Financing for Egyptian LNG Train 2 (ELNG 2) was always going to be notable if only for its size. But the deal is a radical departure from the template set by ELNG 1 – ELNG 2 lenders are taking Henry Hub price risk without a floor and the financial engineering has more in common with the BTC pipeline financing in 2004 than ELNG 1.

The $880 million deal signed on 5 July 2005 in London, pulling in 22 international and four Egyptian lenders. Gearing is 80/20 and average debt service cover ratio around 2x.

The international facilities comprise three 12-year tranches: a commercial tranche of $411.2 million, and two EIB facilities each totalling $144.4 million, comprising an Article 18 guarantee facility and a Euromed guarantee facility. An Egyptian facility of $180 million was also provided.

The commercial bank facility is priced at 60bp over Euribor pre-completion, stepping up to 110bp, 130bp on year seven and 150bp on year ten. The EIB Article 18, and Euromed facilities step up from 60bp through to 120bp.

The international banks joining the financing are: APICORP, Arab Bank, Maybank, Banca Intesa. BayernLB. BNP Paribas, Bank of Tokyo-Mitsubishi, Calyon, Dexia, Fortis, HSBC, HVB, ING, KBC, KfW, Mizuho, RBC, RBS, San Paolo IMI, SG, Standard Chartered and West LB. The Egyptian banks joining the deal are: CIB, MiBANK, National Bank of Egypt and NSGB.

The pricing shaves about a quarter of the post-Libor margin on ELNG train 1. Although pricing on ELNG 1 reflects its status as the first deal of its kind in Egypt and the tenor was three years longer than ELNG 2, the pricing on ELNG 2 is still remarkable because banks are taking gas market risk without a floor price. Conversely, the SPA on ELNG2 was at a fixed price with a strong counterparty – GdF.

ELNG 2 is sponsored by BG (38%), Petronas (38%), EGAS (12%) and EGPC (12%) – all of which also supply gas to the project from the West Delta Deep Marine (WDDM) concession in the offshore Nile Delta. The concession is unique among LNG generating deals in that the contract is not based on a gas sales agreement (GSA) but rather on a capacity payment/tolling fee.

The deal was put together using a group of pathfinder banks – BTM, Calyon, CIB, HSBC and Standard Chartered. BTM was appointed global facility agent and offshore security trustee, CIB was named Egyptian facility agent and onshore security trustee, Calyon acted as technical bank, HSBC as account bank and Standard Chartered insurance bank.

These banks were effectively arbiters between the gas sellers, with Petronas the principal representative, and the gas buyer, BG gas marketing (a separate division to BG upstream). When the banks first came to the table, the negotiators had formed an outline agreement that was commercially viable but not bankable.

The banks, in dialogue with the parties and financial adviser SG, were able to work through the documentation ready for market. On train 1 there were intense negotiations regarding documentation, and the debt required further tweaking before it was sold to the wider market. On train 2 they avoided these delays.

The pathfinder-bank model has been used once before, on the bumper BTC deal (for more details search BTC on www.projectfinancemagazine.com), and could become increasingly used on large complex project financings.

While the model avoids a funding competition for lead arrangers and using a term sheet that can be bid on but easily picked apart afterwards, the risk is that the pathfinders stymie competition and inflate the margin for their own books. This was avoided as the banks were retained on a fee-making basis rather than mandated on pricing.

Once the documentation had been settled, it was widely distributed among the market, and following a dialogue between the pathfinder banks, the market and the sponsors via SG, pricing was agreed. Once the packaging was approved, the pathfinders loosely committed to underwriting the deal.

The principal documentary risk centred on the nature of the standard purchase agreements – not only is there no guaranteed price, a flexible destination clause is woven in which effectively incorporates two SPAs. BG entered into an agreement to purchase the entire 3.6 mtpa output under two long-term SPAs processing gas in its Lake Charles (Louisiana, USA) and in time Brindisi (Italy) receiving terminals.

While the deal is principally backed by Henry Hub pricing, BG marketing has the option of feeding some volume into its prospective Italian terminal, whereon the lenders will be taking European price risk for that portion.

That BG option may take some time to exercise. While the clamour from bank booking agents for the asset is evident in the pricing, further downstream in the municipality and surrounding region of Brindisi they are less keen.

Despite having the requisite central authorisations BG's Brindisi LNG terminal looks certain to be delayed by local unrest – not only is a new regional government challenging the legitimacy of the previous administration's decision to allow the terminal, but the regional melee has caused ENEL, Italy's incumbent electricity supplier, to divest itself from the project.

Is the Brindisi LNG terminal in trouble? BG says no, but others are questioning if two, let alone a prospective six, new LNG terminals will ever be commissioned. (See LNG regas feature in this issue for more details).

When ELNG2 was out in the market the deal was buoyed by the first LNG shipment out of train 1 in mid-May – three months earlier than anticipated.

Due to the acceleration, approximately six early train cargoes have become available, of which BG Group is expected to lift three. Sale of the entire 3.6 million tones per annum (mtpa) output of Train 1 to Gaz de France under a 20-year sales and purchase agreement will commence after these early cargoes.

Egyptian LNG 2
Status: Closed 5 July 2005, CPs to be worked through before funding, expected by 22 July
Size: $880 million
Sponsors: BG (38%), Petronas (38%), EGAS (12%) and EGPC (12%),
Pathfinder banks: BTM, Calyon, CIB, HSBC and Standard Chartered
Other international banks: APICORP, Arab Bank, Maybank, Banca Intesa. BayernLB. BNP Paribas, Dexia, Fortis, HVB, ING, KBC, KfW, Mizuho, RBC, RBS, San Paolo IMI, SG, and West LB
Egpytian facility lenders: CIB, MiBANK, National Bank of Egypt, NSGB
Financial adviser: SG
Sponsor legal: Shearman & Sterling
Lender legal: Slaughter & May