The US liquefied natural gas (LNG) financing boom is still hovering just above the heads of New York's project finance bankers. Deals are still rare and infrequent, solid credits even more so. Moreover, the permitting process, long and arduous, is often best left to smaller, more nimble – and less well capitalised – developers.

But the first large-scale greenfield LNG deal – for Cheniere Energy's Sabine Pass facility – was a blowout success. The $822 million financing experienced such strong demand that the sponsor was able to increase the deal's leverage. The debt attracted the support of 47 banks in syndication, a reflection, maybe, of the lack of suitable credits in the US market, but also the strength of the project's contractual arrangements.

Cheniere is a junior player in exploration, production, and development, focused on the Gulf of Mexico region and LNG opportunities. Cheniere has four main LNG projects, Freeport, Corpus Christi, Creole Trail and Sabine Pass. Of these, it owns 30% of the Freeport project, in which ConocoPhillips owns 50% and management 20%.

For a time Freeport looked like it was most likely to raise finance early, largely because of the presence of an oil major as a dominant shareholder. It mandated an arranger, and has indicated that it will be approaching syndicate banks imminently. But that deal is much less pressing, in part because it has access to a substantial construction loan from Conoco.

Sabine Pass appeared a more distant prospect, if only because when first mooted, the project did not have a potential customer, and was a 100% subsidiary of Cheniere. HSBC won the mandate to advise Cheniere on the debt financing in 2003, and was one of the first appointments for the bank, which was expanding its presence in New York. The sponsor also retained Petrie Parkman, which had been involved in the Freeport negotiations, to advise on equity issues.

Sabine Pass is an LNG receiving terminal that will receive LNG tankers, offload and store their cargoes, vaporize the LNG, and then send it out onto the nearby interstate pipeline. It is located on 570 acres of land along the Sabine Pass Channel in Cameron Parish, Louisiana. It is, like Cheniere's three other projects, strung out along the Gulf Coast, in areas receptive to oil and gas development and with a long history of development.

The Cheniere team gained plaudits from lenders for its tenacity in pursuing permits, a process that is extremely taxing. Cheniere needed to go through the local permitting process, followed by that of the Army Corps of Engineers, and finally the Federal Energy Regulatory Commission (FERC). This is a set of skills that would be familiar to the power developers of the 1990s such as Cogentrix, Panda or Tenaska, the long painful process of bringing in local officials and citizens around.

But the similarity with the developers does not end here. The mandate of the advisers above all encompassed negotiating a financeable sale and purchase agreement for the terminal's cargoes. The terminal has a 2.6 billion cubic feet per day (cfpd) capacity, and would need to secure as much as possible of this total as possible to gain long-term bank debt.

The first element in making the project bankable was in place in September 2004, when Total agreed to take 1 billion cfpd. This anchor agreement was enough for Cheniere to attract lender interest, and for the sponsor to commence the beauty contest. SG won, and HSBC had the right to match the winning bidder's terms to come in as a co-arranger. The two began work in November on a debt package that was likely at the time to come in at $714 million.

Then, as one arranger put it, "we experienced an absolutely amazing December." If the reward for HSBC's faith in Cheniere was the Total contract, then the leads' aggressive bid for the arranging mandate was followed with a series of positive financial movements that firmed up the project's entire contractual undercarriage.

On 2 December 2004, it priced 5 million shares of common stock through JP Morgan Securities, Merrill Lynch, Pierce Fenner & Smith and Petrie Parkman as lead managers, and Pritchard Capital Partners as co-manager, realising $266 million in proceeds. The equity offering meant that Cheniere ended discussions with ChevronTexaco about the latter taking a stake in the project.

But on 13 December Chevron agreed to take 700 million cfpd at the terminal, with options either to decrease this quantity to 500 million or to increase it to 1 billion. Indications are, however, that it is more likely to increase its take than decrease it, according to sources at the arrangers. The remainder of the terminal's capacity will be available for capacity sales conducted on the spot market.

Then, on 15 December, Cheniere snared its final permit from FERC, and on 18 December it concluded a fixed-price engineering procurement and construction contract with Bechtel. The combined effect of these developments meant that the leads could increase the amount of debt that they could offer, and could be more confident of the quantity of debt they could offer.

The most important change is to the project's leverage, which goes up to 80/20 – Cheniere now kicks in $205.5 million, and the banks $822 million. The debt still features strong coverages – the banks' base case has been reported as 1.5x, but some bankers maintain that the average level is nearer 1.7x. The deal features tailored amortization, although lenders will not be repaid fully at the end of the 10-year tenor.

The lenders assumption is that the project will be refinanced in the capital markets as soon as it has built up a solid operational history. The debt has already been in front of ratings agencies, and is likely, once operational, to be solidly investment grade. The debt is priced at 150bp over libor during construction and initially at 125bp after the start of operations. It attracted 47 participants in syndication, among them Mizuho, Calyon, WestLB, ING and BTM.

Cheniere is now pursuing the development of the Corpus Christi project, of which it gained complete control this year, and Creole Trail, for which it is currently conducting an open season. It is currently on the road looking to raise $500 million in senior unsecured debt. Given the banks' response to the Sabine financing, bondholders should be assured that Cheniere can be sparing with its equity contributions.

Sabine Pass LNG

Status: Closed 28 February
Size: $1.027.5 million
Location: Cameron parish, Louisiana
Description: 2.6 billion cubic feet per day LNG receiving terminal
Sponsor: Cheniere Energy
Debt: $822 million
Tenor: 10 years
Arrangers: HSBC, SG
Financial advisers: HSBC; Petrie Parkman
Sponsor legal: Andrews Kurth; King & Spalding
Lender legal: Milbank Tweed