If proof were needed that the drought in US LNG project financings was down to something other than a lack of investor appetite, it came with the runaway success of Cheniere Energy's financing of its Sabine Pass regasification terminal in Louisiana.

The deal – the largest ever LNG financing in the US – was so well received in syndication in New York that Cheniere was able to increase the amount it borrowed to $822 million from the $714 million it had initially planned. Almost a year on, Cheniere is now looking to expand the project, with a refinancing possibly on the horizon.

It was not always thus. Lenders treated the deal with scepticism when Cheniere first floated it; there were no offtakers in place, which left Cheniere exposed to a level of downside risk considered too high for a company that was not a senior player in the exploration, production and development of LNG in the Gulf of Mexico. Moreover, a tricky permitting process makes it hard turning planned US LNG terminals into realities.

Nevertheless, on 1 July 2003, HSBC was mandated to be Cheniere's financial adviser. Less than two years later HSBC and Cheniere had closed financing for the first US fully greenfield LNG terminal.

The key moment came in December 2004, when several elements combined to make the deal an attractive proposition.

The first development was an equity offering on 2 December. Advised by Petrie Parkman, Cheniere raised $300 million by pricing 5 million shares of common stock at $60 each. Petrie Parkman, JP Morgan Securities, Merrill Lynch and Pierce Fenner & Smith acted as lead managers. With its improved capitalisation, Cheniere was able to call off talks with ChevronTexaco about the latter taking a stake in the project.

Then on 13 December, Chevron signed a deal for the regasification rights to 700 million cubic feet per day (cfpd) for 20 years from when the plant becomes operational, no later than 1 April 2009. Total had already signed an agreement the previous September for 1 billion cfpd, so Cheniere now had credits for over half of Sabine Pass's 2.6 billion cfpd capacity. The Chevron deal gave the oil major the option to either increase the amount of its offtake to 1 billion cfpd, or to decrease it to 500 million cfpd – Chevron decided to increase its offtake near the end of last year.

Finally, on 15 December, Cheniere obtained a permit from the Federal Energy Regulatory Commission (FERC) for the terminal. FERC approval was the final stage of an arduous process that previously involved going through a local permitting procedure and then getting a green light from the Army Corps of Engineers. This complexity partly explains the dearth of project financings of LNG terminals in the US prior to Sabine Pass.

Even before the frenetic activity of December, which also saw Bechtel appointed as the EPC contractor, the offtake agreement with Total was enough to make the project bankable. SG won the arranger mandate and HSBC came in as co-arranger under an option it had to match the winning bid. In November they began working on a $714 million debt package, but after the events of December 2004 they were able to increase the projects leverage by offering $822 million of debt, with Cheniere providing $205.5 million of equity.

HSBC and SG launched syndication on 19 January 2005 and the deal closed on 28 February. The syndicate comprised 47 institutions – including at co-arranger level Mizuho, Calyon, ING, WestLB and Bank of Tokyo-Mitsubishi – a wide group that provides Cheniere, a new player in the market, with relationships with a considerable number of banks for future projects.

The debt features a novel type of mini-perm structure that has been described as a 'maxi-perm' – it is a 10-year credit with a balloon payment on final maturity, but has a 19-year amortisation schedule. Pricing is 150bp over Libor during construction and an initial 125bp during operation. Restrictions on distribution come into effect if cover ratios drop below 1.25x.

Construction began on the terminal in April 2005. The project was initially envisioned to include the construction of two docks big enough to handle ships with a capacity greater than 200,000 cubic metres, and three storage tanks able to hold 160,000 cubic meter storage tanks.

However, the site will now likely feature more storage tanks since Cheniere recently decided to increase the terminal's capacity from 2.6 bilion cfpd to 4 million cfpd. The expansion plan was a response to Chevron's decision to increase its offtake to 1 billion cfpd and Cheniere's desire to become a buyer of LNG.

Cheniere also owns another project in development in Louisiana, Creole Trail, and one in Texas at Corpus Christi. Since Sabine Pass closed in February, Cheniere has obtained FERC approval for the Creole project, which is now just waiting for final approval, and has authorisation to commence construction on Corpus Christi.

No offtakers are yet in place for the Corpus Christi project, which in any case is unlikely to feature the scale of offtake in place for Sabine Pass given Cheniere's desire for Henry Hub spread. In the short term this shouldn't be a problem as the sponsor has plenty of cash in reserve having raised $600 million last August from the term 'B' market on top of the equity issue in December 2004.

However, given the confidence in LNG that Sabine Pass has brought to the US project finance market, it is more than likely that Cheniere will return to project debt in 2006.

Sabine Pass
Status: Closed 28 February 2005
Size: $1027.5 million
Location: Cameron Parish, Louisiana
Description: 2.6 billion (since increased to 4 billion) cubic feet per day LNG receiving terminal
Sponsor: Cheniere Energy
Debt: $822 million
Tenor: 10 years
Lead arrangers: HSBC, SG
Financial adviser: HSBC
Co-arrangers: Mizuho, Calyon, ING, WestLB, BoTM
Sponsor legal counsel: Andrews Kurth
Lender legal counsel: Millbank Tweed