Financing documents were signed on 9 August 2010 for Egyp­tian Refining Company’s (ERC) $3.7 billion second-stage oil refinery in the Greater Cairo area, with fin­ancial close due as Project Finance went to press but at the mercy of the country’s fluid political situation. The signing brought to an end a four-year process that had to endure the credit crunch and has endured several political shocks.

“The process of creating ERC began with the January 2006 MOU we signed with the Egyptian General Petroleum Cor­poration, but the project was sub­se­quently delayed while we finalized $2.6 billion of financing during the global financial crisis,” says Marwan Elaraby, managing director at Citadel Capital. “We were disappointed by the delay, but we are very pleased to have signed such a large facility during such challenging times.”

The deal is also notable for placing full refining margin risk with lenders without pre-completion guarantees, despite being led by a financial sponsor relatively unknown to the international project finance commu­nity, Egyptian private equity house Citadel Capital. The transaction represents the largest ever energy project financing in Africa.

Citadel Capital, with a range of co-investors, holds 85% of the project’s special purpose vehicle. Amongst those investors are Swicorp Joussour and IFC, the latter of which secured approval for a $120 million stake. The full list of shareholders, which will in­clude high-net worth individuals, will be known at financial close.

State-owned Egyptian General Petroleum Corporation (EGPC) is 15% owner of the project and is providing back-to-back 25-year agreements for the high-sulphur fuel feedstock from its adjacent Cairo Oil Refining Co (CORC) refinery and a 100% offtake of the refined products, which include naphtha, jet fuel, diesel and other middle distillates.

Elaraby adds: “The fact that this project remained on track through the deepest financial crisis in living memory is a testa­ment to ERC’s solid economic fundamentals and the strong sup­port that we received from the Government of Egypt and inter­national financial institutions that chose to back the project.”

The ERC plant will include a 2 million tonnes-per-year unit for the production of high-quality EURO V diesel; an 80,000 barrels per day (bpd) vacuum distillation unit, and a 40,000 bpd hydrocracker that can transform lower-quality products into middle distillates. Overall annual capacity will be 5 million tonnes of refined products.

The $3.7 billion total project cost is met with $2.35 billion of senior debt, $225 million of subordinated debt and $1.125 billion of equity. Taking the sub-debt as equity, the debt-equity split is just under 65/35. Mitsui, one of the two EPC contractors with GS Engineering & Construction, is providing $200 million and the African Development Bank $25 million of the sub-debt.

The senior debt comprises 17-year fully amortising tranches with a heavy Asian ECA influence. JBIC is providing a direct $540 million export-tied loan and NEXI is providing a $360 million export credit guarantee with 97.5% cover for commercial risk and 95% for political risk. KEXIM is providing a direct loan of $620 million and a $180 million guaranteed facility with 100% cover. The African Development Bank is providing a $200 million direct loan and the EIB is providing a $450 million loan that requires guarantees (the commercial bank guarantees amount to 105% of the loan, $472.5 million).

The commercial banks provide full commercial risk guarantees against the EIB tranche, and the deal marks the first time the EIB has accepted guarantees from Egyptian banks.

The loans have an average life of 7.25 years post construction. Preparatory work for the complex started in September 2007 and operational testing of ERC is expected by the second half of 2014, in time for operations to begin in 2015.

The NEXI insurance facility remunerates the banks with a flat 175bp over Libor margin. The KEXIM ECA tranche is priced at 195bp. And the EIB guarantee is priced at 325bp dur­ing con­struction falling to 300bp through years one to three post completion, then rising to 350bp. The average debt service coverage ratio (DSCR) is 2.1x and the mini­mum DSCR is 1.8x.

Lenders are exposed to market risk as both feedstock and offtake are pegged to international prices on a rolling quarterly basis using Platts Free on Board (FOB) prices.

The project does not benefit from subsidies or other government support but rather bene­fits from some inbuilt economic advantages, des­pite the market risk. All of Egypt’s diesel and jet fuel is supplied from Europe and Russia, so the refinery, which is situated in Cairo, close to its airport, sits on the doorstep of its market with its feedstock next door, and therefore has a buffer of transportation and shipping costs compared with the wider market. The refinery margin is also helped by the uncracked heavy fuel oil feedstock to which a modern refinery can add a lot of value.

Although the breakeven margin per ERC barrel is undisclosed, it compares favourably with Mediterranean refineries, which operate on a $4-$5 per barrel breakeven. In normal market conditions the feedstock and offtake are closely correlated, but if a dramatic and persistent market dislocation does occur ERC would be one of the last refineries to struggle. 

Egyptian Refining Company
Status: Financial documentation signed 9 August 2010, financial close due late January 2011
Size: $3.7 billion
Location: Mostorod in the Greater Cairo area, Egypt
Description: a 5 million tonnes per annum second-stage refinery
Sponsors: Citadel Capital plus co-investors, EGPC
Debt: $2.35 billion senior debt, $225 million subordinated debt
Financial adviser: Societe Generale
Pathfinder banks: BTMU, CIB, Credit Agricole and HSBC
MLAs: BTMU, CIB, Credit Agricole, HSBC, Societe Generale, Alhi United, Espirito Santo, KBC, KfW, Standard Chartered and WestLB
Senior lead arranger: Sumitomo Trust
Multilaterals and ECAs: JBIC, NEXI, KEXIM, EIB and African Development Bank
Subordinated lenders: Mitsui and African Development Bank
Sponsor legal counsel: Shearman & Sterling, Arab Legal Consultants (Egypt)
Lender counsel: Allen & Overy (Asian lenders); Slaughter & May (European lenders); Helmy Hamza & Partners (Egypt)
Borrower technical adviser: KBC Advanced Technologies
Market adviser: Purvin & Gertz
Model auditor: PKF
Insurance adviser: JLT
Environmental consultant: ERM
Project manager: WorleyParsons
EPC contractors: GS Engineering & Construction and Mitsui