The debt package to refinance Oman LNG's two-train facility is arguably one of the most notable deals to have been done in the Gulf last year. The deal's achievement speaks for itself: 12 regional and international banks underwrote $1.3 billion of 16-year financing in the Middle East given the political and economic uncertainty that was generated after September 11. Getting it done, signed, and drawn within two months of starting the process is equally laudable. Yet all this simply serves to underscore the deal's robustness. It is a flexible refinancing of an already proven asset with highly favourable terms for sponsors and lenders alike. It reached successful financial close on December 21, 2001.

The transaction was lead arranged by a group of 12 regional and international banks. They are: HSBC Investment Bank, Royal Bank of Scotland, Bank of Tokyo-Mitsubishi, Credit Agricole Indosuez, Credit Lyonnais, Gulf International Bank, Arab Banking Corporation, Hypovereinsbank, ANZ Investment Bank, Arab Petroleum Investments Corporation (Apicorp), Sumitomo Mitsui Banking Corporation and Mizuho Financial Group. Citibank acted as Oman LNG's financial adviser but it did not join the lead arranging group. ABN Amro, Barclays Capital and BNP Paribas are the other international banks that opted not to participate in the arranging group.

Oman LNG is a 6.6-million tonnes per year, two-train LNG plant. Its shareholders are the government of Oman (51%), Shell Gas (30%), TotalFinaElf (5.54%), Korea LNG (5%), Partex (Oman) Corp (2%), Mitsubishi Corp (2.77%), Mitsui & Co (2.77%) and Itochu Corp (0.92%).

Says a banker close to the project, ?After September 11, getting international deals done in the region was certainly perceived to be more difficult. But the economics of this project are just so good that there was no problem in attracting a substantial level of interest.? In fact, the deal is understood to have closed oversubscribed.

Funds from the $1.3 billion commercial bank facility will be used to refinance existing debt facilities originally raised by Oman LNG in 1997. They funded the first two trains of its LNG facility in Muscat. ?The fact that the deal was signed up by mandated lead arrangers at the end of last year is a clear indication that while September 11 may have caused jitters in the market, there was still tremendous enthusiasm for this region and these projects ? that's what pushed this one through so quickly,? explains a source familiar with the project.

The 16.5-year facility has a step-up pricing structure starting at 90bp over Libor for years one to five, rising to 110bp for years six to 10 and then to 140bp from year 11 to maturity. The facility also has a cash sweep in place at year 14. The original 12.5-year secured term facility signed in 1997 had a base line margin of 90bp. The outstanding debt totalled $1.3 billion including a $355 million commercial loan, a $155 million US Exim loan, a $475 million ECGD portion, a $169 million piece by SACE and $118 million from NCM.

Of note is the cash sweep mechanism at year 14. ?Year 14 could be the year that everything gets paid off ? that's how good this deal looks,? says another banker close to the deal. ?Any refinancing is performed to maximize the NPV benefit and the NPV enhancement in this case will most likely occur during Oman LNG's first 10 years.? The final tenor of 16.5 years was determined as the project specifications developed and fits well with what the market accepts for similar deals what such projects can actually sustain.

The project recently received a two-notch upgrade from Standard & Poor's (S&P) and is now rated A-. Lenders are nevertheless exposed to a degree of commodity price risk as both spot and contract LNG prices are linked to volatile world crude prices. S&P suggests that crude prices have shown significant volatility over the past four years. Furthermore, Oman LNG operates a single-asset facility in a region exposed to political volatility, which could hinder LNG transport. The competitiveness of the global LNG market also threatens near-term excess supply capacity.

Adding to its risk profile, Oman LNG does not currently own LNG ships. This exposes the spot sales of the project to the risk of vessel availability shortage. In addition, existing and proven gas reserves in Oman (at 29.3 trillion cu ft) are smaller and less predictable than those of other countries in the region.

Oman LNG has a 20-year SPA with bankrupt Enron's Dabhol Power Company (DPC) in India for 1.6 million tones per year, originally set to take effect from early 2002. Given DPC's financial difficulties, this is understood to have been put on hold for at least a year. The project's economics are, however, strong enough to offset these risks.

Oman LNG sent off its first export cargo to Korea Gas Corporation (Kogas) last year. Notably, commercial operations began $650 million below budget. The company has in place 25 year LNG sales and purchase agreements with Kogas (4.1 million tones per year) and Japan's Osaka Gas (700,000 tonnes per year). The SPAs feature a crude-oil based LNG proxy market price which, according to S&P, sufficiently covers debt service obligations. All revenues from Kogas, Osaka Gas and others are paid into a controlled offshore bank account. The account will also control all expenses, debt service, and future equity distributions. Another credit enhancement built into the project structure is the absence of foreign exchange exposure ? the company's revenues and payment obligations are almost entirely denominated in US dollars.

One issue plaguing many Middle Eastern deals in recent months has been heightened insurance premiums and scarce cover ? particularly for political risks such as terrorism. For Oman LNG, Shell is understood to have played a major role in smoothing out all insurance issues, bringing in its group insurer to provide coverage. The project is of extreme strategic importance to its LNG buyers, not to mention the government of Oman. It is the cornerstone of Oman's diversification drive. It has so far it has meet all the criteria drawn up by years of planning, pulling in substantial foreign investment, providing a sound, long term revenue stream and much-needed employment opportunities for local Omanis.