Nakilat Inc's US$4.3 billion LNG vessel financing is the latest big ticket deal to have reached financial close bolstering Qatar's impressive efforts to monetise gas from its giant North Field in the Persian Gulf. The transaction is the first of two installments of a US$7 billion-plus financing programme for extra-large LNG ships to operate from the Qatari LNG liquefaction projects at Ras Laffan Industrial City

The deal has a complex structure including senior and subordinated debt and bonds, alongside ECA financing - and as such follows a tried and tested pattern previously used in project financings for some of Qatar's LNG liquefaction plants.

But the Nakilat financing is notable for several other factors. For a start the deal as closed was by a stretch the largest LNG shipping financing in history - and participants believe it is the largest shipping deal ever too.

It is also the first time the bond markets have been tapped for an LNG shipping financing, alongside debt from traditional shipping and project finance banks and ECA financing from Korea (where the ships are being built).

And last but not least, the deal is important for its use of programme financing, whereby a number of ships are built using a single, expandable financing package. This technique was first used earlier in the year by BNP Paribas as financial adviser to Nigeria LNG shipping subsidiary Bonny Gas Transport (BGT) - on a US$680 million refinancing deal covering nine of its ships (with the provision for more to be added over time).

However the Nakilat deal is the first occasion on which it has been used for new build ships.

Background - 'Qatar Inc' and Nakilat

In context, the Nakilat deal should be seen as part of what might be called Qatar Inc's efforts to develop and monetise its vast gas reserves from the North Field (estimated at around 900 trillion cubic feet).  Taking this point a step further, the deal should also be seen in the context of Qatar keeping control of those resources at each stage of the LNG value chain, from upstream and liquefaction to shipping and regasification in target markets. 

State-owned company Qatar Petroleum (QP) owns around 70 per cent of each of the Qatargas and RasGas integrated upstream development and LNG liquefaction ventures in the country. It is also majority owner of the South Hook LNG terminal at Milford Haven in Wales that will receive deliveries from Qatargas 2, and will be majority owner of the Golden Pass terminal on the US Gulf of Mexico that is set to receive cargoes from Qatargas 3.

Joe Blum, head of Latham & Watkins' London project development and finance group, says: 'The Qataris are looking to control the whole value chain of LNG from liquefaction to transport to investing in regas. And this is the central point, that they control much of the LNG shipping for the RasGas and Qatargas projects.  It is critical to the Qatari strategy, which has been very successful.'

The LNG shipping element is a somewhat different kettle of fish, since the ships' operator Nakilat is not a state-owned company. Indeed the company does not even have a track record in LNG shipping as an operator, so getting it to the stage of securing US$4.3 billion in multi-tranche financing at margins as low as LIBOR plus 45bp is a story in itself.

Nakilat Inc as it is known was established on 5 April 2006 by its 100 per cent-owner Qatar Gas Transport Company (aka QGTC - and confusingly also called Nakilat sometimes), solely for the purpose of acquiring 27-plus LNG vessels for the Qatargas project companies.

QGTC is a semi-public company formed in 2004 to provide transportation services to the burgeoning natural gas production industry in Qatar  Half of its shares are listed on the Doha Securities Market (DSM), with the other half held by Qatari state institutions - including a small but significant 5 per cent stake held by QP itself. 

The QGTC share split is:

• Qatar Shipping (20 per cent)
• Qatar Navigation (20 per cent)
• Qatar Petroleum (5 per cent)
• Qatar Foundation (2 per cent)
• General Pension and Retirement Authority (1 per cent)
• Ministries of Health and Education (1 per cent)
• Woqod (1 per cent)
• DSM float (50 per cent)

In reality, Nakilat and QGTC are as much part of 'Qatar Inc' as QP is, and the financing can only be seen in this context. 

A new concept in LNG shipping

The main security on LNG shipping deals is the time charter party agreements between the borrower and the entity/entities that are going to use the vessels - along with the shipbuilding contracts for new build ships.

Korean shipbuilders Samsung, Hyundai and Daewoo are building the huge Q-Max and Q-Flex vessels for Nakilat, all of them on 25-year time charters with Qatargas II and Qatargas 3.

Qatargas II (a joint venture between QP, ExxonMobil and Total) has signed on to charter six Q-Max ships - the largest LNG vessels in the world with 265,000 cubic metres of capacity. Qatargas 3 (QP, ConocoPhillips and Mitsui) has agreed to charter ten ships - three Q-Max ships and seven of the smaller 215,000 cubic metre Q-Flex carriers.

With the 16 ships covered by the December financing and nine more for the expansion later this year ordered from Korean shipbuilders, QGTC now has equity interests in 55 vessels, with two more to follow.

QGTC has already used debt financing for many of its existing ships, and has also formed joint ventures to build and operate them. A deal for the RasGas II project for four vessels was worth US$750 million, and was then the largest LNG ship financing. Then the US$1.6 billion J5-Nakilat deal with a Japanese consortium led by Mitsui OSK Lines trumped that (early in 2006). That transaction covered eight ships.

Both of those financings were done on a ship-by-ship basis, as LNG shipping deals always have been before the landmark BGT refinancing for Nigeria LNG in October 2006.

What BNP Paribas did with BGT was take a number of ships that were already operating for the company and group them together under one financing umbrella, with the ability to add more ships into the structure over time.

The benefits of doing this can be seen in the spectacularly tight margins achieved on that refinanced debt - down to LIBOR plus 75-95bp from 200-300bp on the individual ships beforehand. QGTC/Nakilat would take that example and run with it, achieving similarly competitive margins.

A banker at one of the Nakilat MLAs says: 'This is quite a new concept. You have the ability to expand your financing using the same terms across different financings.

'The big thing is that they have got a lot of flexibility that you would not expect to see in a project financing. In many ways it is more characteristic of a corporate financing.'

SMBC was financial adviser to Nakilat on the deal. Keishi Iwamoto, head of the Japanese bank's London-based shipping finance team, says: 'We have been acting as financial adviser for QGTC since the third quarter of 2004. That is when they started the procurement of the LNG vessels.

'They started it in the form of joint ventures for up to 28 ships. QGTC was to act as a partner with foreign companies - and formed a joint venture with Maran Gas for four vessels, with Teekay Shipping for seven, a Japanese consortium for 9, OSG for four and a German KG for four.

'It was to be ship-by-ship basis financing, and to start their business, they preferred to start with experienced partners.'

This was to change though, as the Qataris decided to maximise their control and proven financing power, while deciding to subcontract the management of the ships to a third party (Shell was selected for this in November, on a 25-year contract).

Iwamoto says: 'If they have to joint venture structure it the structure will be different for every JV project, but as long as no other partner is involved QGTC can decide what structure is best for them.'

Crucial to this process was the intervention of QP, which manages Qatar's gas monetisation strategy.

Blum explains: 'We were called in March or April last year by QP, which was helping QGTC organise financing. QGTC had been looking at doing it ship by ship and had gone into the market and got commitments from banks to do that. Term sheets had already been prepared and the rest. But QP came in and suggested a programme financing under which QGTC could finance additional vessels as it expands. Also, if you aggregate the cash flows from the time charter parties together you would get much better terms of financing.'

Banks, bonds ECA finance - and flexibility

What QP also did was play a big part in the structuring of the deal - which turned out very much along the lines of other Qatari club deals like RasGas II and Qatargas II, with a mix of debt, bonds, and export credit agency (ECA) finance from Korea. Abdulrahman Al-Shaibi and Deepak Agarwal in the QP project finance team came up with that structure and also put together the term sheets for the financing.

Blum says: 'QGTC was looking to raise a lot of money (up to US$7.3 billion), so were looking at bonds, commercial banks, ECAs and Islamic financing. That is an area where Latham & Watkins specialises, as we have done quite a few integrated bond and bank financings like the RasGas projects, the Paitom power project in Indonesia and Tengizchevroil. To integrate bonds, banks and ECAs together, that's the trick of the trade.'

Iwamoto adds: 'What we intended to structure is a hybrid project finance and shipping finance package, because it is part of the Qatar LNG chain. If one vessel crashes and sinks, even with one or two vessels the borrower can service the repayments - it is a combination of shipping finance and project finance.  From a shipping finance perspective there are certain structural challenges - but the cash flow is secured.'

The deal structuring can be seen below [for full details of arrangers and commitments, have a look at the project table at the end of this article]:

• Senior secured debt facilities with 24 commercial banks for US$2.2 billion (LIBOR plus 45 bp to 70 bp
• Subordinated secured debt facilities with 10 commercial banks for US$175 million (LIBOR plus 95 bp to 120 bp)
• Senior secured bonds due 2033 for US$850 million arranged by Lehman Brothers and Credit Suisse (priced at 1.45 per cent over US Treasuries at 6.067 per cent)
• Subordinated secured bonds due 2033 for US$300 million arranged by Lehman Brothers and Credit Suisse (priced at 1.65 per cent over US Treasuries at 6.267 per cent)
• Senior secured debt facility with the Export-Import Bank of Korea (KEXIM) for US$500 million (LIBOR plus 55 bp)
• Senior secured debt facility with a syndicate of commercial banks insured under a Korea Export Insurance Corporation (KEIC) insurance guarantee for US$225 million (LIBOR plus 30 bp)

One of the major difficulties involved in getting the deal to close was the integration of the Korean ECAS, KEXIM and KEIC.

They were involved from a very early stage because the ships were to be built in Korea, but they struggled to reconcile the financing structure with repayment obligations under the OECD's guidelines for ECA institutions. These stipulate that first loan repayments must be made within six months of a project delivery date, which presents a problem when the 16 ships all have different delivery dates.

Iwamoto says: 'It was difficult because of the complex structuring to accommodate the requirement for 16 vessels. ECA finance is normally done vessel by vessel, so it's a new concept to provide bulk finance. The 16 vessels each have a different delivery date, but we did not want to finance them ship by ship. In the end we created certain points which can be said to be the delivery dates which was acceptable.'

Blum adds: 'The Koreans had never done anything like this before, and they had to get comfortable with the unique nature of the programme financing. But they took a lot of comfort from the A+ (S&P and Fitch) and AA3 (Moody's) ratings, and that really goes down to Lehman Brothers. They did a terrific job selling the story to the rating agencies.'

From the commercial lenders point of view, there were some caveats presented as a result of the relative weakness of the covenants, but the importance of the shipping side to Qatar as an integral part of its LNG value chain gave considerable comfort.

A banker from one of the debt lenders says: 'I think that for ourselves it is a Qatari deal. It is a Qatari issuance, so the covenants and the structure are less important. You have got the charterers and the ship owners then Exxon and Conoco. So you have got a huge alignment of interests. They cannot afford to let that venture fail.'

Conclusions

Nakilat LNG shipping was a landmark deal, both for Qatar and the LNG shipping market. In terms of Qatar, QP's role in basically putting together the whole financing package was crucial, and shows how much importance the Qatari government attaches to the LNG shipping element - basically equal to the other parts of its gas monetisation chain.

In terms of LNG financing, the deal picked up on the programme-based structure that BNP Paribas put together for the BGT LNG ship refinancing and ran with it - securing debt at around half the margins it would have if it had financed the ships individually.

The deal is also the first occasion on which bonds have been used in an LNG shipping finance - a point that one banker says 'shouts of QP'.

A second phase of financing worth US$3 billion for the RasGas 3 and Qatargas 4 ships will follow late this year - and a banker says on this: 'It is basically the same again. There is nothing to do to be honest.'

As a result, LNG shipping bankers' minds are now turned towards West Africa, and Nigeria in particular. BGT will need a new fleet of ships for the upcoming Nigeria LNG SevenPlus project, and there is also Brass LNG and Olokola LNG. LNG will likely be delivered off the ship, so those consortiums in Nigeria are going to have to form new shipping arms. Down the coast, Angola LNG is also looking for ships.

Investments in these ships are going to be heavy (in the billions) so it will be interesting to see how they go about it. Bond finance may not be so easy to secure for West Africa, and substantial ECA support will be required. But one would assume that programme financing for LNG ships is now entrenched as a concept to be followed and repeated over and over.

The project at a glance