Cheniere Energy Partners wanted to close the largest project financing in the US in several years despite a rating four notches from investment grade, and during a period of tightened lending standards and retreating European banks. Finding bankable offtake contracts would be key to the success of that effort.

Cheniere, though, always had one big advantage over other LNG export project developers. Its proposed Sabine Pass liquefaction facility in Cameron Parish, Louisiana, was the only one that could sell LNG to countries without free trade agreements with the US. Several sponsors of proposed liquefactions projects in the Gulf of Mexico are clamouring for such licenses from the US Department of Energy, but as Project Finance went to press, Sabine Pass liquefaction was the only facility that can sell LNG to almost any country it likes.

Cheniere Energy Partners leveraged the solid 20-year offtake agreements with BG Group, GAIL India, Gas Natural Fenosa and Korea Gas Corporation that it could sign as a result to convince Blackstone to provide $1.5 billion in equity at the sponsor level. Asian private equity firms Temasek and RRJ Capital also came in at that level. Blackstone’s commitment and the absence of price risk confirmed that Sabine Pass liquefaction was a credible project, and confirmed banks’ initial enthusiasm for the deal.

Cheniere’s financial adviser Société Générale had already lined up $2 billion in project-level debt before Blackstone’s commitment. Meg Gentle, chief financial officer of Cheniere Energy Partners’ general partner, Cheniere Energy, says she never doubted that the first two trains at Sabine Pass liquefaction would be financed. “We worried about the cost,” she says.

During the second quarter of 2011 Cheniere planned to use a bank tranche of about $2.4 billion for the first two trains, which cost $5.77 billion. Even in a strong lending climate, that would be a staggering figure for a project financing in the US, where multilaterals rarely operate and export credit agencies are only starting to get established. In fact, Sabine Pass would be the first liquefaction project globally to be financed without support from multilaterals or export credit agencies and without completion guarantees. But at this juncture, the cost of capital for European lenders shot up, reducing capacity and ticket sizes.

By early 2012, the market had calmed a little. French banks, for example, had greater flexibility to lend than they had in the second half of 2011, when they preferred to sell existing loans to participating in new ones. But still, there was little indication that Cheniere could stretch the bank market well beyond the $2 billion that it had circled, let alone the Sabine Pass’ entire $3.6 billion debt requirement.

So, Cheniere approached two markets at the same time, with the $2.4 billion commercial bank piece and a $1.25 billion seven-year first lien term loan priced at 425bp over Libor. But the bank market proved more liquid – and cheaper – than anticipated.

Several factors explain the strong response from banks. Cheniere wanted the proceeds from the term loan to be drawn ahead of the equity, but the difference in spreads between the loan and bank tranche – 75bp – may have been too small to absorb the additional risk. Investors in the term loan B market were also uncomfortable with Sabine Pass’ five-year construction period. US investment banks – hardly regulars in traditional non-recourse project lending – were willing to fill any liquidity gaps created by the Eurozone crisis. Surviving European project lenders were also eager participants, lured by a spread of 350bp over Libor – slightly above most US project financings – and the likelihood of a quick bond refinancing of the seven-year mini-perm.

That prospect –a quick refinancing – may have clinched their participation. It would mean that European project finance banks would not have their commitments locked up for several years, long-dated commitments that the looming Basel III regulations discourage. Banks that participated in the first Sabine Pass liquefaction financing may be prepaid within 18 months – meaning that the mini-perm is essentially a bridge.

Considering the fees on offer, banks were willing to stretch their ticket sizes. Most of the joint lead arrangers contributed $250 million each, tickets practically unfathomable in US project finance deals. “Considering the size of the tickets, each ticket is essentially its own deal,” says Benjamin Koenigsberg, partner at Chadbourne & Parke, which advised the lenders. “You can’t go, ‘Here, sign.’”

The prospect of regular Cheniere capital markets business, either a refinancings of the project debt or additional equity issues, lured US and European investment banks into the first Sabine Pass liquefaction debt financing. Some of them are well known for disliking balance sheet exposure to highly leveraged developers. Morgan Stanley and Credit Suisse, for instance, wrote $350 million tickets, the largest among the 21 participating banks. Morgan Stanley sought a new client, while Credit Suisse is a long-time Cheniere relationship bank that advised the sponsor on the Blackstone equity transaction. A month before the $3.63 billion debt financing closed – oversubscribed at $3.7 billion – Morgan Stanley helped underwrite an equity issue for Cheniere Energy Partners.

Some banks joined the Sabine Pass liquefaction deal to support their client Blackstone, others to support their commodities desks, and a few sought to boost their profile in US project finance. Other banks participated to build up their credentials as mainstream players in an LNG market that shows considerable promise. Indeed, Sabine Pass is the first export LNG project in the US in more than four decades (and second overall) and the first globally to offer import and export capacity. It is also the largest US project financing to feature a fixed-price turnkey engineering, procurement and construction contract, a $3.9 billion deal with Bechtel, limiting the sponsor’s and lender’s exposure to construction risk.

The refinancing of the initial bank deal has already begun – and is well ahead of schedule. Trains one and two are 18% complete, so bond investors would still be incurring the risk of construction. But the markets proved receptive. In January project company Sabine Pass Liquefaction issued $1.5 billion in the capital markets, up from a proposed $1 billion. Cheniere opted to suspend portions of the 21 banks’ commitments, rather than take out the existing debt, much of which has yet to be drawn. Those suspended commitments will probably be applied to the bank financing for trains three and four at Sabine Pass liquefaction, such that the deal for phase one will merely be amended and restated. “It seemed silly to cancel commitments and close out the hedges,” Gentle says.

All project debt on Sabine Pass liquefaction – from banks and bonds – will be pari passu and equal in rights, including any financings supporting trains three and four. The initial bank debt for the third and fourth trains will amount to $4.5-5 billion and should close by mid-2013. Cheniere expects an even larger club of lenders to participate in the second bank deal than the first. 

Sabine Pass Liquefaction LLC
STATUS
Closed 31 July 2012
SIZE
$5.77 billion
DESCRIPTION
First two trains of an LNG liquefaction project in Cameron Parish, Louisiana
SPONSOR
Cheniere Energy Partners
EQUITY
$2.14 billion
EQUITY PROVIDERS
Blackstone, Temasek, RRJ Capital
DEBT
$3.63 billion
PARTICIPANTS
BBVA, CIC, GE Capital, ING, Korea Development Bank, LBBW, Lloyds, Mizuho, Santander and Scotiabank
JOINT LEAD ARRANGERS
Bank of Tokyo-Mitsubishi UFJ, Crédit Agricole, Credit Suisse, Deutsche Bank, HSBC, JPMorgan, Morgan Stanley, Royal Bank of Canada, Société Générale, Standard Chartered and Union Bank
SPONSOR FINANCIAL ADVISERS
Société Générale (debt) and Credit Suisse (equity)
CHENIERE LEGAL COUNSEL
Andrews & Kurth
BLACKSTONE LEGAL ADVISER
Latham & Watkins
LENDER LEGAL COUNSEL
Chadbourne & Parke
ENVIRONMENTAL ADVISER
TRC
MARKET ADVISER
Wood Mackenzie
TECHNICAL ADVISER
Shaw Consultants
INSURANCE ADVISER
AON
EPC CONTRACTOR
Bechtel