Cameron gets speedy execution
Committed project sponsors and a completion guarantee were among the stand-out features of the mammoth Cameron LNG financing that occupied much of the market for a good part of 2014. By Alison Healey.
To see the full digital edition of the PFI Yearbook 2015, please click here.
To purchase printed copies or a PDF of this report, please email email@example.com
On August 6 2014, Sempra Energy and its project partners, comprised of affiliates of GDF Suez, Mitsui & Co, and Mitsubishi Corporation with Nippon Yusen Kabashiki Kaisha, reached a final investment decision and signed US$7.4bn in financing to back the three-train Cameron LNG export project with planned annual production of 12m tons in Louisiana.
Key features of the deal were the deep involvement of the sponsor in all aspects of the project, the fast-tracking of such a huge financing, and a structure developed through consensus in what the parties to the deal described as a true collaborative effort. Sempra’s skilful handling of the regulatory process has also been mentioned as a stand-out feature for the project, as has the completion guarantee.
From the time when the deal was in the early days, the goal was a financing that would be well-structured and a project that would be easy to take to credit committees. These features were a necessity to facilitate speed of execution as dozens of US export projects made their way through the hurdles within a very short window in a race to compete.
The US$7.4bn project financing backed the US$10bn Cameron LNG natural gas liquefaction and export project. The existing regasification site will be expanded to allow for liquefaction under a fixed price date-certain EPC contract with an experienced consortium of Chiyoda and CB&I.
Japan Bank for International Cooperation (JBIC) provided a loan of US$2.5bn and a group of 29 commercial banks provided the remaining US$4.9bn. Nippon Export & Investment Insurance (Nexi) insured US$2bn of the commercial bank debt. The sponsors, which include Sempra, GDF Suez, Mitsubishi Corporation and Mitsui, provided completion guarantees over the debt deal. The loan has a tenor of 16 years. Pricing was 175bp for the uncovered tranche and 125bp for the Nexi-covered tranche. RBS advised the sponsors.
The US$2.5bn loan facility agreement was among Cameron LNG, Japan Bank for International Cooperation (JBIC) and Bank of Tokyo Mitsubishi UFJ, as loan facility agent, combined with a US$2.0bn loan facility agreement, among Cameron LNG, 15 commercial banks and Sumitomo Mitsui Banking Corporation as facility agent, with insurance coverage provided by Nippon Export and Investment Insurance (Nexi) and a US$2.9bn loan facility agreement, among Cameron LNG, 25 commercial banks and Mizuho Bank as facility agent.
“The Cameron LNG project was the first US LNG project supported by Nexi, which would contribute significantly to Japanese energy security,” said Mikio Takeuchi, director, oil and gas group, structured and trade finance insurance department, at Nexi. “Nexi provided US$2bn of insurance coverage to the lenders for this project and this is the second-largest project in our history in terms of the insured loan amount.”
The banks in the uncovered portion include Bayerische Landesbank, BBVA, BTMU, CBA, CIC, Credit Agricole, Deutsche, DNB, Goldman Sachs, Helaba, HSBC, ING, JP Morgan, MetLife, Mitsubishi Trust, Mizuho, Natixis, Norinchukin Bank, RBS, SMBC, Santander, Shinsei Bank, SG, Sumitomo Trust and UniCredit.
The banks in the Nexi tranche are Aozora Bank, BTMU, CBA, Chiba Bank, HSBC, ING, Mitsubishi Trust, Mizuho, Norinchukin Bank, SMBC, Shinkin Central Bank, Shinsei Bank, Shizuoka Bank, SG and Sumitomo Mitsui Trust.
The project’s tolling agreements follow a conventional tolling model with no exposure by the borrower to feed gas or LNG price risk or to feed gas procurement or LNG off-take risk. Tolling customers or their respective parents are rated Single A or better and have a strong strategic interest in the project, given their role as experienced players in the gas marketing and trading business.
The long-term financing, at a tenor of 16 years, is quite unusual for the US market and was seen early in the process as a potential challenge, said Hugues Marchand, head of acquisitions, investments and financial advisory, LNG, at GDF SUEZ. There was an expectation that the cost of funding of the project might be high as a result and the appetite of banks quite limited.
However, the reasons for choosing the structure centred on the sponsors’ wish to fully fund the project from day one, make the project benefit from current liquidity in the market by locking attractive financing terms and conditions in the long run, and the involvement of Japanese ECAs requiring commercial bank debt to match their loan tenor.
The financing was the first US LNG project to-date in which three liquefaction trains were financed in one single multi-tranche financing. The outcome of syndication was very positive, with large tickets from JBIC and Nexi, and good competition for the uncovered tranche between commercial banks. As a result, sponsors achieved a low cost of funding and managed to embed in the financing agreements flexibility to raise additional funds for expansion and to issue bonds at a later stage.
The tolling model had a strong appeal to the market and was bolstered by market conditions, with a large pool of money chasing few projects.
The sponsors all have strategic interests in the project. For GDF Suez, LNG is seen as a key business to enable the group to accelerate its development internationally and a focus of GDF Suez Group for its international business in Asia and elsewhere. The project for GDF Suez does not stop at its investment in the liquefaction plant. The company is an off-taker of liquefaction capacity in the amount of 4mtpa, a third of plant capacity, giving access to flexible LNG “destination free”.
The company is buying gas in the US, booking pipeline capacity in the US to be able to benefit from the liquidity of the gas market at various points in the US, and contracting and increasing its LNG fleet. GDF Suez is also selling LNG to a number of counterparties with a strong focus on Asia, including Marubeni, Tohoku and CPC and, in the process, growing the presence of GDF Suez group in key Asian markets. The additional liquefaction capacity increases the flexibility of the company’s global LNG portfolio, enabling it to achieve optimisation and shipping savings.
The Cameron financing documents require Cameron to swap 50% of the floating-rate interest exposure to a fixed rate, which helps to mitigate the exposure to higher interest costs. The project’s financial model includes a self-adjusting feature for changes in capital costs, including the ability to cover capital cost overruns with a compensating tariff increase. The average DSCR is 1.85x, with a 1.65x minimum.
Moody’s gave its A3 rating to the project’s US$2.9bn uncovered senior secured credit facility due 2030. S&P and Fitch each gave the deal a Single A rating.
On October 1 2014, after receipt of final regulatory approval and satisfaction of certain conditions precedent to the first disbursement of the project financing, the Cameron LNG joint venture became effective. At that time, the project partners were issued indirect equity interests in Cameron LNG in an aggregate of 49.8%, and Cameron LNG ceased to be wholly owned or controlled by Sempra Energy, which now owns 50.2% of the project.
As of the effective date, Sempra Energy will account for its investment in the Cameron LNG joint venture under the equity method. The occurrence of the effectiveness of the Cameron LNG joint venture was a condition precedent to first disbursement of funds under the loans and for the Sempra Energy guarantee of 50.2% of the project financing.
The loans have a maturity date of July 15 2030. The weighted average all-in cost of the loans outstanding is 159bp over Libor prior to “financial completion” of the project, which occurs upon satisfaction of certain conditions under Cameron LNG’s finance documents, including all three trains achieving commercial operation and meeting certain operational performance tests, and 178bp over Libor following financial completion of the project. Financial completion is expected to occur in the second half of 2019.
Interest is payable semi-annually in arrears on payment dates set at January 15 and July 15 of each year. The first payment of principal is scheduled for the earlier of the first such payment date occurring more than six months following the occurrence of financial completion and July 15 2020.
For JBIC, the project is important as it is Japan’s policy issue to secure the stable supply of and to reduce the procurement cost of LNG, which consists of more than 40% of Japan’s power energy mix at present. The promotion of diversification of LNG procurement sources, including the US, and the LNG pricing formula has been touted in the “Strategic Energy Plan” approved by the Cabinet in April 2014.
The first project is the first to export LNG from the lower 48 US to Japan based on a long-term contract using the pricing formula linked to the US gas market index, which is different from the existing LNG pricing linked to crude oil prices. Cameron contributes to the promotion of diversifying LNG procurement sources and pricing formula. Thus, the support for this project by JBIC, which will contribute to the securing of a stable supply of energy resources to Japan, as well as the steady implementation of the energy policy of Japan.
Strengths of the project over the only comparable transaction in the US at the time of Cameron’s financial close, Sabine Pass, were highlighted in a special report from Moody’s.
Cameron’s lenders benefit from direct debt guarantees from its owners during the construction period and tolling contracts that allow payments to adjust to compensate for construction cost overruns. Sabine lacked these safeguards and also faces funding uncertainty since it relies on US$1.8bn of its pre-completion cashflow to pay for construction.
While both Cameron and Sabine Pass use long-term contracts that provide fixed revenue payments, Cameron’s tolling contract includes what Moody’s classifies as credit supportive terms, such as a direct pass-through of operating costs to its tolling counterparties and an obligation on the tolling counterparties to deliver feedstock. The tolling counterparties’ interests are also better aligned with those of Cameron since they are also its part-owners.
The project does not incorporate speculative revenues in its base case forecast, Moody’s points out, as it does not have to source natural gas given its tolling agreements, and owns all of its existing LNG import facilities outright.
Cameron’s lenders also benefit from direct debt guarantees during the construction period and are further protected by tolling contracts that allow prices to adjust to compensate for construction cost overruns. The latter feature preserves Cameron’s ability to service its debt, even if cost overruns are funded in part through additional borrowing. For example, a 20% cost overrun at Cameron would lower its average debt service coverage ratio only moderately, to 1.86x from 2.0x.
Cameron will use LNG liquefaction technology licensed from APCI, which is used by many of the LNG producers globally. Latham & Watkins acted as counsel to lenders, while Sullivan & Cromwell acted as counsel to the borrower/sponsors. Vinson & Elkins advised Mitsubishi and Linklaters advised GDF Suez. Lummus Consultant International acted as independent engineer and environmental consultant, JLT Specialty acted as lenders’ insurance counsel, and Poten & Partners acted as market consultant.