GNL Quintero: Going for robust

The $1.3 billion financing for the Quintero liquefied natural gas receiving terminal features the largest loan ever syndicated for a Chilean project. It marks the high-point for commercial bank involvement in the country's energy market, as sponsors have since turned to multilaterals and export credit agencies for support. The project's sponsors also found a way to assemble a robust deal structure around Chile's small and untested gas market.

After Argentina's default in 2001, and its subsequent restrictions on gas exports to Chile, the administration of then-president Ricardo Lagos directed the state-owned oil company, Empresa Nacional del Petroleo, or Enap, to explore the building of a new receiving terminal. The terminal would allow the country to shop for cargoes, albeit at the prevailing market price. In 2004, Enap mandated Citigroup and Linklaters as advisers on signing up LNG shippers and developers.

At the time the project was much smaller in scope – roughly 3 million cubic metres per day to the eventual 15 million cubic metres per day – and its cost was estimated then at $450 million. But as Enap did the rounds in London and New York it encountered considerable enthusiasm, because the terminal already had interested customers, which were prepared to pay a premium to the benchmark ordinarily used in the Americas.

Enap, with an 87% share of the oil and gas market in Chile, was the anchor customer, joined by Metrogas, the largest pure gas distributor in the country. The sponsors approached several generators, and brought in Endesa as a customer, though two other large players, Gener and Colbun, decided instead to concentrate on building coal-fired capacity instead.

But the Chilean government has enacted new pricing regulations that allow generators and regulators to recover fuel costs from customers. These provide the terminal's users with the incentive to use the terminal, where necessary, and the terminal's lenders with confidence that its customers will stick with their commitments. The three, Enap, Endesa and Metrogas, jointly own the marketing company that has signed a 20-year terminal use agreement (TUA) with Quintero.

Enap issued a request for proposals in the second quarter of 2005, and signed a letter of intent with BG Group in February 2006, for BG to supply and own a stake in the terminal. The choice of BG was a natural one, since not only did it have a record of developing LNG projects in smaller and less-developed markets, it also had a chequered experience in Argentina.

BG took a 40% stake in the terminal, with the three offtakers each taking a 20% stake, and also signed a 21-year supply agreement with the marketing company. This distances the borrower from risks connected with a potential mismatch between supply and offtake arrangements. The structure does not give terminal lenders security over its LNG supply agreements, but they do have access to the gas sales contracts. The terminal use agreement includes a capacity charge, and the pass-through of operating costs.

In June, following the execution of the BG supply agreement, the sponsors moved to bring the financing to market. The sponsors wanted to move fast, since construction had begun in February 2007. The project benefits from a fixed-price, turnkey engineering, procurement and construction contract with Chicago Bridge and Iron Company, and maintaining the price, in the overheated construction market of 2007, was paramount.

HSBC had replaced Citigroup, whose mandate expired after 2005, based on its experience bringing US and Middle Eastern projects to market. Still, the templates of receiving terminals such as South Hook and Sabine Pass were of limited use, since these involved the presence of oil majors or national oil companies as suppliers, which made for a more straightforward credit and came with more relationship banks attached.

HSBC went out to banks in August 2007, with a New York bank meeting, looking for arrangers. "We got a couple of very competitive underwriting bids, which had flex provisions, and a larger group also formed, which offered a little more pricing certainty," says Noortje Magis, chief financial officer at Quintero, and former head of structured finance at Enap.

While other sponsors might have chafed at the presence of such an oligopoly in the bank market, Quintero used the more competitive outliers to bring pricing pressure to bear on the large group. In March 2008 it named nine banks as mandated lead arrangers, deciding that having nine banks on the other side was the price of margin certainty. The nine are BBVA, ING, (both co-documentation agents), Fortis (administrative agent), Banesto, Calyon, Intesa Sanpaolo, WestLB (co-syndication agents), Mizuho Corporate Bank (technical agent), and Banco Santander (collateral agent).

BBVA, as key relationship lender, ING as head of the club grouping during the bidding, and Fortis, whose aggressive pursuit of Chilean business maintained pricing pressure, were the lead negotiators for the group. The financing, at 15 years of tenor, and wth margins that start at 150bp over Libor, does not match the terms of Gener's earlier Ventanas power financing, but they are much closer to Ventanas than Gener's later Angamos deal, which closed in the teeth of the crisis later in 2008.

The $1.1 billion in debt has 42% of principal outstanding at maturity, but another five years to run on the TUA. The sponsors will look to refinance the project as soon as market conditions permit. The sponsors did not hit their March 2008 deadline for close, but the eventual closing in June was comfortably ahead of the worst in the bank market. The same could be said of both the pricing and amortization profile, and while Quintero did not have the difficult choices that faced borrowers at the end of 2008, it made its easier choices clearly, decisively, and correctly.

GNL Quintero
Status: Closed 21 June 2008
Size: $1.3 billion
Location: Quintero Bay, Chile
Description: 15 million cubic feet per day LNG receiving terminal
Equity: $196 million
Sponsors: BG (40%), Metrogas (20%), Endesa (20%), ENAP (20%)
Debt: $1.1 billion
Lead arrangers: BBVA, Banesto, Calyon, Fortis, ING, Intesa, Mizuho Corporate Bank, Santander, and WestLB
Sponsor loan provider: BG Group
Financial adviser: HSBC
Sponsor legal counsel: Linklaters (international) Larrain y Asociados (local)
Lender legal counsel: Shearman & Sterling (international) Guerrero Olivos (local)
BG legal counsel: Vinson & Elkins
Independent engineer and environmental: Stone & Webster
Insurance adviser: Moore-McNeil
EPC contractor: Chicago Bridge & Iron