Boom to Bust? Boom to Bust?
projects should benefit from any “flight to quality” in the lending market. But it is clear that all projects
seeking finance are going to face a much more difficult lending environment. What might the elements
of this new environment be? Our contacts with LNG project finance experts have led to the following
tentative conclusions.
•
Lending costs will increase. The pre-crisis loan margins on the best projects – LIBOR plus 50 to 70 basis
points – may rise by at least 100 basis points.
•
Political risk will be more thoroughly examined. The current trend to “resource nationalism” and
increasingly assertive host governments and NOCs has occurred at a time when LNG arbitrage profits
have soared. Financiers are likely to question the sustainability of any arrangements which are not
perceived to share these benefits equitably.
•
LNG sales agreements will come under more intense scrutiny. The long-term sales and purchase
agreement (SPA) with credit-worthy buyers who are prepared to assume tight take-or-pay obligations
has always been one of the major sources of security. These agreements provided a degree of security
of off-take that the illiquid LNG market could not provide. Lenders have traditionally only been prepared
to consider cash-flows (calculated according to conservative oil price assumptions) from long-term SPAs
in assessing how much they are prepared to lend to a project. With the increase in LNG short-term
trading in recent years there has been speculation that the banks might be prepared to factor in to their
calculations the cash-flow from capacity the project reserves for short-term sales. This possibility is now
less likely to materialise, and banks may want to stick to the traditional model, meaning that projects
will continue to need to place most or all of their capacity on long-term contracts concluded before
finalising the finance.
•
The ability of buyers to stand behind their take-or-pay obligations will be the subject of greater
scrutiny. The creditworthiness of smaller buyers is likely to be questioned as the spectre of recession
and high energy prices inject new uncertainty into gas markets, and these buyers themselves face
new financing issues. And this questioning may also extend to sales to the most substantial buyers.
Traditional buyers such as Tokyo Electric and Tokyo Gas have always been a key part of the market
security package. But with both companies facing record losses in 2008 as a result of high energy costs,
the security of the take-or-pay provisions even to such “gold standard” buyers will be examined more
closely than in the past. This increased scrutiny may well extend to sales to IOCs. In recent years there
has been a trend to the IOC participants in LNG projects becoming buyers from the projects in their own
right. Banks in the future may want to “see through” such arrangements and question whether the
buyer – even if it is lifting on an FOB basis – can provide assurance that there are no unseen sources of
market risk further down the LNG chain.
•
The bond market is unlikely to be a major source of financing in the short-term as the market is
strongly affected by sentiment and liquidity, and appetite for risk will be very low. Projects must also
obtain an investment grade credit rating, and the credit rating agencies will perform extensive due
diligence in this current climate. This is not a route for high risk projects, unproven technology or areas of
high political risk.
•
The large “mega-projects” involving “world scale” LNG trains (7.8 mtpa capacity and upwards) and
investments of over $10 billion may be disadvantaged because of their sheer scale. In the past, the
market has dealt with the raising of these massive sums through the underwriting approach, where
a number of banks take the lead and guarantee the debt conditions, but then seek to spread the risk
through syndicating the loan in the market – dividing the debt and offering it to other banks. This
approach may now prove unpopular. Given the current financial climate, banks are unprepared to
take the risk of underwriting as they are less able to predict the conditions on which they will be able
to syndicate. This could mean the mega projects will struggle to fund all they require from the debt
markets. Sponsors will therefore be required to put more equity into projects. In addition, technical
features within the loan documentation, such as the debt service reserve accounts (DSRA), will become
less sponsor friendly with higher amounts needed in the DSRA. Loan tenors (i.e. repayment periods)
could shorten and stricter banking covenants could become a feature.
LNG Business Review - OCTOBER 2008 - WWW.LNGBUSINESSREVIEW.COM 
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