Canaport LNG: Trans-Atlantic margins

A highly aggressive liquefied natural gas (LNG) financing featuring Euro market pricing and terms for North American assets, the $756 million Canaport LNG debt facility achieved the longest tenor and lowest pricing for an oil and gas project financing in the North American market to date.

The financing backs development of Canaport's New Brunswick regasification terminal and is senior sponsor Repsol's (75%) first LNG project in North America and co-project sponsor Irving Oil's (25%) first project financing and first LNG project.

Canaport LNG will be the first new receiving terminal on the North American East Coast in over 30 years. Canaport's capacity is fully contracted under a 25-year terminal services agreement with Repsol subsidiary Repsol Energy Canada (REC).

REC has transportation capacity in the Brunswick pipeline to take the gas from the terminal to the US border and Repsol Energy North America has transportation capacity to take the gas form the Canada-US border to the marketplace in New England.

Irving owns a 275,000 bpd refinery in St. John, with an oil receiving terminal that has clear capacity for an LNG plant – St. John is a small port city where public support for the project is strong. Irving approached Repsol in early 2004 and in June 2005 the joint project agreement was signed with Repsol also agreeing to build a pipeline from the project to the US border, thus making it attractive to LNG suppliers.

The total project cost is around $1.08 billion, of which $756 million is provided through a single facility construction and term loan led and underwritten by a club of predominantly Spanish banks – Banco Santander, BBVA, Royal Bank of Scotland, La Caixa and BMO.

The construction loan becomes a term loan post-completion with a 27-year maturity and very tight pricing – the loan pays a margin of 70bp with step-ups to 110bp over time. The amortisation is sculpted in quarterly instalments, beginning six months after the start of the availability period. Citigroup was financial adviser on the transaction.

Only institutions that had relationships with the sponsors were invited to submit proposals, and the offers were very competitive. "When we started the advisory process we thought the debt would most likely come from the bond market because of the long length of the project revenue contract", says Erik Codrington, director at Citigroup Global Markets, "as it turns out the banks were more aggressive than the bond market, and they were willing to go just as long and the pricing was the same if not better. With the project's capacity fully contracted under a 25-year terminal services agreement with Repsol Energy Canada, the project was able to tap into the European market for very strong offers".

The pricing reflects a deal that is of investment grade quality and the relationship banking pull of Repsol – of the two non-Spanish banks in the lending club (RBS and BMO) only BMO does not have a strong presence in the Spanish project lending market. Furthermore, although non-recourse and with no completion guarantees from the sponsors, the project does have signed fixed-price turnkey contracts with both the offshore and onshore contractors.

A one-phase syndication is currently underway with tickets of $50 million on offer for a 65bp fee. However, "the five banks are very comfortable with holding the transaction on their own books, which is why there was no rush in placing the transaction in the market" says Javier Sanz, director at Repsol, "there's a lot of appetite for these assets and the deal has received a lot of interest."

Construction began in October 2005 in two parts – onshore construction is being carried out by a consortium consisting of SNC-Lavalin and Saipem affiliate CENMC Canada, and offshore construction of a jetty is being carried out by Peter Kiewit, Weeks Marine and Sandwell Engineering. The process is being managed by Canaport LNG with Foster Wheeler as the engineer.

Construction is ahead of schedule and expected to be complete by the end of 2008. Initial capacity will be 1 billion cubic feet per day (cfpd), with space on the site for up to five additional tanks and up to 2.5 billion cfpd of vaporisation.

Flushed with the success of Canaport, Irving Oil is now looking at the possibility of building a second refinery at Saint John and is sounding out banks for funding for the $5-$7 billion project. Feasibility, environmental and socio-economic studies are underway and application for a licence for an estimated 300,000 bpd plant is expected in the coming months.

Canaport LNG
Status: Closed 22 November 2006
Total cost: $1.08 billion
Debt: $756 million
Location: St. John, New Brunswick
Description: 1 billion cubic feet per day LNG regas terminal
Sponsors: Repsol YPF; Irving Oil
Lead arrangers: Banco Santander, BBVA, BMO, La Caixa and Royal Bank of Scotland
Financial adviser: Citigroup
Market consultant: Wood Mackenzie
Independent engineer: Purvin & Gertz
Legal counsel to sponsors: Linklaters; McDermott Will & Emery for Irving; Bennett Jones for Repsol
Legal counsel to lenders: Shearman & Sterling
Insurance: Moore-McNeil