The Qalhat LNG project is hardly a debut credit - it is an extension of existing successful operations, and there are long-term purchase agreements already in place for LNG form the new train into Spain and Japan. Combine this with the voracious appetite of banks for LNG assets out of the Middle East and the results are exceptional terms for the sponsors.

The project is most notable for being, at 90%, the highest geared LNG project yet to come out of the region - yet the deal retains keen pricing. One banker on the deal says, "We are likely to see more of these expansion projects, because historical data gives great comfort to lenders whilst obtaining advantageous terms for sponsors. If this was a purely greenfield project, pricing would have been somewhat higher."

Overall financing comprises a $648 million bank facility, $40 million letter of credit facility, and $76 million equity from project sponsors the Sultanate of Oman's government (55.84%), Oman LNG (36.8%) and Spain's Union Fenosa Gas (7.36%).

Before the deal came to market, Oman LNG raised a corporate loan to fund its equity participation. Nine banks signed up to that loan -Apicorp, ANZ, Bank of Tokyo-Mitsubishi, Calyon, GIB, HSBC, ING Bank, Standard Chartered and SMBC - each taking an equal share of the $175 million term loan and of an $18 million revolving credit facility. Tenor on the equity loan is 8.5 years with a step up pricing structure starting at 45bp over Libor for years 1-3, rising to 50bp in years 4-6 and up to 55bp in the final 2.5 years.

The pricing on the equity loan set the tone for the project financing proper. Qalhat's $648 million, 15.5-year facility is repaid over a six monthly amortization schedule, is priced at 40bp over Libor during construction, 55bp at the start of operations and rising every four years to 110bp. There is a 25% balloon with cash sweep, extending the average life of the loan to 10.5 years. The letter of credit facility pays 30bp over Libor, increasing every four years to 110bp over its 15.5-year tenor.

A group of seven banks lead arranged the financing: Banca Intesa, Calyon, GIB, ING, Mizuho, RBS and Standard Chartered. A limited syndication closed on 26 January and six further banks joined: Apicorp, BBVA, BNL, SG, SMBC and QNB.

Despite the tight pricing, the lack of terrorism insurance, and lack of direct agreement with shipping services, lenders can take comfort both from the successful operations of Oman LNG trains 1 and 2 (albeit with different shareholders to Qalhat), and the long-term purchase agreements in place.

Union Fenosa will take 50% of the output from 2006 for 15 years and Qalhat has smaller agreements in place with Japanese offtakers Itochu Corp, Mitsubishi Corp, and Osaka Gas, each over a 20-year period. The offtake agreements provide for a base case debt service coverage ratio just above 2x, and there is also the added protection of a dividend block if the DSCR falls to 1.25x.

The project entails the development, engineering, construction, operation and maintenance of a 3.3 tonnes per year (nameplate) liquefaction train. The train is being built next to the second train of Oman LNG, allowing the project to share Oman LNG's storage, loading and other facilities - effectively Oman LNG will be running the three trains as one complex, allowing sizeable economies of scale.

The successful close and syndication of the deal reiterates the seemingly unquenchable thirst banks have for LNG assets, particularly given that Qalhat closed weeks after Qatargas 2, and that the Qalhat financing - unlike Qatargas - relies entirely on the bank market, without the involvement of export credit agencies.

That Qalhat is an annexe to existing operations has helped the sponsors obtain the highest leverage yet and competitive pricing. The pricing is tighter than the $3 billion international bank tranche for Qatargas 2, which priced at 50bp over Libor pre-completion - while the sponsor's guarantee is in place - rising from 95bp after completion to 125bp. However, the deals are not similar.

By virtue of its sheer size Qatargas 2 is unusual, but also it deploys a new integrated model whereby the project sponsors, QP and Exxon Mobil, control all aspects of the supply chain from upstream through to downstream. QP and Exxon Mobil are offtakers at the Milford Haven terminal in Wales under 25-year SPAs. The credit strength the sponsors afford the project is offset by the fact that banks are accepting gas market price risk without the safety of a floor price.

Qalhat, on the other hand, follows the conventional model of having different entities at the upstream and downstream, but unlike a greenfield project the train benefits from close integration with OLNG 1 & 2.

Qatargas 2 paves the way for banks to accept more gas market risk, and Qalhat pushes in another direction by maximising leveraging. What both projects share is an emerging picture of banks taking more risk at lower margins for LNG projects in Oman and Qatar. This is a boon time for project sponsors.

Qalhat LNG

Status: Closed 17 December 2004, syndicated 26 January 2005

Size: $648 million bank debt; $40 million letter of credit; $76 million equity

Location: Qalhat port in the eastern city of Sur, Oman

Description: Construction of a third LNG terminal in Qalhat (with different shareholders to the first two)

Sponsor: Sultanate of Oman's government (55.84%); Oman LNG (36.8%); Union Fenosa Gas (7.36%)

Financial adviser: Citigroup

Lead arrangers: Banca Intesa; Calyon; GIB; ING; Mizuho; RBS; Standard Chartered

Legal counsel to the sponsors: Allen & Overy

Legal counsel to the lenders: Slaughter & May

EPC contractors: Chiyoda Corp; Foster Wheeler

Technical adviser: Merlin Associates