A consortium of Hunt Oil, Repsol, SK Energy and Marubeni signed $2.25 billion in loan agreements to finance its $3.8 billion Peru LNG project on 26 July 2008. According to the sponsors, the financing is the largest direct foreign investment in the country's history, and also includes new records for multilateral lending in the region. Commercial banks, however, have been less adventurous, and all of the debt benefits from ECA and multilateral cover, and carries, at least during construction, sub-100bp pricing.

The Inter-American Development Bank (IDB) accounts for $800 million in debt to the project, split into two tranches; a $400 million A loan on the IDB's books, and second $400 million B loan from Société Générale, BBVA, Calyon, Sumitomo, ING, Mizuho, and Bank of Tokyo-Mitsubishi. The A loan has a 14-year maturity and is priced at 75bp over Libor during construction and 100bp thereafter. The B loan has a shorter maturity of 12 years, and is priced at 100bp over Libor during construction, rising to 137.5bp over Libor thereafter. The A loan exceeds comfortably the IDB's previous per-project limit of $200 million, which was changed earlier this year.

The International Finance Corporation (IFC) is providing a $300 million A-loan, also with a 14-year maturity, its largest to date in Latin America, and it carries pricing that is said to be in line with the other multilateral debt.

US Ex-Im has signed a $400 million guarantee facility approval for the project, with SG and BBVA as guaranteed lenders. Ex-Im approved a $458 million guarantee, but the sponsors reduced this when they decided to buy US content for the project with sponsor equity. Kexim is providing a $300 million loan, and SACE's portion of the debt is $250 million. All of the ECA debt has a 14-year maturity, with a 7.5-year average life.

The pricing on the ECA debt is also said to be in line with the rest of the facilities, though calculated with reference to the OECD's CIRR rate. The loans will be disbursed within two months of signing. The debt carries pro-rata corporate guarantees from the sponsors during construction, which explains in large part the ultra-low pricing on the debt during this period. The sponsors are providing 40% of the project's cost in equity (split 50/20/20/10 between Hunt Oil, SK Energy, Repsol, and Marubeni respectively).

According to Brian Swinford, vice-president of finance at Hunt Oil, there will also be "debt on the project that is not under an MLA umbrella or ECA guarantee, but we haven't placed it yet." The sponsors hope to issue $200 million of 15-year bonds in the Peruvian capital markets in the fourth quarter of 2008 to complete the required financing. They also plan to have a $75 million working capital revolver, arranged in the Peruvian bank market, with a two- to three-year maturity, renewable annually. The bonds and revolver – if they can be closed – will be pari passu with the international debt.

Although Peru now has an investment-grade rating, banks are still wary of lending uncovered into the country. Swinford explains that, "In short, international commercial banks can find it challenging to provide long-dated debt in Peru without some sort of ECA or multilateral support."

The project involves two parts; the construction and operation of a natural gas liquefaction plant and a marine loading terminal at the Pampa Melchorita site between Cañete and Chincha, 170km south of Lima; and a 408km gas supply pipeline linking the plant to the existing Transportadora de Gas del Perú (TGP) gas pipeline between Camisea and Lima, from the existing Malvinas separation plant.

The TGP pipeline was built in 2004, and included a 211km section that was designed to accommodate more LNG than was then needed. This minimised disruption to the rainforest through which the pipeline passed. Nevertheless, the project attracted so much negative attention that it forced the exit of US Ex-Im and Citigroup from the financing. That $600 million deal went through with the IDB, BNDES, CAF and a local bond issue. Hunt Oil and SK Energy are also sponsors on the TGP project, in a consortium with Tecgas, Pluspetrol and Sonatrach.

The plant will have a capacity of 4.45 million tonnes per year of LNG, or a daily supply of 625 million cubic feet, and is expected to be in operation by 2010. Construction is already underway and on schedule, with 20 months remaining.

Repsol has an offtake agreement to purchase 100% of the LNG produced. It will supply the Manzanillo LNG terminal in Mexico, under a 15-year contract with Mexico's federal electricity commission (CFE). Under the agreement, Manzanillo will receive between 65% and 75% of Peru LNG's output, or 80 million cubic feet per day (cfpd), ramping up to 500 million cfpd by 2015. The LNG will be regasified and used at existing and planned power plants in the west of Mexico. Repsol has suggested that it will market the remaining LNG to Asia, Chile and the United States.

The Manzanillo terminal is under construction and will not be complete until 2011, a year later than the Peru LNG project is due to come online. A financing for the project, however, is believed to be close to market. In the year's gap and during Manzanillo's ramp-up period, Repsol will sell the LNG on the spot market or through exchanges.

Peru LNG has taken a long time to come to market, since it was meant to follow close on the heels of the Camisea pipeline. In the end the Quintero receiving terminal, located in neighbouring Chile, just beat it to close, and closed without any multilateral support at all. Chile would make a logical destination for Peru's gas, but after its experience with interrupted supplies from Argentina, Chile prefers to pay up for access to international producers rather than strike a deal with Peru.

Peru LNG
Status: Closed 26 June 2008
Size: $3.8 billion
Location: Peru
Description: LNG terminal and pipeline
Debt: $2.25 billion
Sponsors: Hunt Oil (50%), Repsol (20%), SK Energy (20%), Marubeni (10%)
Lenders: IDB, IFC, US Ex-Im, Kexim, SACE, Société Générale, BBVA, Calyon, Sumitomo, ING, Mizuho, and Bank of Tokyo Mitsubishi
Financial adviser to sponsors: Société Générale
Legal counsel to sponsors: Skadden Arps Slate Meagher & Flom (international), Miranda & Amado (local)
Legal counsel to lenders: Milbank Tweed (international), Roselló (local)
Financial adviser to Ex-Im: GreenGate Associates
Independent technical adviser: Merlin
Insurer: AON