A group of banks led by Chase Manhattan closed the long-term financing package for the Profertil nitrates plant on 24 August 2000. The deal has justified the patience of the four banks that led the original bridge financing and has managed to stay in place despite the threat of higher gas prices and an as-yet untested market for the plant's product.

Profertil is a straight 50:50 venture between the Canadian fertiliser producer Agrium and the Spanish/Argentinean energy concern Repsol-YPF, formed by a merger in 1999. Perez Companc, the offshore and exploration specialist, originally joined the two, but its involvement was curtailed in early 1999 as a non-core activity. The fundamentals of the project lie with the growing offshore gas industry in Argentina and an increase worldwide in the price of fertilisers, a trend predicted to continue in the medium term. Argentina is currently dependent on imports for its requirements, and hopes to use a domestic supplier to increase use its use in an already profitable agriculture sector.

The main determinant of siting for a nitrate plant is the access to cheap supplies of gas, and the project follows in the footsteps of recent deals, including a plant and associated LNG terminal in Trinidad and the Fertinitro plant in Venezuela. Arguably these two plants benefit from even greater competitive advantages as lower-cost producers, although neither of them serve a large-scale agricultural sector. It is anticipated, however, that Profertil will find a ready market in the export-led grain and livestock sectors that power Argentina's economy.

Plans for the financing of the plant have followed the rollercoaster course that 1998 vintage Latin deals usually travel. Argentina's recession and continued investor wariness has meant that a long-term financing structure has only really been put into place as the plant is close to completion. The banks can nevertheless breathe a sigh of relief as a project subject to fairly extensive commercial risk and high supply costs has dwindled in significance on their balance sheet.

The plant's original financing schedule envisaged a $440 million long-term loan of around 12 years, and the mandate was won by Chase Manhattan, which also acted as financing advisor to the venture, SG, Mediocredito Centrale and the Export Development Corporation of Canada. Acting in a commercial capacity. Market conditions intervened, and the arrangers stepped in to provide an 18-month bridge loan. This $285 million uncovered loan was priced between 300 and 250bp over Libor, and was designed to carry the sponsors through construction.

The new financing features heavy Export Credit Agency support and a slightly shorter tenor, even allowing for the bridge, than was originally intended. It divides into three sections, according to the level of cover provided. Tranche one is an uncovered commercial bank portion of just over $91 million, priced at 125bp over Libor pre-completion and then stepping up between 425bp and 550bp thereafter. The second piece, $80 million, is covered by political risk only insurance from the EDC, and again carries pricing of 125bp pre-completion. Afterwards the pricing steps up from 225bp to 350bp. The final, most substantial, portion is covered by comprehensive insurance from Sace, the Italian ECA, and amounts to $144.1 million. This carries the same pre-completion pricing, and thereafter is priced at a uniform 100bp over libor.

The lead arranger group is the same as for the bridge financing, and banks further down the scale are dominated by Italian, Canadian and Spanish institutions. Co-arranger titles were taken by Rabobank, Banco Bilbao Viscaya, Banco Santander Centro Hispano and Instituto de Credito Oficial. Caja Madrid, Bayerische Landesbank, Dai-Ichi Kangyo Bank, Bayerische Hypo- Und Vereinsbank and Bank Austria acted as managing agents. Finally, Erste Bank, Efibanca, Bank of Nova Scotia, Unicredito Italiana and Banque Worms were participants on the deal.

The lending carries little currency risk since, whilst Argentina as a sovereign credit is some way yet from investment grade, most transactions involving ammonia and urea are carried out in dollars. As long as domestic farmers receive payment for their produce (and most potential customers will have significant export businesses) in dollars this situation is a comfortable one. The output of the plant is put at 1.1 million tonnes per year of urea and 60,000 of ammonia, off which around 50% will initially be exported.

The economics of the nitrates business, however, are largely driven by the gas price since it makes up about 80% of a plant's running costs. And gas prices are now beginning to start heading upwards in a similar fashion to that of crude oil, roughly 60% for the first half of 2000. This is not entirely bad news, since other plants will also find this hard to cope with, but Argentina is a relatively high cost producer, and margins are likely to feel more strain at Profertil.

However, nitrate prices are still holding steady, and most of the more recent additions to the global production capacity are low-cost facilities that can exploit economies of scale. Profertil, for instance, holds the title of the largest single-train urea facility in the world. The sponsors have also based revenue streams and therefore coverage ratios, on the added cost of import to both Argentina and Brazil, the largest foreign offtaker, rather than predicted spot prices. These are likely to be extremely volatile in the near term, since a number of smaller, higher-cost, producers are taking capacity out of the market in response to the higher gas prices.

Profertil is now operating, and should be ready to contribute to a self-sufficient Argentinean agriculture industry shortly. Agrium is unlikely to be taking on many more large projects in the near future, but Repsol-YPF has announced plans for investment of up to $6.9 billion, concentrated on offshore exploration activities.