Mitsui, Korea Gas and Samsung have closed and funded the $701 million financing for their Manzanillo liquefied natural gas receiving terminal. The debt's maturity, at 15 years, is comfortably the longest in the Western hemisphere since the crunch and the scheme is the first LNG facility in Mexico to close a project financing.

It uses a regulatory framework that has not been tested on a long-term project financing, and was financed with Mexico's state electricity company, the Comision Federal de Electricidad (CFE), rather than its state oil and gas company, Petroleos de Mexico (Pemex), as customer. The successful closing of financing for an oil and gas project by the CFE will be embarrassing to Pemex, which has been unable to procure projects even using its own, more flexible, legal framework.

Manzanillo is a 3.65 million tonnes-per-year, or 500 billion cubic-feet-per-day, regasification terminal located on Mexico's Pacific coast in Colima state, close to the country's largest port. It is the third LNG receiving terminal to be built in Mexico, and the third to be built to serve the CFE, after Sempra Energy's Costa Azul terminal, a 1 billion cubic-feet-per-day facility with a 15-year contract to supply the CFE, and the Altamira terminal, owned by Shell, Total and Mitsui. While Costa Azul, which went on line in 2008, was built on Sempra's initiative, and Altamira, which has been open since 2006, was built in response to a CFE request for bids, neither was project financed.

One big reason for the use of balance sheet financing, aside from the relative financial strength of the sponsors, was the concern about the termination provisions embodied in the law of acquisitions, leases and services of the public sector, or LAASSP. While the CFE's independent power projects have been procured successfully, and competitively, under Mexico's IPP law, its gas-related procurement efforts would not fall under it. Pemex' small number of private pipeline project concessions have managed to gain exemptions, often by being structured as service contracts.

The IPP law lays down a specific formula for the termination of projects, indicating the specific circumstances under which these can be terminated and the compensation payable. LAASSP is much more vague and does not allow the public sector to be as specific in its promises to the private sector. Lenders fret that this vagueness might leave them holding losses if a project is terminated at the public sector's provision, and that LAASSP does not allow them step-in rights over projects. Sponsors also worry that LAASSP makes them jointly and severally liable for the obligations of a project company.

According to Motoshi Asahara, the chief financial officer of the project company, Terminal KMS de GNL, the sponsors have been looking at the project since 2004-5. The CFE issued bid documents on the project on 7 June 2006, the consortium retained Mizuho as financial adviser on 9 February 2007, it submitted its bid on 25 February 2008, and learrned it had been successful on 7 March.

The winning consortium had an unusual composition. Korean and Japanese bidders have traditionally been fierce competitors on resources projects, since both have fast growing manufacturing-based economies and limited hydrocarbon reserves. Manzanillo is the largest Korean-Japanese overseas investment ever. To comply with the letter of LAASSP, the consortium partners had to agree an elaborate set of cross-indemnity provisions that mimicked a pro rata share of the project's obligations, even though their obligation to the CFE was joint and several.

The project benefits from a 20-year terminal use agreement, which does not expose it to volume or price risk, with the CFE. The CFE, in turn, has signed an agreement with Repsol to supply the terminal, although this agreement is quite separate from the Manzanillo financing. Repsol is likely to use gas from the Peru LNG liquefaction plant, of which it is the sole offtaker, to meet its obligations to the CFE, though these obliagtions are no part of the Peru LNG financing, which closed in June 2008.

Still, both Mizuho and Calyon, which was appointed lead arranger on the Manzanillo financing on 29 May 2008, participated in the $2.05 billion Peru LNG financing. Korea Ex-Im provided a $300 million loan to Peru LNG, and during the bid for Manzanillo agreed to provide or cover 70% of that project's debt requirement. It stepped up to provide the support mostly because Samsung, in its first such engagement outside Korea, is the contractor on the terminal, but also, as one banker close to the financing admitted, because JBIC's attention is focused on some even larger power projects in the Middle East. Samsung's EPC contract has a value of $630 million and was signed on 5 August 2008.

Kexim is providing a 15-year $262.1 million direct loan to the project, and guaranteeing another $214.4 million covered loan from commercial lenders. The banks are also providing a 14-year uncovered loan of $204.2 million, at a margin that starts at 320bp over Libor, and steps up to 370bp over the loan's life. The tenor is exceptional, the more so since work did not begin in earnest on the financing until well after the Lehman collapse, though discussions of tenor, as well as some contingent sponsor support to the project, dominated the financing process.

The banks were able to gain comfort about the termination provisions thanks to a "clarification" that the CFE appended to the contract, outlining in more detail how a termination payment might be calculated, and giving the banks comfort that they would be made whole in the event of CFE calling a default for convenience. The CFE has issued such clarifications before, in instances where the IPP law has not been sufficient to reassure foreign lenders to power projects. The legal framework might be different, but the CFE's flexibility in working round it to satisfy lenders endures.

The financing signed on 11 September, after the two leads brought in lead arranger commitments from Bank of Tokyo-Mitsubishi, BBVA, Development Bank of Japan, Standard Chartered and Sumitomo Mitsui Banking Corporation. The size of the group, particularly at this lengthy tenor, indicates the regard in which Latin project lenders hold Kexim, after a number of deals in Peru and Chile. The financing bodes well for Korean contractors' ability to pursue Pemex business in Mexico.

Pemex will be the main beneficiary of the work on Manzanillo, even though it lost the project to the CFE, and even though the CFE's success on the project will be extremely embarrassing. President Felipe Calderon's recent reforms to Pemex include procurement laws that should be easier to use than either LAASSP or the IPP law, and Pemex needs urgently to upgrade its infrastructure to address declining production levels. CFE has little need, for now, of additional gas infrastructure. For Pemex, seizing the opportunity is critical, as its upcoming power project, Nuevo Pemex, should demonstrate.

Terminal KMS de GNL
Status: Signed 11 September 2009, funded 1 October
Description: 500 billion cubic feet per day LNG receiving terminal
Sponsors: Korea Gas, Mitsui, Samsung
Debt: $701 million
Lead arrangers: Bank of Tokyo-Mitsubishi, BBVA, Calyon, Development Bank of Japan, Mizuho, Standard Chartered and Sumitomo Mitsui Banking Corporation
Independent engineer: Shaw Stone & Webster
Insurance adviser: Marsh
Sponsor legal counsel: Allen & Overy (international); Creel García-Cuellar Aiza y Enriquez (local)
Lender legal counsel: Milbank Tweed (international); Lopez Velarde, Heftye and Soria (local)