Mexico's state electricity company, the Comision Federal de Electricidad, is responsible for the country's first liquefied natural gas project financing. Its generation fleet's thirst for gas has accomplished what Mexico's aversion to private investment in oil and gas has so far hindered.

The $876.4 million Manzanillo project financing, aside from marking a first in the country, marks a swift recovery in lender appetite for Latin oil and gas assets. Its keen terms – especially its tenor – would be enviable in any financing environment. It brought together some of the largest sponsors from Korea and Japan, countries that have usually competed for natural resources.

The Manzanillo terminal will be located at the port city of the same name in Colima state, on Mexico's Pacific coast. The city is Mexico's busiest port, but more important to the project is the location's proximity to generation capacity that the CFE wants to refurbish to run on gas instead of oil.

The project has a proposed capacity of 3.65 million tonnes per year, or 14.2 million cubic metres (500 billion cubic feet) per day. It involves building two 150,000-cubic-metre storage tanks and a wharf that is capable of handing 200,000-cubic-metre ships. The project will dispatch gas into Mexico's national pipeline system, and into a pipeline destined for CFE's Manzanillo power station, the first up for refurbishment.

When it comes online in the last quarter of 2011, it is likely to take gas from the Peru LNG gasification project, because Repsol, which holds the contract to supply the terminal with LNG, is also a shareholder in the Peru LNG project. CFE issued bid documents on the project on 7 June 2006, and on 7 February 2008 named a consortium of Mitsui (37.5%), Samsung (37.5%) and Kogas (25.0%), which had submitted a bid on 25 February that year, the winner.

In theory, Pemex, Mexico's state oil and gas company, should be responsible for importing gas, and for procuring the associated infrastructure. For a time, the Mexican government tried to persuade independent power producers to buy their gas from Pemex rather than the CFE, though the move slowed financing processes to a crawl and was subsequently abandoned.

The CFE has already procured two LNG receiving terminals, though both of these were financed on the balance sheets of the private sector developers. The CFE has a good reputation among project finance banks for its success in bidding out lender-friendly power purchase agreements. But Mexico's independent power project law covered those contracts.

Manzanillo will sell capacity to the CFE under a 20-year service contract, which falls under the law of acquisitions, leases and services of the public sector, or LAASSP, according to its Spanish initials. The law creates three main hindrances to a successful project financing. It requires joint and several guarantees of a project company's obligations from shareholders, makes it difficult for lenders to assert their step-in rights, and has a termination regime that is not as prescriptive as lenders would like.

The way round these issues was to assemble a suite of agreements lying outside the project company that mimicked many of the provisions that lenders and sponsors needed. For the sponsors this meant a set of agreements between them under which they indemnified each other in the event of a sponsor default. Each sponsor owns its stake through a Dutch holding company – MIT Investment Manzanillo for Mitsui, SAM Investment Manzanillo for Samsung and KOGAMEX Investment Manzanillo for Kogas.

The sponsors and their financial advisers chose to anchor the financing to the Korea Export-Import Bank, even though the Japanese export credit agency, JBIC, has a longer history in Mexican project finance. Kexim had stepped up during the bid to promise to cover 70% of the project's debt, and has recently gained some experience of LNG from committing $300 million to Peru LNG. This support comes on the back of Samsung holding the $630 million engineering, procurement and construction contract for the terminal (a smaller second contract, with TOA, covers a jetty).

The sponsors are, between them, putting up $195.7 million in equity, and despite the relatively high 78% gearing brought in a club of seven commercial banks to support the $680.7 mill,ion debt. Kexim is providing a direct loan of $262.1 million, and guaranteeing another one of $214.4 million, while the banks are contributing a $204.2 million uncovered loan. Lead arrangers on the Kexim-covered debt are Calyon, BBVA, Bank of Tokyo-Mitsubishi UFJ, Standard Chartered Bank and Development Bank of Japan, the last of which is making a rare foray into cross-border protect finance. The commercial tranche arrangers are Mizuho, Calyon, BBVA and SMBC.

More impressive than the gearing is the tenor of the debt. At 14 years it is almost double what several banks in New York saw as their limit in early 2009, and the debt has an amortisation profile of 20 years, in line with the CFE contract. The pricing on the debt starts at 320bp and rises over the life of the debt to 370bp, a respectable showing given the market's pricing expectations in 2009.

Lenders showed considerable willingness to stick by the sponsors in navigating a difficult process, and the results of this cooperation between Japanese and Korean sponsors suggests that, if only for the debt terms, the two countries should put aside their resource rivalry more often. Whether these ECA-driven terms become the norm is harder to tell. The Pemex deal currently in the market, for a cogeneration plant, features heavy support from Mexico's national development bank, Banobras.

Terminal KMS de GNL
Status: Signed 11 September 2009, funded 1 October
Description: 500 billion cubic feet per day LNG receiving terminal
Sponsors: Korea Gas, Mitsui, Samsung
Debt: $701 million
Lead arrangers: Bank of Tokyo-Mitsubishi, BBVA, Credit Agricole CIB, Development Bank of Japan, Mizuho, Standard Chartered and Sumitomo Mitsui Banking Corporation
Financial advisers: Credit Agricole CIB, Mizuho
Independent engineer: Shaw Consultants
Insurance adviser: Marsh
Sponsor legal counsel: Allen & Overy (international); Creel García-Cuellar Aiza y Enriquez (local)
Lender legal counsel: Milbank Tweed (international); Lopez Velarde, Heftye and Soria (local), Loyens & Loeff (Dutch)