Egypt Hydrocarbon Corporation (EHC) closed the $298 million debt financing for its ammonium nitrate plant with an entirely domestic group of lenders in November. International involvement was not required, as Egyptian banks offered fully under­written debt with competitive pricing and tenors. If they maintain this enthu­siasm, and Egypt moves past its current period of instability, local lenders may reshape the country’s project finance market.

Before signing, the project was in development for three years. RBS was man­dated as financial adviser in 2008 and approached banks in 2009 for in­formal discussions. It approached international banks first and then brought local banks into the process in October 2009. While the response from international banks was relatively muted, the Egyptian banks lobbied hard to participate, and in March and April of 2010 communicated in writing that they had the appetite for both project risk and underwriting.

Egyptian banks have suffered less than international lenders from a lack of liquidi­ty because their sector has been largely insulated from the credit crunch’s fall-out. Enthusiasm among local banks for the project also brought the advantage of speeding up deliberations. The three com­mercial banks were formally man­dated in June 2010 and reached finan­cial close just five months later.

The financing model is said to be strong. Market, technical and environmental assessments took 18 months and were produced to an international ECA standard rather than just satisfying the commercial banks. British Sulphur carried out the market analysis and Baker & O’Brien the technical analysis.

Because the debt is being financed in dollars, Egyptian banks did not have the same funding advantage as they would have if they were lending in Egyptian pounds. Although banks would have offered a two-year longer tenor if the deal was done in Egyptian pounds, EHC was put off by the high Egyptian interest rates. At the time the deal closed, the Egyptian Central Bank overnight rate was over 8%. Furthermore, as feedstock and output are both priced in dollars, doing the deal in Egyptian pounds would have necessitated currency hedging.

Nevertheless, the tenor is a competitive 10 years, and the debt competitively priced, at 400bp over Libor. The debt is fully underwritten on an equal club basis, and debt service coverage ratios are below 2x, an impressive level given petrochemicals projects’ traditionally volatile revenues. EHC is investing $156 million in equity, putting the debt to equity ratio at 65:35.

The project is unusual for the region in that it has no corporate or completion guarantees. Although the EBIC ammonia project, signed in 2005, was similar in this regard, two-thirds of that financing was provided by US Ex-Im.

The project will produce low-density ammonium nitrate, a component used in precision explosives for the mining industry. Having studied the market dynamics, EHC is expecting increased demand for the product as mining companies are forced to penetrate deeper underground. The Egyptian government is also drafting new legislation to encourage the incipient domestic mining sector, and the prospect of coal mining projects in the pipeline should provide a natural local market for the project’s output.

Commodity prices have been rising and although demand is set to increase, the supply of ammonium nitrate remains relatively constrained. There is only one other ammonium nitrate facility on the continent, located in South Africa, and EHC’s new facility will almost certainly be the first of its kind to be delivered through project financing.

Ammonium nitrate’s unique properties, specific application and absence from the project finance market thus far, meant that there was no previous template for the structuring of offtake and supply con­tracts. Transammonia is providing 100% of the ammonia feedstock – which it is most likely to purchase from the EBIC plant just 20km away from EHC – and is also purchasing 100% of the output. There is no fixed pricing for the EHC feedstock and offtake contracts with Trans­ammonia, which will instead be priced at market rate. The prices of ammonia and ammonium nitrate are closely linked, however, so this largely eliminates the risk of dangerous disparities between feedstock cost and revenue.

Uhde, a wholly owned subsidiary of ThyssenKrupp, signed up as EPC con­trac­tor on 20 August 2010 on a lump-sum turnkey basis. Transactions with the Ger­man firm are conducted in Euros, intro­ducing some currency risk, but Uhde is one of the most experienced foreign con­tractors in Egypt and operates through a Cairo-based subsidiary called Uhde Engi­neering Egypt. Uhde’s appointment pro­vides some comfort to the lenders and explains why they are willing to take on some construction risk.

The project is expected to begin oper­ating in 2013. When completed the com­plex will convert the ammonia feed­stock into 925 tonnes per day (tpd) of nitric acid, which will then be processed to produce 1,060 tpd of low-density ammonium nitrate.

EHC is a testament to Egyptian banks’ ability to competitively fund complex projects. As the chairman and chief executive offi­cer of EHC Basil El Baz puts it: “The project demonstrates the sophistication of the Egyptian bank market in being able to analyse a new market sector and mobilise significant liquidity, with­out the participation of international banks in the financing.” 

EHC Ain Sokhna Ammonium Nitrate
Status: Financial close 22 November 2010
Size: $454 million
Location: Egypt
Description: Nitric acid and ammonium nitrate complex
Sponsor: Egyptian Hydrocarbon Commission
Debt: $298 million
Mandated lead arrangers: Commercial International Bank (facilities agent); Banque Misr (security agent); Ahli United Bank (bookrunner)
Financial adviser to the sponsors: RBS
Legal adviser to the sponsors: White & Case and Helmy Hamza & Partners (local)
Legal adviser to the lenders: Sarie Eldin & Partners
Market adviser: British Sulphur
Technical adviser: Baker & O’Brien
EPC contractor: Uhde