Two years ago a succession of deals in the power and telecoms sectors put Egypt firmly on the radar of banks and sponsors, with deals such as the Sidi Krir power plant, Ezz Heavy Industries, Egyptian Company for Mobile Services and Misrfone. While at the same time other north African countries such as Tunisia emerged with deals such as the Rades power project.

Two years on Egypt has a sub-investment grade rating from Standard & Poor's and Moody's, and the focus of attention has switched to hard currency export deals in the gas and oil sector.

But with a dearth of deals it is not surprising that the Egypt liquefied natural gas project is already attracting a considerable amount of attention in the market, with initial information memoranda sent out to about 20 international banks in September.

The deal, sponsored by BG, Edison International, Egyptian General Petroleum, Egyptian Natural Gas and Gaz de France, is one of the more advanced of a number of LNG projects proposed in Northern Africa. Others include an LNG scheme being worked on by Spain's Union Fenosa also in Egypt, and the Nigeria Liquefied Natural Gas scheme. BP has put its plans for a third Egyptian LNG train on the back burner.

SG, as adviser, first sounded out the market in July for reactions to Egypt LNG, receiving strong indications of support from about 20 international banks and a number of Egyptian banks. A preliminary information memorandum was issued in September and banks are now invited to submit bids by October 14. From the international group about five to eight lead arranges are expected to emerge, with banks expected to make commitments by the end of November aiming towards a signing in February 2003.

The $1.15 billion financing is split into two parts an Egyptian tranche of $150-$200 million on a take-and-hold basis and an international tranche of $950 million-$1 billion. This tranche comprises a $500-$550 million loan. Perhaps more surprising to some was the involvement of the European Investment Bank, rather than an export credit agency or multilateral such as the IFC. The EIB is providing $225 million under its Euromed programme, in which the European bank provides political risk insurance, and $225 million provided under the bank's article 18 programme.

Says Stéphane Renard, director at SG, advisor on the Egypt LNG deal: ?We invited about 20 international banks to submit bids and from that we expect about five to eight lead arrangers to emerge. It is quite a large group but this is the first time such a large financing is being done for a project in Egypt and we thought banks would be comfortable with that size group. Feedback from our market sounding suggests that banks would not be happy with a group of 12-14 mandated lead arrangers (MLA) of the type seen in deals such as Oman LNG but we should be in a better position to decide on the size of the MLA group once we have received the bids.?

Certainly the presence of such a large arranging group is increasingly becoming the norm for many projects in the region, with most banks more than willing to make the trade-off of taking a smaller slice of the pie to remove some of the risks.

Simon Byrne, senior vice-president and head of oil and gas project finance at ABN Amro in London, says: ?Aiming for a bank group of seven of eight banks, or sometimes even 10-14, has become almost standard. From a pure asset return perspective, it is often the case that any value in a deal is dissipated among a very large group of institutions. It is as though the syndication has become less important than the formation of a large arranging group. The corollary to this is of course that without such arranging groups, some deals might not have reached financial close.?

Nevertheless the deal offers a strong export project, which is not only needed to boost ailing export revenue for the country and help escape the current economic impasse, but is proving a strong lure for banks at a time when interest in Egypt's privatisation process shows signs of flagging.

Standard & Poor's says it continues to be concerned about Egypt's level of public debt, weak control over public capital expenditures, sustainability of the exchange rate regime, and the pace of structural reform. It says the government may have taken steps to address all of these issues but that the strength of these measures has been tempered by the need to maintain socio-political stability.

Meanwhile, the country's privatisation process, now in the next phase, has slowed. Says Ala'a Al-Yousuf, an analyst at S&P in London: ?The privatisation process has continued, but it has entered into a more difficult stage, with many of the most viable public enterprises already sold, while some of the remainder are in need of restructuring if they are to be sold rather than liquidated.?

Such concerns are impacting on the level of appetite for projects in which revenues are paid in domestic currency or where the level of political risk is considered high. Added to this are concerns over the level of withholding tax for Egypt. When Sidi Krir came to market two years ago it marked one of the first attempts to place uncovered long-term Egyptian debt into the project finance market. But the deal, arranged by ABN Amro, Dresdner Kleinworth Benson (now Wasserstein), Paribas (now BNP Paribas), SG and EDC, Canada's export credit agency, faltered in syndication. At issue was not the deal's 12-ear tenor but the fact that so few banks could book the deal in the two paces which avoid withholding tax ? Egypt or Switzerland.

Says Michael Emery, director of syndicated debt at ABN Amro in London: ?Withholding tax is a major issue in Egypt ? with as much as 32.5% being charged at the top end. If you are a developer looking to be competitive to win a contract it is a real concern. For the banks it can complicate the process if they are forced to book the loans in a particular jurisdiction such as Switzerland, with a 0 per cent withholding tax rate.?

He adds: ?Sidi Krir was the first time international banks had gone 12 years clean in Egypt and after that EdF brought in the IFC and stretched tenors even further. But now Egypt has been downgraded, some banks may need to re-examine whether they remain comfortable lending long-term money to Egypt on a clean basis. Having said that, where revenues are paid in hard currency into an offshore escrow account, some of the conventional country risks such as transferability and convertibility risks are mitigated. This is different from a power deal where there are domestic revenues and you are relying on a government to convert the funds into US dollars to service and repay the international debt.?

Egypt's LNG projects remain an attractive prospect for bank and sponsors in the region. Egypt LNG offers the hope of a second train once financing has been closed for the first. Meanwhile, Union Fenosa, the Spanish utility, mandated Citibank at the beginning of the year to advise on its own LNG project. Progress of the project is somewhat dependent on Union Fenosa finding a strategic partner. The utility has a limited amount of upstream experience but a large domestic distribution network and wants a strategic partner to provide technical expertise and financing to assist its project in Egypt, as well as those in Oman and some other regasification facilities. Indicative bids are in and a winner is not expected to be announced until the end of the year.

Meanwhile, a third scheme proposed by BP still appears to be in its infancy. All three aim to assist Egypt in its target of exporting 8.6 million tonnes a year of gas to European power groups.

Local banks have also warmed to the Egypt LNG deal. ?For the Egyptian banks, their facility is arranged on a different basis because their underwriting ability is constrained by their maximum lending limits,? says SG's Renard.? They are invited into the deal on a take-and-hold basis. However, we received a very positive response from the Egyptian banks and we are extremely confident on our ability to raise at least $150 million from those banks.?

The deal also differs from most previous project finance transactions in Egypt. With the Sidi Krir or EdF power deals, there was a Central Bank Guarantee structure where banks had sovereign payment risk, including transferability.

Says Renard: ?Egyptian LNG is a very different kind of deal. There is a whole chain from the upstream to the offtaker. All the revenues from the LNG sales are paid in US dollars to an offshore escrow account. From this 20% is a priority gas payment to the upstream gas supply project and the remaining 80% is available to repay debt. Subordination of the upstream (for all but 20%) gives the Egyptian LNG deal a loan-life coverage ratio in excess of 2.?

Renard also sees the involvement of the EIB as a definite advantage. ?For a project of this size in Egypt the involvement of at least one multilateral is a must. We went to see all the agencies and decided to use the EIB because of their ability to deliver quickly, the attractive cost and the flexibility of the political risk cover they can provide for this project.?

ABN Amro's Emery says that there are other attractions to having a bank such as the EIB on board: ?ECAs generally require upfront premiums which are less attractive when you have paid out for 15 years cover in advance and then five years down the line want to refinance the deal. The EIB meanwhile, offers a preferential funding rate to its clients, sometimes swapping their own fixed-rate funding into attractive floating-rate funding which benefits the borrowers.?

But while Egypt may be enticing banks into the region with an export deal there are signs of activity elsewhere in North Africa. ?In Tunisia there is a lot of appetite for lending as it is investment grade and is considered the best risk of the North African countries but it is a small market and opportunities are scarce,? says Emery. ?On the Rades IPP, the banks were queuing to get a piece of the pie.?

Rades, a $250 million financing for a 471MW power plant in Tunisia, closed financing in 1999 and was a showcase for future deals. Sanwa and Paribas arranged two 10-year tranches of $109.5 million and a $79 million Jexim loan. Under the terms of the deal PSEG Global, Sithe and Marubeni sell on their power to STEG, the state-owned gas and electricity company.

Having never defaulted on its debt repayment schedule, Tunisia was viewed as a good risk but the deal suffered from the government's lack of project finance experience.

Since then deals in the telecom sector for companies such as Egypt's Orascom, already present in Algeria, have whetted the appetite of some banks.

And in March this year, Caterpillar Power and Centurion Energy closed the $29 million, 27MW Zarzis power project, a build, own and operate scheme in south central Tunisia near the port of Zarzis. The plant is the first in Tunisia to be built under legislation allowing independent power operations to use gas from marginal fields.

Financing for the concession came from a $20.2 million loan arranged by ABC International Bank, part of the Arab Banking Corp Group, with Amen Bank, a local player, providing $10.1 million.

Under the terms of the deal, Societe D'Electricite D'El Bibane ? the borrower ? will use gas currently being flared from the Ezzaouia and El Biban fields.

Says Keith Louch, AGM in the project finance division of Arab Banking Corporation in London: ?It was a small deal but part of the problem is that there is the same amount of work for a small project financed on a limited recourse basis as there is for something the size of Rades.?

He says that having Caterpillar on board helped the progress of the transaction through. ?Caterpillar is a very good ethical sponsor and on this deal they went out on a limb to push forward the deal. When financing was delayed because of the documentation process, Caterpillar put in its own money to push it through.?

He says given the bank's experience in Tunisia, it will be looking at the next deal on the block ? the 350MW to 500MW Ghannouch IPP in Gabes, central Tunisia. But there are several other project concessions on offer including those for the El Allef waste water plant and the Enfidha airport ? tenders for both of these are expected to be issued by the end of the year.

Algeria, meanwhile, is also attracting a certain amount of interest primarily related to its own gas exports ? the country is the third largest exporter of gas and about 90% of its exports go to European markets. Faced by growing competition from Libya, Algeria's government recently announced plans to increase exports by 25% within the next 10 years.

Among the corporates already in the region, and expected to have more gas stream in the next few years, are the likes of BP and BHP Billiton. And the country recently opened bidding for its Gassi Touil integrated gas project.

Says ABN Amro's Byrne: ?So far almost everything done in the oil and gas sector in Algeria has been for Sonatrach and has not been concluded on a project finance basis, but instead purely with ECAs. Maybe with announcements such as the plans to develop new LNG operations, this could change. Algeria is not itself impossible, although political risk mitigation would still likely be required.?

Meanwhile, in September Sonatrach, the state owned oil group, said it would take a 30% stake in the gas distribution and electricity generation facilities of Cespa, the Spanish oil and gas concern in which TotalFinaElf has a stake. As part of the deal Sonatrach will supply gas for the businesses.

The two groups have already announced plans to build the $6 billion Medgaz gas pipeline between the Hassi R'Mel field in Algeria and Spain.

What remains clear, is that where north Africa is concerned, export oil and gas deals hold the strongest lure for lenders. The outcome of the Egypt LNG deal could provide a benchmark for the next round of deals.