With world trade in the doldrums, many shipping operators struggled to fill their vessels last year. Over-capacity in the industry also made it a tough year for shipbuilders. Orders dropped and average prices for new vessels fell by about 35 per cent in the 12 months following the market peak in mid-2008. Even for those owners that did wish to expand their fleets, money to buy new vessels was difficult to find in the depressed financial climate.

According to figures from UK banking analyst Dealogic, global lending to shipping companies amounted to just $7.6bn in the first nine months of 2009, down from $72bn in the first nine months of 2008.

Few ship-owners placed new orders last year, and many tried to defer existing orders, particularly those for new container ships and car transporters, the sectors hit hardest by the downturn. However, orders in the Middle East were more resilient than in many other markets and Saudi Arabia, Oman and Qatar continued to add tonnage to their fleets.

Debt financing

Despite the downturn in the economy and some delays to the construction of new liquefied natural gas (LNG) production capacity, Qatar Gas Transport Company (Nakilat) maintained its order programme and delivery timetable. It also successfully negotiated its third and final tranche of finance.

Nakilat had secured its first tranche of debt financing in December 2006, when the -company raised an initial debt of $4.3bn. It completed the second tranche in August 2008, raising an additional $1.5bn. Tranche three, the most recent deal raising a further $1bn, completes the $6.8bn of debt Nakilat needed to finance its wholly owned fleet comprising 25 LNG carriers ordered from South Korea’s -Samsung Heavy Industries, Hyundai Heavy Industries and Daewoo Ship Building & Marine Engineering.

Unlike most shipping lines, Nakilat had ordered highly specialised tonnage – a fleet of modern gas tankers essential to boost Qatar’s LNG exports. It had also secured long-term supply contracts with Qatargas and RasGas, the two companies behind the development of Qatar’s LNG industry. Nakilat benefited from good timing. When it placed the orders for its new vessels with the South Korean shipyards in 2004, shipbuilding prices had yet to peak, and commodity prices, including those of steel, were still competitive.

“Our business is stable. We are not at the mercy of the financial markets nor of the oil markets”

Muhammad Ghannam, MD, Nakilat

Muhammad Ghannam, managing director of Nakilat, describes the company as “a floating pipeline” for Qatargas and RasGas. Unlike traditional shipping lines, the company knows exactly who its customers are and what capacity they need, and does not have to compete against other players to fill its ships. With Qatar set to export 77 million tonnes of LNG by 2011, all Nakilat’s ships are tied into 25-year charter agreements with Qatargas and RasGas, so the company is more protected than most ship owners against fluctuating volumes.

With this guaranteed revenue stream, the company was able to finance one of the largest ship acquisition programmes in the world, worth an estimated $11bn.

Despite the woes facing the international project finance market, Nakilat’s third tranche of funding was oversubscribed in early 2009. In May, financing consultant Sumitomo Mitsui Banking Corporation helped Nakilat complete a $949m financing deal that brought together 17 regional and international banks.

New investors

Chinese banks shouldered the main debt financing, with Bank of China and the China Exim Bank taking on 49 per cent. Ghannam calls the deal ground-breaking.

“Investors appreciate the strength of Nakilat in a challenging market,” he says. “This is demonstrated by the strong appetite from new investors, including two major Chinese banks. They value the financing, which is underpinned by strong charter contracts with Qatari LNG projects. We will continue to identify high-yield investment opportunities to maximise returns to our shareholders.”

In February 2009, the company and its adviser, French bank BNP Paribas, started approaching banks about the third tranche. Nakilat’s case to the lenders was based on forecasts that Qatar would be one of the few world economies to grow in 2009 and on the company’s core strategy of controlling the entire Qatari LNG distribution chain, from well-head to point of sale.

“We wanted overall control over the LNG chain and were building all the infrastructure to make that possible,” says Ghannam. “Our business is stable. We are not at the mercy of the financial markets nor of the oil markets – we are building a real, asset-based economy in Qatar. Our business is based on energy, and we see future demand booming in the Far East and in China, in particular. Our business is going to be healthy for a very long time.”

Initially, Nakilat expected to fund up to half the debt through Islamic finance. But in the event nearly all the funding was secured via conventional channels. It also brought major Chinese banks into the Middle East project finance market with large-ticket financing for the first time. Japanese bank Mitsubishi UFJ Financial Group helped to arrange the deal.

The money raised is split between an $803m senior bank facility with a tenor of 10 years and a $146m subordinated bank facility with a 10-year tenor.

Of the 25 vessels, Nakilat had taken delivery of 22 by the end of 2009. The remaining three ships are due to be delivered by summer 2010. Nakilat has structured the loans as project finance deals, using its ships to generate income to meet repayments.

Nakilat is also part-owner of 29 other LNG carriers, in which it holds between 20 and 60 per cent of the equity. The average stake is 43 per cent. This tonnage is also deployed on long-term time charter to RasGas and Qatargas.

When Nakilat launched in 2004, it invested in tonnage through joint ventures with third-party ship-owners including Japan’s NYK, K Line and MOL. Nakilat supplied funding, but took a back seat when it came to operating the vessels from the gas fields of Ras Laffan on behalf of Qatargas and RasGas.

In 2005, the company floated half its equity on the Doha Securities Market and in the following year decided to seek a competitive advantage by building and managing its own fleet of vessels.

By the middle of 2010, Nakilat will have a fleet of 54 vessels and control more than 18 per cent of the world’s LNG tonnage. In four years, Nakilat has concentrated the entire LNG chain from point of production to point of sale in Qatari hands. In doing so, it has evolved from an investment house into one of the world’s largest ship-owners.

Healthy profits

Nakilat’s most recent results, released in October 2009, show that the company doubled its profits to QR348m ($96m) for the first nine months of 2009, up from QR152m in same period in 2008. Earnings per share for the period rose to QR0.63, up from QR0.27 in the first nine months of 2008.

As MEED went to press, Nakilat had no new investment plans to declare. In the medium to long term, however, new tonnage may be considered if Qatar lifts its moratorium on new exploration in the North Field – and if charter rates for liquefied petroleum gas (LPG) and other product carriers harden sufficiently to make it worth Nakilat investing in such specialist carriers.

“A lot will depend on what strategic decisions are made by Qatar,” Ghannam says. “If production were to increase, there would be a need for additional vessels. By 2011, Qatar’s LPG production is set to hit 12 million tonnes a year. If we were to handle all of that, we would need between 30 and 32 very large gas carriers (VLGCs). At the moment, we have just four VLGCs and are taking advantage of the weak market to charter additional tonnage.

“But we continue to monitor the market. If and when it makes commercial sense, we will increase our presence in LPG transport. We also handle 100 per cent of Qatar’s sulphur exports, but we are not committing capital to this business because, again, charter rates are currently very attractive.

“We are chartering five vessels now and will increase the number to eight by 2011. But we monitor the situation day by day: if the price is right, we are willing to jump in and invest.”