A $283 million financing mandate was signed for Petronet LNG on 3 July 2002. It is being touted as the largest ever LNG ship project with the offtaker, India LNG Transport Company 1 and 2, based in a non-investment grade country. The twelve-year loan, priced at 230bp over Libor, will finance the acquisition and construction of two tankers, which will run on long-term, 25-year charter to Petronet for the transportation of LNG from Ras Laffan LNG Co (RasGas) in Qatar to Petronet's facilities in Dahej, India.

A club of five mandated banks acted as lead arrangers on the transaction, comprising ANZ Investment Bank, ABB Structured Finance, Credit Lyonnais, Mizuho Corporate Bank and The Sumitomo Mitsui Banking Corporation. ANZ Investment Bank also acted as financial advisor to the sponsors at time charter bid stage in July 2001.

Four companies sponsored borrower India LNG Transport Company 1 and 2. They are: Mitsui OSK Lines, The Shipping Corporation of India, Nippon Yusen Kabushiki Kaisha and Kawasaki Kisen Kaisha, all of whom joined the five mandated arrangers to fully underwrite the entire straight debt facility. The total project was about $378 million, this was reached using equity from the sponsors. Mitsui OSK Lines and Shipping Corporation of India were the two largest shareholders.

At sub-underwriting stage (over-subscribed), another seven banks joined the transaction. The deal is expected to go into general syndication shortly. The total project cost is $378 million. The debt/equity ratio is 3:1.

ANZ says that putting together project financing for this deal with a non-investment grade offtaker was a challenging task. Says Guarav Seth of ANZ Investment Bank: ?Acceptable financing and quality of structure for risk allocation to make risk acceptable was important.? Evidence lies in the fact that seven banks came on board to support the five mandated lead arrangers. The deal is said to simulate in part an asset project financing, it benefits from the security of the underlying asset and long-term contract, providing quality of cashflow.

At bidder stage for the transportation control of the Petronet LNG facility, the other bidders were, namely: Exmar, Louis Dreyfus, FSK Shipping, Mitsui (the winning consortium), Leifhogh, Hyundai Merchant Marine, Hanjin Shipping and Offsprey Maritime Trading.

The time charters for the transportation of LNG operate on a Free on Board (FOB) basis. This means that the buyer, Petronet, will get LNG at the RasGas board facilities. Because Petronet is responsible for the transportation from A to B, it must find a ship owner to do this for them. The best way to do this is on a time charter, contracted transportation and long-term charter agreements.

Of the pricing on the loan (230bp over Libor) ANZ's Seth says: ?This is a function of risk and reward, and achieves the right balance. This is adequate for the underlying asset.?

Two main issues were embedded in this transaction. Firstly, vessel-related issues. The tankers transporting LNG from one place to another under a long-term contract financing structures means that risks lie upstream and downstream within the value chain. This had to be analysed carefully before structures were put in place. Secondly, there was issue with the development of the acceptance payment security mechanism.

Cashflow had to be isolated to an extent, relating to the transportation and the cash stream - so the investors can have access to cash, which ultimately belongs to them. The co-ordination of financing across the chain and harmonisation of lenders' rights of upstream and downstream assets was another challenge.

Petronet LNG is formed of four major Indian companies in a 50/50 joint venture on a public/private basis. The four companies, Gas Authority of India, Indian Oil Corporation, Oil and Natural Gas Corporation and Bharat Petroleum Corporation, will also promote the build of a re-gassification terminal.

Petronet LNG is setting up the receiving terminal at Dahej with an initial 5 million tones per year (tpy) capacity. However, it has a provision to double this expansion to 10 million tpy. It is currently under construction, with completion expected for the fourth quarter of 2003. It has been said that Petronet expects to import 2.5 million tpy in the first year of operation.

Daewoo Shipping & Marine Engineering Company, in Korea, were commissioned to construct the tankers by the Mitsui consortium. One ship's construction was started in May and will be called ?Disha'. Her build is expected to be completed in December 2003 and the second ship in December 2004. The ships will cost about 800 crore each.

The supply of LNG from Qatar to India will give India a boost in provision for power generation and fertilizer production. It is also expected to help supply the rising demand of CNG to the transport sector. It is understood that once in India, LNG will be distributed to six states: Gujarat, Madhya Pradesh, UP, Rajasthan, Delhi and Haryana via an HBJ pipeline.

According to market players, this deal has set a benchmark in terms of its non-investment grade nature, and we can expect to see this again. There are several LNG carriers with deals in the pipeline which will show appetite for this type of structure going forward.

India LNG Transport Company 1 and 2
Status: Closed 3 July 2002, general syndication expected shortlySize: $378 millionDebt: $283 millionDescription: Transportation of LNG from Qatar to IndiaSponsors: Mitsui OSK Lines, The Shipping Corporation of India, Nippon Yusen Kabushiki Kaisha, Kawasaki Kisen KaishaArrangers: ANZ Investment Bank, ABB Structured Finance, Credit Lyonnais, Mizuho Corporate Bank, The Sumitomo Mitsui Banking Corporation Maturity: Twelve years, with shipping time charters of 25 years Pricing: 230bp over Libor