delineation well in 1994, the results of which verified gas quality, well deliverability and gas reserves to support a minimum of 2 trains of LNG production for 25 years.The Ras Laffan project was expected to take five years to construct, drawing on some of the worlds major LNG contractors. Major portions of the LNG facility would be constructed at sub-contractor sites around the world, with co-ordination among the drilling and construction consortium being essential.LNG processing will consist of the following steps-

Furthermore, a number of Reservoir and Completion studies were completed tosupport the most optimum development plan for the RasGas concession area, the development plan which calls for the drilling of 15 wells from 3 Wellhead Platforms will:

1. Meet gas demand for at least the next 25 years without compression.2. Ensure prudent reservoir management of the gas reserves.3. Provide safe, reliable, cost effective and mechanically sound completions.Drilling operations from 2 rigs commenced in April 1997.

There was an intercreditor protection Agreements which covered some clauses like- Minimum equity levels Approval of new SPAs Issuance of additional debt. Restriction on asset sates exceeding $30 million in a year Restriction on issuance of new equity with minimum ownership levels for each of the two current sponsors.As construction on the project continued, Rass laffan and its investment bankers sought to launch project finance bonds which will be sold without recourse to the parents companies. QGPC and Mobil felt comfortable with leverage consisting of 70% debt and 30% equity if the project was expanded to two trains and Kogas doubled its LNG purchases. Now Rass Lafan considered to sell two series of project finance bonds with $400 million maturing in 2006 carrying a coupon of 7.6 per cent, and $800 million maturing in 2014 with an interest rate of around 8.3%. Now the question is why Broadway should invest in the Rass laffan project finance, Non-recourse bonds. Stterthwaite began reviewing the risk inherent in the project and notes on how each risk was being handled so as to satisfy bondholders.

Country risk analysisCountry risk:The decision to invest overseas begins with determining the riskiness of the investment climate in the country under consideration. Country risk refers to the economic, political and business risks that are unique to a specific country, and that might result in unexpected investment losses. Here country risk analysis has been done based on International Country Risk Guide Methodology. The International Country Risk Guide (ICRG) rating comprises 22 variables in three subcategories of risk: political, financial, and economic which are described below.THE POLITICAL RISK RATING The aim of the political risk rating is to provide a means of assessing the political stability of the countries covered by ICRG on a comparable basis. This is done by assigning risk points to a pre- set group of factors, termed political risk components. The following risk components, weights, and sequence are used to produce the political risk rating: POLITICAL RISK COMPONENTS Government Stability 12

Socioeconomic Conditions 12

Investment Profile 12

Internal Conflict12

External Conflict 12

Corruption 6

Military in Politics 6

Religious Tensions 6

Law and Order 6

Ethnic Tensions 6

Democratic Accountability 6

Bureaucracy Quality 4

Total 100100

Government Stability This is an assessment both of the governments ability to carry out its declared program(s), and its ability to stay in office. The risk rating assigned is the sum of three subcomponents, each with a maximum score of four points and a minimum score of 0 points. A score of 4 points equates to Very Low Risk and a score of 0 points to Very High Risk. The subcomponents are: Government Unity Legislative Strength Popular Support Government Unity in QatarThe political situation can best be described as stable. The country is not a democracy and it is ruled by the Emir. The Emir is both the head of state and the head of government and he has full control over the country. He does however have to answer to the other members of the royal family about his decisions. While the lack of democracy is a problem for a lot of people the reality is that most people in Qatar are a lot better off than those in other countries in the region. As the Government unity is strong so low risk grading has been assigned for this.

Legislative strengthWhile the Emir does have full power to rule the country there is a consultative assembly. Their role is mainly to act as advisors to the Emir and they are appointed by him. That being said they do have some ability to check the powers of the Emir by ensuring that he does not enact legislation that is too unpopular. While far from being the same as having a democratic assembly it has done a fairly good job of ensuring that the rule of the Emir respects the rights of the citizens.Qatar has a well established code of laws and trials are generally thought to be fair. The country is ruled by Islamic law so things are more strict than most Westerners are used to but not nearly as strict as you would find in other countries in the Middle East. It indicates that the country is low risky and the assigned point is 3.Popular SupportQatar has been ruled by the Al Thani family since the mid-1800s, Qatar transformed itself from a poor British protectorate noted mainly for pearling into an independent state with significant oil and natural gas revenues.During the late 1980s and early 1990s, the Qatari economy was crippled by a continuous siphoning off of petroleum revenues by the amir who had ruled the country since 1972. He was overthrown by his son, the current Amir HAMAD bin Khalifa Al Thani, in a bloodless coup in 1995The summery of the Government stability rating are giving below:

Government stability:VariablesScoreTotalMaximumTotal

Government unity24

Legislative strength34

Popular support24

Total712

Socioeconomic conditions This is an assessment of the socioeconomic pressures at work in society that could constrain government action or fuel social dissatisfaction. The risk rating assigned is the sum of three subcomponents, each with a maximum score of four points and a minimum score of 0 points. A score of 4 points equates to Very Low Risk and a score of 0 points to Very High Risk. The subcomponents are: Unemployment Consumer Confidence Poverty UnemploymentThe unemployment rate measures the number of people actively looking for a job as a percentage of the labor force. Unemployment rate in Qatar 2.7% Which indicates moderate level of risk . Thats why 2 points has been assigned for this.

Consumer ConfidenceQatars oil exports led to a high standard of living, with per capita incomes averaging $13,000, surpassed only by Kuwait and the United Arab Emirates. Thats why consumer confidence in Qatar was high. So 3 points has been assigned for this.PovertyPetroleum is the cornerstone of Qatar's economy and accounts for more than 70% of total government revenue, more than 60% of gross domestic product, and roughly 85% of export earnings. Oil has given Qatar a per capita GDP that ranks among the highest in the world. Qatars oil exports led to a high standard of living and its poverty rate is almost zero. Thats why we have assigned 3 points for this.The summery of Socioeconomic conditions rating are provided below:

Socio-economic condition:VariablesScoreTotalMaximumTotal

Unemployment24

Consumer confidence34

Poverty34

Total912

Investment profile:Qatar is the wealthiest country in the world in per capita terms with substantial oil and gas reserves, an excellent infrastructure system and free market economic policies. Qatar's economy has been growing by around 7.6% per year in recent years. The Foreign Investment Law has also played an important role in stimulating economic growth. The law permitted up to 100% foreign ownership for the first time in the sectors of agriculture, manufacturing, health, education, and tourism. It also offered investors a number of substantial incentives, including the freedom to repatriate all profits to the investors country of origin.Investment profile:Contract viability34

Profit repotration 44

Payment delays34

Total1012

Internal Conflict This is an assessment of political violence in the country and its actual or potential impact on governance. There was always a possibility that events such as civil strife, war, natural disasters, labor unrest and similar events could affect the production and shipment of oil and LNG. The risk rating assigned is the sum of three subcomponents considering these issue. The subcomponents are: Civil War/Coup Threat Terrorism/Political Violence Civil DisorderThe summery of internal conflict risk rating are giving below:Internal conflict:Civil war14

Terrorism violence14

Civil disorder14

Total312

External Conflict Qatar had larger and sometimes aggressive neighbors. Qatar could be affected by forces outside its control, in what was sometimes described as force majeure risk.

It indicates that the external conflict risk in Qatar is high and points have been assigned in three subcomponent War, Cross-Border Conflict ,& Foreign Pressures by considering this.

The summery of internal conflict risk rating are giving below:

External conflict:War24

Cross border conflict14

Foreign pressure34

Total612

Religious TensionOf the citizen population, Shi'a Muslims account for approximately 10 percent and Sunni Muslims 90 percent. The majority of noncitizens are from South and Southeast Asian and Arab countries working on temporary employment contracts, accompanied by family members in some cases. Most noncitizens are Sunni or Shi'a Muslims, Christians, Hindus, Buddhists, or Bah's.There were no reports of societal abuses or discrimination based on religious belief or practice, and prominent societal leaders took positive steps to promote religious freedom. So the assigned point is 5 out of 6.Ethnic Tensions This component is an assessment of the degree of tension within a country attributable to racial, nationality, or language divisions. No Ethnic tension exists in Qatar so the assigned point is 6 out of 6.Bureaucracy Quality The other big concern about doing business in Qatar is dealing with the red tape and bureaucracy. The government has made efforts to reduce the problems in this regard but they do still exist. It involves moderate level of risk . so the assigned point is 2 out of 4.Military in Politics The Qatar Armed Forces are the military forces of Qatar. The country maintains a modest military force of approximately 11,800 men, including an army (8,500), navy (1,800) and air force (1,500). Qatar's defense expenditures accounted for approximately 4.2% of gross national product in 1993. Qatar has recently signed defense pacts with the United States, as well as with France earlier in 1994. The presence of a large American military base in the country provides the country with a guaranteed source of defense and national security. It indicates that the military politics risk is low.Law & OrderAlthough critics continue to complain of a lack of transparency in government procurement, Qatars anti-corruption record is among the best in the Middle East. The rule of law has been solidly respected. A well-functioning legal framework is in place, but the judiciary is susceptible to political influence and can be bureaucratic. Foreigners are generally not allowed to own property & Qatari law did not allow to obtain a security interest in the tangible assets. It involves moderate level of risk.Corruption Crime in Qatar is relatively low compared to industrialized nations.]Petty crime such as pick pocketing and bag snatching does occur, but is extremely uncommon. But threat of terrorist attack is a matter of concern The Department of Foreign Affairs and Trade (DFAT) of the Government of Australia advised travelers "to exercise a high degree of caution in Qatar" due to high threat of terrorism. According to Interpol data, criminal homicide rate in Qatar increased from 1.52 to 2.11 per 100,000 population between 1994 and 1996.

Democratic Accountability This is a measure of how responsive government is to its people, on the basis that the less responsive it is. As the country is not a democratic and it is ruled by the Emir so the power ultimately rests with just four key people; the emir, his wife, the prime minister and the Crown Prince. Understanding policymaking often involves second-guessing the wishes, intentions and rivalries within this small group of decision-makers. So there are low level of democratic accountability in QatarSummaryThe political situation in Qatar should not be a major issue that keeps anyone from setting up a business in the country. Therefore there is no need to worry that there will be a major shift in policy that will affect business. The summery of total political risk rating are giving below:

Political Risk 67%

SequenceComponentScorePoints ( max. )

AGovernment stability9.0012.00

BSocio-economic condition8.0012.00

CInvestment profile10.0012.00

DInternal conflict4.0012.00

EExternal conflict4.0012.00

FCorruption5.006.00

GMilitary in politics5.006.00

HReligion in politics5.006.00

ILaw and order4.006.00

JEthnic tension6.006.00

KDemocratic accountability4.006.00

LBureaucracy quality2.004.00

TOTAL67.00100.00

The overall political risk rating is 66% which indicates that the country has moderate level of political risk. THE ECONOMIC RISK RATING The overall aim of the Economic Risk Rating is to provide a means of assessing a countrys current economic strengths and weaknesses. In general terms where its strengths outweigh its weaknesses it will present a low economic risk and where its weaknesses outweigh its strengths it will present a high economic risk. Qatar GDPThe gross domestic product (GDP) measures of national income and output for a given country's economy. The gross domestic product (GDP) is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time. The Gross Domestic Product (GDP) in Qatar was worth 32 billion US dollars in 1996. GDP in Qatar is reported by the World Bank. The following chart shows the GDP trend of Qatar from 1990 to 1996.

According to ICRG, GDP is between 50to 50.9, 3.9 points should be assigned . As Qatar GDP is 51 billion thats why 3.5 has been assigned for this.Qatar Inflation RateThe inflation rate in Qatar was recorded at 4.90 percent in February of 1996. Inflation Rate in Qatar is reported by the Qatar Statistics Authority.

According to ICRG, if inflation rate is between 4 to 5.9, then 9 points should be assigned . As Qatar inflation is 4.9% thats why 9 points has been assigned for this.Qatar Current Account Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). Qatar recorded a Current Account deficit of -26.69% of GDP in 1996. Current Account in Qatar is reported by the Qatar Central Bank. The e following chart shows the current account situation from 1990 to 1996.

As C/A deficit is more than -12% of GDP , point 8 has been assigned for this.

Qatar Government budget balance as percent of GDP: The budget balance in Qatar and other countries is calculated as the difference between the taxes collected by the government and the government spending. The budget could be in surplus (or deficit) if the tax revenue is greater (smaller) than the spending. A budget surplus is recorded with a plus sign and a deficit is recorded with a minus sign. The budget balance is usually reported as percent of GDP. This tells us how large the deficit or surplus is relative to the economy. The government budget balance as percent of GDP is -8.374 . As per ICRG rule government budget balance as percent of GDP -8 to -8.9 should be provided 3.5 points.Qatar GDP Annual Growth RateThe Gross Domestic Product (GDP) in Qatar expanded 7.6 percent in 1996. GDP Annual Growth Rate in Qatar is reported by the Qatar Statistics Authority.. As Qatar has vast oil and natural gas reserves, mining is the main driver of the economy, contributing 58 percent of GDP. The second biggest sector is Services which accounts for 28 percent of total output. The following figure shows the GDP growth rate for the year 1990 to 1996.

As Qatars GDP growth rate is more than 6% so 10 point should be assigned.

Summery The summery of the economic risk rating are provided below:

Economic Risk Rating:69%

GDP per head35

Real GDP growth rate1010

Annual inflation rate910

Budget balance as % of GDP3.510

Current account balance as% of GDP915

Total points3550

Economic risk rating is 69% which indicates moderate level of risk.

THE FINANCIAL RISK RATING The overall aim of the Financial Risk Rating is to provide a means of assessing a countrys ability to pay its way. In essence, this requires a system of measuring a countrys ability to finance its official, commercial, and trade debt obligations. This is done by assigning risk points to a pre-set group of factors, termed financial risk components. The minimum number of points that can be assigned to each component is zero, while the maximum number of points depends on the fixed weight that component is given in the overall financial risk assessment. In every case the lower the risk point total, the higher the risk, and the higher the risk point total the lower the risk.Foreign Debt as a Percentage of GDPForeign Debt was 58 percent of GDP in 1996 & as per ICRG rule 5 points has been assigned for this.Net International Liquidity as Months of Import CoverQatars foreign exchange cover is likely to remain strong, equivalent to about six months of total imports, according to the Ministry of Development Planning and Statistics .Exchange Rate Stability The appreciation or depreciation of a currency against the US dollar (over a calendar year or the most recent 12-month period is calculated as a percentage change. In 1996 Qatari Riyal has appreciated 4.20876E-05% against US Dollar & for this reason 10 points has been assigned here. Summary The summary of Financial risk rating are provided below:

Financial Risk Rating:75%

Foreign debt as % of GDP510

Debt service as % paid710

Current account as % of export1215

Net international liquidity3.55

Exchange Rate stability1010

Total points3850

THE COMPOSITE RISK RATING The method of calculating the Composite Political, Financial, and Economic Risk Rating remains unchanged. The political risk rating contributes 50% of the composite rating, while the financial and economic risk ratings each contribute 25%. The following formula is used to calculate the aggregate political, financial and economic risk: CPFER (country X) = 0.5 (PR + FR + ER) where CPFER = Composite political, financial and economic risk ratings PR = Total political risk indicators FR = Total financial risk indicators ER = Total economic risk indicators The highest overall rating (theoretically 100) indicates the lowest risk, and the lowest rating(theoretically zero) indicates the highest risk.

Composite Risk Rating: CPFER =0.5(PR+ER+FR)

PR(Political Risk)*0.537%

ER(Economic Risk)*0.2516%

FR(Financial Risk)*0.2518%

TOTAL71%

This composite risk rating shows that It is low risky country.

Industry AnalysisThe LNG Industry overviewThe worldwide demand for natural gas has been increasing rapidly since 1980. These countries do not have adequate supply of domestic gas. They have to import it in the form of LNG. There are substitute products of LNG which are coal, oil and nuclear power. LNG compared favorably among these alternative sources of energy. There was public opposition to nuclear energy. coal produced environmentally undesirable consequence. And sulfur emission from oil-based energy generation were a problem. Gas was a source of energy that was environmentally acceptable, financially economical and energy efficient. LNG projects are highly capital intensive which require significant capital investment. This project requires capital investment of about $ 1 billion per million of metric yens per annum (MMTA). Once gas fields were discovered, the gas had to be transmitted to LNG processing facilities that converted natural gas into the LNG form. The LNG was stored, then transported by LNG tankers from specialized port facilities. At the receiving end, similar specialized facilities were needed to unload tankers and store LNG. Utilities using LNG as an energy source had to invest in specialized gas transmission and distribution systems, costing billions of dollars.

In order to meet large upfront investment and earn a stable return, both LNG suppliers and the utility buyers needed the security of the long term contracts. Both of them preferred long term supply- purchase agreement, so there was little supply of LNG in the spot market. The long-term contracts also encouraged lenders to provide debt capital to the LNG project, because the long term Supply & Purchase Agreement (SPA) created a reliable annual source of revenues and cash flows.Porters Five Forces AnalysisA critical factor affecting the industry profitability is the intensity of competition the industry. To evaluate whether a firm has profit potential or not, it is very important to assess the profit potential of each of the industries in which the firm is competing, because the profitability of various industries differs systematically and predictably over time. An industry earning forecast should be preceded by the analysis of the competitive structure of the industry.Porters concept of competitive strategy is described as the search by a firm for a favorable competitive position in an industry. Porters believes that the competitive environment determines the ability of a firm to earn above average return on invested capital. According to this framework, the intensity of competition determines the potential for creating abnormal profits by the firms in an industry. Whether or not the potential profits are kept by the industry is determined by the relative bargaining power of the firms in the industry and their customers and suppliers. In analyzing industry we divide the five forces in two broad categories: Degree of actual and potential competition Bargaining power in input and output markets

Figure1: Model of Porters Five Forces AnalysisPorters Five Forces AnalysisThe forces are described below with their factors in case of Aerospace industry where B/E Aerospace Inc. belongs. These forces are:

1. Threat of New Entrants, 2. Degree of rivalry,3. Threat of Substitutes, 4. Bargaining Power of the Buyers, 5. Bargaining Power of the Suppliers.Rivalry among the existing competitors High capital involvement required Rapid growth of demand High barriers to exitThreat of new entrance High of barriers to entry High fixed cost required Exclusive distribution contracts that is supply- purchase agreement (SPA) Substantial economies of scale achieved by existing firms. low product differenciation Industry was profitableThreat of substitute products or servicesThere are substitute products of LNG which are coal, oil and nuclear pwer. LNG comparedfavourably among these alternative sources of energy. There was public opposition to nuclear energy.coal produced environmentally undesirable consequence. And sulfer emission from oil-based energygenerstion were a problem. Buyers propensity to substitute is low Switching cost is high Number of substitute products in the market is low.Bargaining power of buyers Worldwide demand for natural gas has been growing rapidly. Buyers switching cost is high Availability of effective substitute product is low Product differentiation is lowBargaining power of suppliers Degree of differentiation of inputs is low Exclusive distribution contract that is supply- purchase agreement (SPA) exist. Few suppliers who are concentrated and very powerful than the buyer of LNG

Competitive structure of LNG industry:

Problem StatementMario Ippata, her supervisor at Broadway Value and Growth Fund, had listened carefully as Satterthwaite outlined why she thought the Ras Laffan project finance bonds could be a good investment. As they finished their spaghetti and clams, Ippata said, Ellie, no one is perfect when it comes to investing. We all buy duds occasionally. When you present your recommendations tomorrow before the Investment Board, we all will be paying attention to your recommendations. But, we will also want to know that you have considered all the risks carefully, and that you are satisfied that the returns outweigh the risks.

Ras Laffan wanted to sell two series of project finance bonds, with $400 million maturing in 2006 carrying a coupon of around 7.6 per cent, and $800 million in 2014 with an interest rate of around 8.3 per cent. The bonds would be sold as a Rule 144A offering, restricted to Qualified Institutional Buyers.

Ellison Satterthwaite had been working at Broadway for just less than a year, and her current assignment was to analyze the Ras Laffan project finance bonds. A group of investment managers met weekly to review new investment ideas, on both the equity and bond sides, and Satterthwaite knew that the quality of her analysis and recommendations would help her move towards her goal of running her own fund.

So, the problems of this case are-

1. What are the risks inherent in the project and the notes on how each risk was being handled so as to satisfy bondholders2. Why Broadway should invest in the Ras Laffan project finance, non-recourse, bonds.

Project Valuation

Here, the project is evaluated in different scenario. NPV and IRR are calculated under three scenarios. These are the base case, reduced LNG price that is worst case and the last one is increased LNG price which is the best case. From the very beginning of taking decision about the projects profitability, WACC has been calculated.

Calculation of Cost of Capital (WACC) of Ras Laffan:

The calculation of the Cost of Capital of the Ras Laffa is as follow:

Beta1.8

Rf2.00%

Rm10.00%

Kd9%

Ke16%

Tax35%

We30.00%

Wd70.00%

After Tax Kd6%

WACC8.83300%

Valuation: NPV and IRR(Worst Case)

Valuation of Ras Laffan:

We have We are considering the the project standing at the end of 1996. As the project is done for 25 years and 12 years cashflow projections are given, we have forecasted cash flow for the next 13 years. We have forecaseted the cashflow from 2001 to 2021.

For this valuation purpose we have made some assumptions. The assumptions are as follow:

Assumtion

Sales growth rate2%

Royalty as % of sales20%

Operating cost as % of sales20%

Interest income as % of sales2%

Capex10%

CNWC6%

Result

Net Present Value is the difference between an investments market vlue and its cost. NPV rule for any project is-CriteriaDecision

Negative NPV Reject the project

Positive NPVAccept the project

IRR is the rate of return which results in a zero NPV when it is used as the discount rate. Decision rule of IRR is-CriteriaDecision

IRR < Required rate of return Reject the project

IRR > Required rate of return Accept the project

We have found the following NPV and IRR for the worst case scenario-

NPV-386.1035419

IRR0.079871857

It is observed that NPV for the project is -386.1035 if the LNG price is low. This implies that the initial cost of the project outweigh the future cash inflow of the project by this amount. This leads to the decision that the project is not profitable if the reduced market price for LNG is more likely in the future. So the project should not be accepted.

Here, IRR is 7.987% and required rate of return is 8.30%. In this case, IRR is lower than the required rate of return, so the project doesnot earn enough return to satisfy the investors. Therefore the project should not be accepted in this scenario.

Simulation Analysis

Crystal ball software has been used to do the Monte Carlo Simulation analysis. Simulation has been conducted for the worst case scenario. The simulations results for this are given below-

Simulation Analysis 1: NPV for Reduced market price

Summary results are a follows-

Forecast: NPV

StatisticForecast values

Trials100,000

Mean-386.11

Median-384.46

Mode'---

Standard Deviation59.52

Variance3543.06

Skewness-0.1845

Kurtosis3.09

Coeff. of Variability-0.1542

Minimum-690.73

Maximum-148.01

Mean Std. Error0.19

Here, the entire range is from -690.73to -148.01. The base case is -386.11. We have run 10,000 trials, and after this trials the standerd error for the mean is 0.19. The coefficient of variability is -0.1542 which is very low.

Simulation Analysis 2: IRR for Reduced market price

Summary results are a follows-

Summery output

StatisticForecast values

Trials100,000

Mean0.08

Median0.08

Mode'---

Standard Deviation0

Variance0

Skewness-0.2489

Kurtosis3.15

Coeff. of Variability0.0336

Minimum0.07

Maximum0.09

Mean Std. Error0

Here, the entire range is from 0.07to 0.09. The base case is 0.08. We have run 10,000 trials, and after this trials, the standard error for the mean is 0. The coefficient of variability is 0.0336which is less than 0.50.

Risk of the Projects:Ras Laffan Project involves different risks which affects the cash flow of the project which in turn may affect the return of the bond considered to be issued. these risks are as follows- Foreign Exchange Risk Reliance on Single Customer Energy Commodity Price Construction Risk Credit Risk/Default Risk

Credit Risk/Default RiskDefault risk is the risk that the lenders may not be able to repay the debt obligation. Ras Laffan is a very risky project. There may be some problem which reduce the cash flow. As a result, cash flow of the project will not be enough to repay the debt. Some of the sources of risks are as follows- Production Problems Economic Stability Energy Commodity Prices Breach of Contract

Debt servicing may shortfall due to lower LNG prices. Actual quantity supplied would be different from the Base Annual Contract Quantity (BACQ), due to operational and other difficulties (for example, it would be uneconomical to ship less than a full tanker load).

To mitigate this, the SPA attempted to achieve fair price by linking the monthly LNG price over the contracts life to the JCC index, a basket of prices of crude oils delivered to Japan.To prevent shortfalls from affecting long-term cash flow that might negatively impact debt servicing, the SPA had an adjustment process so that average annual quantities shipped would go up or down to reflect previous period adjustments. The SPA noted that a worst case scenario of two years in a row of five per cent downward adjustments would not threaten debt service. The intent was that while actual quantities shipped each year could fluctuate, the two sides would act to even out these fluctuations so that the long term average annual quantities shipped would approach the BACQ

Construction risk

There are some construction risk associated with this type of project. Risks were present in such complex construction, including corrosion problems, fires and explosions due to simultaneous drilling and production operations.Project sponsors, however, agreed to repay lenders if the project was not completed on schedule and as designed. This project completion guarantee was not joint but several. That is, each of the two project sponsors was only pro rata liable (to the extent of their ownership shares). Thus, Mobil would be responsible for 26.5 per cent of the total guarantee obligation.

Ras Laffan would carry different kinds of insurance, including well control insurance during the drilling phase, construction risk insurance, operating insurance and $200 million business interruption insurance.

Reliance on Single CustomerKogas, was expected to be the sole customer for Ras Laffans output. Kogas would purchase LNG under a 25-year SPA, with LNG deliveries beginning in August 1999. There is a risk that Kogas may default which affect Raslaffans sale. This may mitigated by some factors. Kogas spent over $7 billion on LNG infrastructure investments. It intended to spend an additional $1.2 billion per year on LNG infrastructure each year to 2000. Kogas forecasted demand to grow at seven per cent annually over the contract life and Korean regulators approved all requests for natural gas rate increases to its utility customers. Korea government is committed to agreement and will shift consumption if necessary.

Currency Exchange RiskKogas billed its Korean customers in Korean won, while all LNG purchases from Ras Laffan would be paid for in U.S. dollars. So, there are some risk associated with the volatility of korean won per dollar. The evolution of the won/dollar exchange rate over the 1994 to 1996 period is given below-

Mitigating the risk: Rass Laffan can start selling LNG into the world market. Kogascan hedge the won/US dollar exchange rate using forward, future contracts. Investors ask for a higher rate of return on the Bonds.

Price Risk

Higher Crude Oil Prices could cause higher LNG prices. As a result, other energy sources would be more affordable. This could cause Kogas to default.The lack of a minimum floor price raised the importance of trends in crude oil prices. Brent crude oil prices, a benchmark for the industry, dropped to as low as $15 in nominal dollars in 1996, bringing down LNG prices correspondingly. Brent crude oil prices for 1988-1996 are given below-

Price risk is also mitigated by some way. Mobils $200 million loan funds guaranteed a minimum price through the Kogas price difference provision, equivalent to $1.90 per MMBTU through 2009, and $1.65 for subsequent periods. Kogas spent over $7 billion on LNG infrastructure investments.

Protecting the Bondholders: The Security Trust Agreement In New YorkRas Laffan created escrow accounts to service debt. A practical way to implement this was to create a New York-based Security Trust agreement. The various parties in the Ras Laffan project, including Kogas, entered into a trust agreement whereby sales revenues would be deposited with the New York-based trustee (bank), Credit Suisse. After disbursements for Ras Laffan operating and maintenance, the trustee would use the funds to pay lenders their principal and interest payments, unhampered by any restraints that Ras Laffan or Qatar might seek to place on revenues and funds disbursement. Thus, even if Ras Laffan changed ownership, sales proceeds could be earmarked for debt amortization and redemption and a possible change of control would not affect lenders.The trustee had to ensure that loan life coverage ratios exceeded 1.4 and that the debt service account was fully funded before he could make payments to the project sponsors, such as paying dividends to Mobil and the state of Qatar. The trustee would ensure that a debt service reserve covering six months was also maintained.

Inter creditor Protection AgreementsRas Laffan provides some safeguards for bondholders. Following clauses covered issues such as-

Minimum equity levels Approval of new SPAs Issuance of additional debt. Restriction on asset sales exceeding $30 million in a year Restriction on issuance of new equity with minimum ownership levels for each of the two current sponsors.

Debt Service CapabilityBase CaseUnder base case, debt service capacity of Ras Laffan are given below-

20012002200320042005200620072,008

INTEREST COVERAGE RATIO $ 2.67 $ 3.74 $ 4.22 $ 4.74 $ 5.53 $ 6.56 $ 7.71 $ 9.21

PROJ DEBT COVERAGE RATIO $ 1.55 $ 1.73 $ 1.84 $ 1.93 $ 2.07 $ 2.22 $ 2.95 $ 3.18

Here, we see that the company has enough cash flow available to service its debt. Projected debt service coverage exceeds one for all years this scenario.

Worst CaseUnder worst case, debt service capacity of Ras Laffan are given below-

20012002200320042005200620072,008

INTEREST COVERAGE RATIO $ 2.00 $ 2.81 $ 3.12 $ 3.43 $ 3.97 $ 4.61 $ 5.27 $ 6.21

PROJ DEBT COVERAGE RATIO $ 1.16 $ 1.30 $ 1.36 $ 1.40 $ 1.49 $ 1.56 $ 2.02 $ 2.14

Here, we see that the company has enough cash flow available to service its debt. Projected debt service coverage exceeds one for all years this scenario. It is close to one in the early years of the lower LNG price scenario.