Qatargas 4: Margin mashing

Sponsored by Qatar Petroleum (QP) (70%) and Shell (30%), Qatargas 4 set a new historic pricing low for Qatari LNG projects – the $2.8 billion commercial bank debt priced at 30bp to 60bp over Libor – and raised over $4 billion of financing in total.

The project also shares some facilities with Qatargas 3, which required a clear delineation of responsibilities and liabilities on those assets, and despite the aggressive pricing and financing structure, the debt syndication was hugely successful coming in 2x oversubscribed.

The financing comprises a $2.8 billion bank tranche, a $225 million L/C and a $1.2 billion sponsor loan from Shell. In all 30 international, regional and Qatari banks participated in the deal. All the facilities have a maturity of 15.5 years.
Banks were asked to commit to take-and-hold positions of $100 million on the senior and $15 million on the L/C, although many offered larger commitments. Banks were scaled back slightly on a pro-rata basis. Pricing on the debt starts at 30bp over Libor pre-completion, rising to 50bp during years five to eight, 55bp during years nine to 12 and 60bp for the final four years.

This compares with the $1.488 billion 16.5-year bank backing QP-ConocoPhillips' Qatargas 3 project that closed at the beginning of 2006. The Qatargas 3 debt had a pre-completion margin of 45bp over Libor, rising to 60bp post-completion through to year eight, 65bp from years nine to 12, and 70bp from years 13 to 161/2.

The deal is not a template copy of Qatargas 2 or Qatargas 3, and falls between those deals and RasGas 2/3 in terms of covenant package – with Qatargas 2 and 3 exhibiting more non-recourse covenants and RasGas more borrower flexibility from a corporate-style deal. Cover ratios on Qatargas 4 are 2.9x minimum debt service and 3.05x average DSCR. The debt is backed by a construction guarantee from QP with Shell providing the same for its loan.

Following the Qatargas 2 precedent, lenders are taking gas market price risk on Shell's offtake. That did not put banks off – an original 30 bank group was only tweaked slightly: Following the merger of Banca Intesa and SanPaulo IMI, a new bank came in to keep the numbers at 30, Europe Arab Bank – a new European-based subsidiary of Arab Bank.

Calyon acted as the documentation bank and is the bank facility agent and intercreditor agent. Citigroup is the security trustee and account bank. International bookrunners are Barclays Capital and RBS. Regional bookrunners were Apicorp and Qatar National Bank.

Despite the low margins, the bank portion was upsized from an anticipated $1.5 billion – a figure which would have seen the club come in on a take-and-hold basis – to $2.8 billion. In the initial financing plan it was envisaged that a $1.3 billion 144a bond tranche would negate the need for a general syndication. It is QP's explicit aim to diversify its funding sources.

However, because the joint venture and sale and purchase agreements were signed by Shell and QP at a late stage (10 July), there was not enough lead time to incorporate a capital markets financing before the holiday period and adhere to the financing schedule. That the bond was overtaken by events was a blessing in disguise, allowing Q4 to avoid the choppy conditions of the capital markets following US sub-prime mortgage sickness.

The bank portion was upsized from an anticipated $1.5 billion – a figure which would have seen the club come in on a take-and-hold basis – to $2.8 billion.

The project – Qatar Petroleum's second biggest – comprises upstream facilities to produce around 1.4 billion cubic feet per day of natural gas, including 24,000 bbl/d of LPG and 46,000 bbl/d of condensate from Qatar's North Field over the 25-year life of the project. The integrated project also includes a 7.8 million tonnes-per-annum liquefaction plant and an LNG shipping capability.

The main engineering, procurement and construction contract for onshore facilities was awarded in December 2005 and construction activities are in full swing in Ras Laffan. First LNG cargoes are scheduled for delivery in 2009. Q4 has signed an eight-LNG vessel charter agreement with Qatar Gas Transport Company (Nakilat).

The LNG volumes are intended to flow primarily into natural gas markets in the eastern United States. Shell has arranged for capacity at the Elba Island LNG import terminal as well as in the new Elba Express natural gas pipeline to receive and regasify the LNG exported to the United States.

Qatargas 4
Status: Signed 26 July 2007
Description: $4.03 billion financing of LNG train Qatargas 4
Sponsors: Qatar Petroleum (70%), Shell (30%)
Financial adviser: Royal Bank of Scotland
Mandated Lead Arrangers: Arab Banking Corporation, Apicorp, Banco Santander, Bank of Tokyo-Mitsubishi, Barclays Capital, Bayerische, BBVA, BNP Paribas, Caja Madrid, Calyon (facility and intercreditor bank), Citigroup (security and accounts bank), Commercial Bank of Qatar, Dexia, DNB Nord, EDC, Fortis, HVB, Intesa SanPaulo, KfW, Lehman Brothers, Lloyds TSB, Mizuho, Natixis, Qatar National Bank, SG, Standard Chartered, SMBC, RBS, WestLB and Europe Arab Bank
International bookrunners: Barclays Capital and RBS
Regional bookrunners: Apicorp and Qatar National Bank
Legal counsel to the sponsors: White & Case
Legal counsel to the banks: Skadden, Arps, Slate, Meagher & Flom