Yemen LNG has raised $2.8 billion via a syndicated loan to build an LNG plant in Yemen – slightly below the $3 billion originally sought but closed on time and without a pricing flex.

The deal backs a $4 billion project–first launched in August 2005–to build a liquefied natural gas (LNG) plant near Balhaf in Yemen's Gulf of Aden Coast. The plant is 75% built and will produce 6.7 million mt/year of LNG (proven gas reserves are sufficient for that rate of production for at least 20 years) when it comes on stream in early 2009, a few months later than its original schedule of December 2008.

French petrochemicals group Total is the project's lead sponsor with a 40% stake. US energy firm Hunt Oil holds 18% and Yemen Gas 17%. Other sponsors include SK Energy, Korea Gas, the General Authority for Social Security and Pensions of Yemen and Hyundai.

The financing, for which syndication closed on May 19, comprises a $1.7 billion limited recourse facility and a $1.1 billion sponsor loan from Total. The $1.7 billion loan is split into a $1.05 billion ECA-backed tranche and a $650 million uncovered tranche.

The unsecured tranche has a 12-year tenor while the loan's average life is seven years. Debt repayment is every six months and is priced at 165bp for construction-plus three years, 180bp for the following three years and 210bp thereafter.

Lead arrangers BTMU, BNP Paribas, Calyon, Citigroup, ING, Royal Bank of Scotland, SMBC, Societe Generale and Sumitomo Mitsui Banking Corporation bankrolled the bulk of the unsecured tranche in which Dexia, KDB, Mizuho and BACB also contributed small, undisclosed amounts. The banks financed roughly 60% of the insured tranche while the other 40% was lent by Coface, Nexi, Kexim, and JBIC. The lead arrangers also funded Total's loan.

All lenders underwrote their original commitments. Yemen LNG is understood to have offered the banks 25bp for commitments of $30 million, $15 million and $10 million on the ECA-backed tranche.

The deal has been around for a long time and although a success given the tight lending climate, Yemen LNG received $220 million less than it originally sought from the banks and sponsors.

When the deal first went to market, Yemen LNG had sought $750 million for the unsecured tranche while French ECA Coface was expected to stump up $450 million but ended up allocating $430 million. Total had also originally pledged $1.2 billion.

Coface (which typically backs deals that can boost French exports) lowered its contribution by $20 million after technical problems caused France's share of raw-material exports to the project to fall. Total's smaller disbursement stemmed from pro-rata adjustments in the financing scheme.

Yemen LNG was forced to reduce the deal "because there were limitations as to how much you can raise in a [risky] country like Yemen in the current credit environment," says a lawyer involved in the deal. "They could have got all the money but they decided on the cut down deal to get it done on time." The sponsors can also raise more debt at the original contract terms if market conditions improve.

Deal participants say the transaction pays "generously" compared to similar LNG projects in the Middle East. "It's true that you have risks in Yemen, but this project is all for export and there have been plenty of other LNG facilities in the Middle East financed at less than 1%," claims a banker on the deal. "As a banker, I'm never going to tell you we get paid enough, but this deal was a big success in the context of the credit crunch."

The contract's terms and price offset any risks related to soaring gas prices, rising construction costs and the spectre that offtake contracts could be cancelled. "There weren't any risk scenarios that weren't addressed in the contract," says a lawyer on the deal. "The sponsors were 100% behind the deal which these made the banks very comfortable."

Participants also dismiss suggestions that the deal was dogged by uncertainties linked to the project's gas feedstock and sale contracts. "The offtake contracts are pretty solid and so is the project," adds the lawyer. "The contracts were negotiated when the LNG market was robust in 2005 and the construction contracts were signed before construction costs began to rise."

A revenue-sharing dispute about the gas feedstock contracts between Hunt Oil and Yemen's government delayed the project, the lawyer conceded. However, the issue was resolved after the Yemen government-owned Safer bought the upstream assets from Hunt last year, allowing the financing to move forward. The plant kept being built in the meantime so there was no delay in the construction process.

Yemen LNG has committed approximately 100% of the guaranteed plant capacity under three 20-year take-or-pay LNG sales and purchase contracts with Korea Gas, Total and Suez LNG Trading. The two-train liquefaction plant will use gas from the Marib region of central Yemen and convert it into LNG for shipping to the international markets, notably the US.

Yemen LNG
Status: Financial close May 19 2008
Size: $4 billion
Debt: $2.8 billion
Sponsors: Total, Hunt Oil, Yemen Gas, SK Energy, Korea Gas, the General Authority for Social Security and Pensions of Yemen and Hyundai.
Financial adviser: Citigroup
Commercial lead arrangers: BTMU, BNP Paribas, Calyon, Citi, ING, Royal Bank of Scotland, SMBC, Societe Generale and Sumitomo Mitsui Banking Corporation
ECAs: Coface, JBIC, NEXI, Kexim
Legal counsel to lenders: Milbank, Tweed, Hadley & McCloy
Legal counsel to sponsors: Sullivan & Cromwell