Peru LNG attracts biggest FDI yet

In June 2008, Peru LNG secured US$2.25bn in debt facilities to finance the construction of the Peru LNG project. The project involves the construction of a LNG plant capable of producing 4.45 million tonnes per year and a 408km natural gas pipeline that will connect the plant to the Camisea gasfields, found in the interior of the country.

BBVA and Société Générale CIB were the mandated lead arrangers on this multi-tranche project financing facility. The total project cost is estimated at US$3.8bn, and marks the largest direct foreign investment in Peru.

Peru LNG is owned by a consortium consisting of Hunt Oil Company of Dallas, Texas (50%), SK Energy of South Korea (20%), Spain’s Repsol YPF (20%) and Marubeni of Japan (10%).

The plant will be constructed at Pampa Melchorita on the Pacific coast of Peru, and will position Peru as the leader in the LNG market in Latin America. Once in operation, Peru LNG is expected to generate around US$800mn annually of hard currency export revenues.

Erich Michel, head of global trade finance, North America, at BBVA, comments: “The project is tremendously important for Peru and its economy by creating jobs and prosperity for the Peruvian people.”

Peru LNG is also landmark in nature as it is not a typical integrated LNG project as the upstream development and the midstream infrastructure were not part of financing.

The complex financing package consists of a number of tranches from the Inter-American Development Bank (IADB), the International Finance Corporation (IFC), US Ex-Im, Export-Import Bank of Korea (Kexim), Italy’s Sace, and commercial banks BBVA, Société Générale CIB, Sumitomo, ING, Mizuho, and Bank of Tokyo-Mitsubishi. There are also some bond issuances in the Peruvian capital markets.

The ECA tranches were funded by Société Générale CIB and BBVA.

BBVA’s Michel highlights some of the key aspects of the deal structure: “The transaction is a perfect example of putting together a hybrid financing solution whereby the project finance and export finance teams have collaborated to structure a deal that involves multilateral, ECA and commercial banking facilities.”

The Inter-American Development Bank (IADB)-backed US$800mn A/B loan is a significant portion of the financing, and it is the largest loan of this nature in the multilateral’s history. It has set a new benchmark for the bank’s lending capacity, as it previously had a US$200mn limit for projects.

The loan was arranged via the bank’s A/B loan structure, which meant that US$400mn was kept on IADB’s books, while US$400mn was raised commercially. BBVA and Société Générale CIB were the original MLAs on the commercial tranche and were initially mandated to raise US$250mn. However, with attractive pricing, and some changes in the market conditions for a domestic bond issuance in Peru, the sponsors tried to rebalance the source of the funds and upsized the B loan to US$400mn.

Joining this facility as lead arrangers and bookrunners were SMBC and ING. Additional lenders were Calyon, Mizuho and Bank of Tokyo-Mitsubishi.

The rest of the financing breaks down into a US$400mn US Ex-Im facility; a Kexim direct facility for US$165mn; a Kexim-guaranteed facility for US$135mn; a Sace facility of US$250mn; and an IFC loan of US$300mn.

Given the complexity of the deal structure, the number of banks, sponsors, multilaterals and ECAs involved, the final closing of the financing agreements was a significant achievement.

Roberto Simon, managing director of energy project finance in the Americas within the natural resources and energy financing group at Société Générale CIB, notes the many achievements of the transaction: “As the first LNG export facility in South America, Peru LNG represents the single largest foreign direct investment in Peru which will make the Peru LNG project a significant contributor to the Peruvian economy eventually transforming the country into a hydocarbons net exporter.

“Furthermore, the combined IADB financing is the largest A/B loan and the IFC loan is the largest IFC A loan to date. The lending group in itself is unique and unprecedented, hence making Peru LNG an experiment in multilateral and commercial project finance.”

He adds: “The transaction was also a test of adaptation to quickly deteriorating markets.”

BBVA’s Michel comments that the deal was well-positioned to resist the economic downturn: “The approval of this deal was given before the credit crisis and, therefore, committed the lenders to provide the necessary funding upon the borrower’s disbursement requests.

“Given the fact that the multilaterals and ECAs have been little affected by this crisis, as well as the strong liquidity position of the commercial banks, no major issue occurred that would have threatened the timely continuance of the project. Also, the monitoring of the construction phase is prudently done in coordination with the sponsors and outside technical consultants.”

Deal Information

Borrower: Peru LNG
Sponsors: Hunt Oil; Repsol YPF; SK Energy; Marubeni Corporation
Amount: US$2.25bn (total project cost: US$3.8bn and US$200mn bond issuance for Q2 2009)
Mandated lead arrangers: BBVA, Société Générale Corporate & Investment Banking (financial advisor), Calyon (co-syndication agent) , ING (joint bookrunner) and Mizuho Corporate Bank (co-syndication agent)
Additional lenders: Bank of Tokyo-Mitsubishi UFJ (documentation agent) and SMBC (joint bookrunner)
ECAs: US Ex-Im; Kexim; Sace
Multilaterals: IADB and IFC
Law firms: Milbank, Tweed, Hadley & McCloy (international counsel for lenders); Rosell Abogados (Peruvian counsel for lenders); Skadden, Arps, Slate, Meagher & Flom (international counsel for borrower); Mirando & Amando (local counsel for borrower)
Tenor: Up to 17 years
Date signed: June 2008