Shale From Louisiana Funded in Tokyo as MUFG Bids: Japan Credit

Mitsubishi UFJ Financial Group Inc. is bidding with Tokyo-based megabanks to fund a U.S. shale gas terminal that could offer Japan its first imports from fracking.

The lenders offered this month to provide funds for the development of the Hackberry, Louisiana-based Cameron liquefied natural gas project at around 200 to 250 basis points over the London interbank offered rate, according to five people familiar with the bidding. That’s about three times higher than domestic long-term lending rates, which fell to 0.899 percent in October, the lowest on record, Bank of Japan data show.

Japanese lenders are seeking better yields as unprecedented central bank stimulus caps interest rates, weighing on lending income. The nation has had a record run of monthly trade deficits after a nuclear industry shutdown following the 2011 disaster made extra energy imports necessary. It’s planning to boost gas imports from the U.S., where protests are mounting over the environmental impact of the fracking process.

“Japanese banks are aggressively targeting shale-gas related projects,” said Keisuke Tsujimoto, a general manager at the Vancouver office for state-run Japan Oil, Gas & Metals National Corp. “I see a huge business chance there.”

The spread offered by the lenders is less than the average interest margin for U.S. dollar loans in 2013 at 265 points for Asia excluding Japan, according to data compiled by Bloomberg.

Megabanks Bidding

The lending units of Mitsubishi UFJ (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Mizuho Financial Group Inc. (8411) are among the commercial banks that are considering loans to develop the $10 billion Cameron terminal, according to the people, who asked not be identified because the information isn’t public. The project is part-owned by Mitsui & Co. and Mitsubishi Corp.

State-owned Japan Bank for Internal Cooperation may supply as much as $3 billion, they said. The Cameron project will set the loan allocations after mid-January, three people said.

Mitsui spokesman Yusuke Yamauchi said the company was unable to disclose details of its work on Cameron, including its financing, while it completes studies on the project in preparation for an investment decision next year. Mitsubishi spokesman Masahiro Deguchi didn’t immediately return calls seeking comment.

Shutting Japan’s reactors after a tsunami wrecked the Fukushima nuclear plant has forced the nation to import fuels such as LNG, oil and coal for running replacement power plants.

Higher energy costs combined with a 25 percent weakening in the yen in the past two years against the dollar have caused Japan to post 17 consecutive months of trade deficits as of November, the longest run of shortfalls in comparable Ministry of Finance data going back to 1979.

Gas Agreement

The Japanese government signed an agreement on Dec. 2 with British Columbia to jointly explore shale gas in the Canadian province, according to a statement from the trade ministry.

U.S. oil production grew 18 percent to a 25-year high in the past 12 months, the Energy Information Administration said, as horizontal drilling and hydraulic fracturing, or fracking, unlocked supplies in shale formations including the Eagle Ford in Texas and the Bakken in North Dakota.

Japan may rely on the U.S. for 20 percent of its liquefied petroleum gas imports in 2018, up from 3.5 percent last year, according to The Japan LP Gas Association, an industry group.

“Japan’s government is putting a high priority on importing LNG from North America,” Soichiro Yamashita, deputy director-general of energy, natural resources and environment finance group for JBIC, said in an interview. “Those projects that help Japan achieve a stable energy supply are very meaningful and that’s a promising market for Japanese banks.”

Texas, Maryland

Besides the Cameron project, Chubu Electric Power Co. and Osaka Gas Co. announced 20-year contracts last year with Houston-based Freeport LNG Development LP to export 4.4 million ton of the gas from the proposed facility in Texas starting in 2017. Sumitomo Corp. and Tokyo Gas Co. also agreed to buy 2.3 million tons of LNG for 20 years from Dominion Resources Inc.’s planned Cove Point terminal in Maryland, due to begin in 2017.

The spread of as much as 250 basis points, or 2.5 percentage points, that the Japanese banks are offering for the Cameron project in the 16-year credit facility compares with the premium from 300 to 325 basis points on seven-year loans for Cheniere Energy Inc.’s Sabine Pass LNG project in Louisiana, according to the company’s statement.

Prime Minister Shinzo Abe’s stimulus measures have helped lending at major banks climb for 12 months through November, according to Bank of Japan data. Even so, profits on loans are constrained by interest rates kept low by the BOJ’s bond buying.

Lowest Margin

The average net interest margin for the 85 lenders on the Tokyo Stock Exchange Topix Banks Index is 1.31 percent, the least in Asia, according to data compiled by Bloomberg based on their latest filings.

“The trend of lending growing but loan margins shrinking at the same time is continuing,” because of the BOJ stimulus, Takeshi Kunibe, the chairman of the Japanese Bankers Association, told reporters on Dec. 19.

Kunibe, who is also the president of Sumitomo Mitsui Banking Corp., said with overseas margins widening and opportunities in infrastructure and energy-related projects emerging, his bank’s overseas business will probably expand.

Japan’s 10-year benchmark bond yield was at 0.68 percent today, the world’s lowest, as the BOJ buys more than 7 trillion yen ($67 billion) of sovereign notes a month to spur inflation. The yen traded at 104.18 per dollar as of 4:48 p.m. in Tokyo, after touching 104.64 last week, the weakest since October 2008. Japanese markets were closed for a holiday yesterday.

“These projects are attractive for banks now that the government has made it its policy to strengthen” energy procurement,’’ said Naoko Nemoto, managing director of financial institutions ratings at Standard & Poor’s in Tokyo. “But there are risks involved because these are overseas projects.”

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Emi Urabe in Tokyo at eurabe@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net; Sandy Hendry at shendry@bloomberg.net

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