The $1.35 billion Egyptian LNG (ELNG) project financing is Egypt's largest ever such transaction, the biggest ever done by sponsor BG and, at 15 years, it sports the longest tenor ever for a bank financed greenfield LNG deal.

And for a deal that marks the launch of Egypt's LNG (liquefied natural gas) industry, it is fitting that it also features a pioneering structure that serves as a possible template for future multi-phase LNG deals worldwide.

Crucially, the deal allows for flexibility to finance future LNG trains without the need for refinancing the current phase - a significant innovation for international LNG projects. Aside from these intrinsic strengths, the deal also features the largest loan the European Investment Bank (EIB) has ever made outside Europe.

It was finally wrapped up by 12 mandated lead arrangers in December 2003 in a difficult climate, having withstood the withdrawal of one of the original sponsors, as well as a general market wariness over political and military risks to the region.

Project financiers have spent the past year trying to close the deal. The arranging group comprises: ANZ, Apicorp, Bayerische Landesbank, Bank of Tokyo Mitsubishi, Credit Lyonnais, HSBC, IntesaBci, Royal Bank of Canada, Royal Bank of Scotland, Sanpaolo IMI, SG and West LB.

"It's a real first for Egypt," says Stuart Fysh, executive vice president and managing director for the Mediterranean and Africa at BG Group. "It should send out the message to the financial markets that Egypt is capable of participating in large project financings."

BG, and its partner Edison, signed a permit with the Egyptian government department, the EGPC, to export LNG in 1995, having made substantial discoveries in the West Delta Deep Marine region of the country.

Edison, however, pulled out of the project last February, because of its restructuring. Its stake was bought by Malaysia's Petronas in a smooth takeover.

What made the transition complicated, however, was the fact that BG was trying to finalize the deal for the second train at the time of Edison's withdrawal. The final sponsor group consists of BG (35.5%), Petronas (35.5%), Egyptian Natural Gas (12%) and Gaz de France (5%).

The strength of the deal lies in the flexibility of its structure.

The plant in effect acts as a tolling facility, whereby a third party can come in at a later stage and piggy-back on to the project with a separate train, while sharing common facilities. The Egyptian government promoted this approach, in part through its requirement that the project remain open to future strategic sponsors.

"At first we resisted the idea," says Fysh. "But we thought that if we put time into figuring out how to share our costs with other potential partners while controlling value leakage and maintaining some control over expansion, it made sense."

The template favours the sponsor by reducing the costs involved in refinancing at a later stage. Later trains can be developed by different sponsors, which will pay money into a pool for shared facilities, or pay a reimbursement to the train owners for use of the common facilities.

The flexibility granted to the sponsors had to be reflected in the documentation. "A lot of deals done in the last three or four years have featured allowances for more financing to be put in place with a reasonable minimal consultation," says Peter Goodall, head of project finance at Credit Lyonnais.

The tolling element was built into the deal as a requirement of the Egyptian government. ELNG and its financial advisers, SG, looked to Bontang, an Indonesian LNG plant in operation since the 1970s, and the only other tolling plant in the world, as a model for a multi-train facility. "We borrowed concepts from there," says SG's Stephen Craen.

This structure also suits the lenders, as there is less bankruptcy risk because of the effective credit firewall: each set of lenders is as remote from the other lenders as they can possibly be. Even if the second train goes bankrupt, it will not impact the first train lenders. "Still," says Fysh, "we wouldn't have done this without government support."

Gaz de France is also offtaker for the LNG, a fact that proved crucial. "The further you go down the ratings scale of the host country, the more important the strength of the offtaker," says Credit Lyonnais' Goodall. "Though the banks might take price risk, they're less happy to take volume risk. GdF was really the anchor in getting this done."

The project costs on train 1 were initially financed by $200 million in equity (15%) and by $1.15 billion in debt (85%). Since train 2 sponsors will be responsible for financing 50% of the common facilities with train 1 - with a $235 million equity contribution - the total debt portion decreased to $950 million.

Still, at 85/15 the deal features one of the highest ever debt to equity ratios for a greenfield LNG deal.

Financing breaks down into three tranches: a $447.7 million, 15-year international loan; a $189.2 million, 12-year facility, under EIB's Article 18 guarantee programme; and a $189.2 million EIB facility under its Euromed programme.

Unusually for LNG deals, EIB's involvement was sought instead of export credit cover. "If you bring in institutions that may take longer and bring in greater material costs, it's not always the right approach," says Fysh, "But I wouldn't rule it out in the future."

The EIB is providing 22.5% political risk cover on the commercial bank tranche, which effectively has grown to near 50% at maturity, at 15 years. The EIB's presence also helps the deal avoid a 32.5% withholding tax, given a peculiarity in Egyptian law.

BG is mulling a third train later this year.

ELNG

Status: closed December 2003

Size: $1.35 billion

Location: Egypt

Description: Egypt's first LNG deal is also the country's largest ever project financing, and the largest done by sponsor BG.

Sponsors: BG (35.5%), Petronas (35.5%), Egyptian Natural Gas (12%) and Gaz de France (5%).

Lead arrangers: ANZ, Apicorp, Bayerische Landesbank, Bank of Tokyo Mitsubishi, Credit Lyonnais, HSBC, IntesaBci, Royal Bank of Canada, Royal Bank of Scotland, San Paolo, SG and WestLB.

Financial adviser: SG

Lawyers to the project : Shearman & Sterling

Lawyers to the lenders: Slaughter and May

Insurance consultant: Miller Consulting Services Limited

Upstream consultant: Stone & Webster Consultants Limited

Downstream consultant: Merlin Associates

Model auditor: PKF

Gas Reserves Consultant: DeGolyer and MacNaughton

Environmental Consultant: Environmental Resources Management