Never slow to spot a growth market, international and regional banks are increasingly developing LNG ship financing capabilities. 'More and more banks are getting into the area,' says M Chandrasekaran, head of project and structured finance at Gulf International Bank. 'It is becoming very competitive.' The current Oman Shipping Company deal, on which Societe Generale is advising, is a case in point. A number of banks complained that they put in what they regarded as low bids to join the mandated lead arranger (MLA) group, only to lose out.

Ship finance has typically been regarded as a niche area, far from the concerns of the project finance divisions of international and GCC banks. On the one hand, merchant and container vessels are predominantly financed by a narrow group of European, particularly Scandinavian, banks at high margins. On the other, oil-related vessels such as chemical and crude carriers to serve the main Middle East oil producers are most commonly funded by local banks - so Saudi banks will fund Saudi Aramco's ships and Qatari banks will meet Qatar Petroleum's requirements - and are part corporate, part asset finance, aggressively priced.

Funding LNG ships is a hybrid of a project and asset financing, becoming closer to the former. While an LNG vessel is technically a mobile asset, the lack of a significant spot market for the fuel makes the limited-recourse finance almost entirely reliant on the charter agreement which the ship is built to serve. As such, the tankers are sometimes described as being more like 'floating pipelines' between the liquefaction facility and the regassification terminal.

'Margins are a little thinner on the ships than on the fixed facilities since they are technically seizable in case of default and because the revenues for charter payments come at the top of the project's cash waterfall, ahead of debt service payments, so the financing is seen as slightly lower risk,' says Chandrasekaran. Otherwise, lenders price the tanker package with reference to similar considerations as they would the other elements of an integrated LNG project - shareholder strength and project track record of the supplier and creditworthiness of the offtaker.

Repayment profiles are set to match the terms of the charter agreement, with shipowners selected on the best daily rate offered for a time charter of 20-25 years - the usual duration of the project's sales and purchase agreements (SPAs). However, lenders are generally unwilling to stretch the tenor to this extent on shipping deals and door-to-door tenors are typically 12 years, with a balloon mechanism. Leverage is greater than on most project finance transactions, with the debt/equity split typically around 75:25 or 80:20.

'The main risk in charter agreements is not the capital cost but the operating risk,' says Chandrasekaran. 'The transport of LNG is technically very challenging and the growth in the industry is inevitably stretching skill resources.' The shipping industry also carries a high risk of third-party claims, primarily for pollution, which partly dictates the ownership structure of the vessels, normally consisting of a single special purpose vehicle (SPV) for each ship. 'A plaintiff in such a case [of pollution or collision] tends to go after whichever party involved in the project has the deepest pockets, generally the