The process of closing the $3.7 billion financing for the Egyptian Refining Company (ERC) took in three successive restructurings. The first, in 2009, involved adapting the project’s structure to the aftermath of the September 2008 crash. The second, from August 2010, involved dealing with the departure of several equity investors. The third, from January 2011 involved resuscitating the project after Egypt’s revolution.

The third restructuring managed to preserve the margins, tenor, and coverages of the second deal, despite the intervening ravages of the eurozone crisis. In 2010 sponsors tried to revisit the debt terms of 2007, usually without success. By 2012, a 2010-vintage debt package looked comparatively attractive. During the seven-year development process, however, the underlying commercial rationale for the project never changed.

The $2.6 billion debt package survived the events since the 9 August 2010 signing of financing documents with very minor alterations. The equity, on the other hand, was a more protracted struggle. The easiest path, for both developer and lenders, would have been to persuade an oil major to wrap construction and margin risk.

The lead developer of the project, Citadel Capital, is a financial sponsor, and tried, wherever possible, to attract financial investors. This target included high net-worth individuals, development banks, and regional conglomerates. Much of the $300 million in expenditure on the refinery project came from early-stage private investors.

These investors cannot offer much in the way of assuming risks or contingent support, but they are, by and large, interchangeable. The arrival or departure of a new equity provider had little effect on the underlying project economics or contracts. What looked, after 2008, like a source of weakness, made the project more resilient to the shocks of 2011.

The evolving ERC

The original plan for the ERC financing included a mixture of direct lending from Kexim and the European Investment Bank (EIB), together with a large uncovered bank tranche. As the post 2008 freeze in credit markets took route, the sponsors, and their adviser, Societe Generale (SG), moved to bring in a substantial Japanese export credit component and eliminate the need for uncovered commercial bank debt.

The debt package that signed in August 2010 consisted of $2.35 billion in senior loans, and $225 million in subordinated debt from the African Development Bank (AfDB). Mitsui’s participation in the subdebt supported its presence as one of the project’s engineering, procurement and construction contractors, while the AfDB, which only recently started marketing the product more aggressively, wanted to test it out, and its commitment accounts for only $25 million of the total, with Mitsui supplying the rest.

The 17-year amortising senior debt breaks down into a direct $540 million export-tied loan from JBIC, a $360 million loan with 97.5% cover for commercial risk and 95% for political risk from NEXI, a $620 million direct Kexim loan, a $180 million Kexim-covered loan, a $200 million direct loan from the AfDB, and a $450 million loan from the EIB that benefits from counter-guarantees from commercial banks.

The commercial banks on the deal are BTMU, CIB, Credit Agricole, HSBC, Societe Generale, Alhi United, KBC, KfW, and Standard Chartered, which had signed the August 2010, and stayed with it throughout the upheavals in Egypt. WestLB and Espirito Santo were among the original lending group, but have both been among the Eurozone crisis’ victims, and withdrew, to be replaced by Saudi bank Apicorp and Qatari bank QNB. Both of the new banks come from countries that have been highly supportive of Egypt’s new government. The presence of the two Egyptian banks is impressive because the EIB has not accepted a guarantee from an Egyptian bank before, and because funding at extremely long tenors, even with ECA cover, is often a struggle for them.

The equity-raising ERC

The second struggle that the developer faced was to raise additional equity, when it learned that some of its potential investors were not in a position to fund on their commitments. These investors, many of them from the Gulf region, were nursing losses from a downturn in the real estate market. The sponsors had assumed a shortfall of $20-30 million, but the real figure was close to $100 million.

The developer tweaked the construction package and the contingency in the model, so that the benefits of coming in under budget flowed to the equity, rather than being shared with the debt, effectively reducing the equity requirement. The developers also approached state-managed pension funds, including that for the country’s post office, asking them to commit. By January, the entire financing was ready to sign.

The project will have a capacity of 5 million tonnes per year of various refined products, and is located in Mostarod, close to central Cairo. It will take high-sulphur fuel oil from a next-door 43-year-old refinery owned by the Cairo Oil Refining Company, a subsidiary of state-owned Egyptian General Petroleum Corporation. Demand for such fuel oil is stagnant (some power generators will use it when no gas is available), while Egypt imports diesel, which is in demand to run personal, commercial and agricultural vehicles.

The short distance between the supplier and the new refinery, and between the new refinery and its customers, gives ERC a cost advantage over diesel landed at Alexandria, even from equally low-cost refiners. EGPC is buying the entire output of the project, which includes naphtha, jet fuel and middle distillates, as well as diesel, under a 25-year offtake agreement.

The enduring ERC

The obligations of EGPC, rather than carrying a full sovereign guarantee (as the earliest independent power projects in the country did), benefit from a comfort letter signed by Egypt’s prime minister, finance minister, and petroleum minister. The significance of the revolution, which broke out three weeks before final close was due, was that of these three signatories of the original comfort letters, the prime minister, Ahmed Shafiq, and petroleum minster, Sameh Fahmy, are in prison, and the former finance minister, Youssef Boutros-Ghali, is in exile in London.

The revolution also restricted the ability of the state pension funds to invest in the project, until they knew what their lines of responsibility would be. The fuel shortage that started in December 2011 concentrated minds, however, and the interim administration of Mohamed Hussein Tantawi, commander in chief of the country’s armed forces, offered the project its full support. The project’s commercial rationale, hope project participants, will make it immune to any further political unrest.

The biggest change to the cast of equity providers is the arrival of Qatar Petroleum International (QP), which started looking over the project towards the end of 2011. QP is a well-regarded and sophisticated sponsor that has built up a track record developing value-added gas infrastructure in its home market. It has formed joint ventures in the Chinese and Vietnamese petrochemical sectors, though ERC is more advanced.

The Qatari investment is primarily financial, though it will have the chance to be involved in some management functions, and is now the project’s single largest shareholder, committing $362 million for a 27.9% stake. Citadel Capital, with a $155 million equity contribution, retains an 11.7% stake, and EGPC, which contributed $270 million, has a 23.8% stake.

Additional significant equity providers are the International Finance Corporation (IFC), contributing $85 million for 6.4%, FMO, with $29million for 2.2%, DEG, with $26 million, for 2%, and the InfraMed Fund, which contributed $100 million for 7.5%. The remainder of the project’s shareholders are smaller individual and family-owned businesses such as Swicorp Joussour, which have been involved in the project from an early stage. EFG Hermes was responsible for placing $462 million of the total $1.1 billion equity requirement.

Observers looking for a relationship between equity, and even in-kind contributions and the investors’ final shareholding, are likely to be disappointed. Equity contributions have been through a variety of vehicles, and different points in time, and at different valuations. Throughout the period after the revolution the existing sponsors, including EGPC, continued to honour their cash calls – and the project continued to pay the banks their commitment fees.

The exultant ERC

By February 2012, the lenders reconvened, and looked over the project documents, and many of them had to go back to their credit committees. For most of them, the arrival of QP as a sponsor will have helped keep them on board, though banks did grumble about the intervening increase in funding costs. The documentation required some changes to the availability period and amortisiation schedule, simply to reflect the passage of time, but was essentially unchanged.

The project’s strong economics make it hard to draw any lessons about the potential for a rapid rebound in project finance activity in Egypt. The cast of investors in ERC, may not turn out for a water plant financing, for instance. The gearing – and potential returns on a refining operation – are closer to those that Citadel’s target investors expect.

As Tom Thomason, ERC’s chief executive, notes, eliminating the costs of landing diesel from overseas will save EGPC about $300 million per year, and the refinery will account for about 50% of domestic diesel demand per year. This ensures that the project has the broadest possible base of support.

The sponsors have made sure that the plant, since it is located close to the centre of Cairo, is as environmentally friendly as possible, though this location limits the ability of EGPC to make further value-added developments. The plant sells petcoke to the local cement industry, and about 95,000 tonnes per year of sulphur to sulphuric acid producers.

The development history of ERC – at seven years – is not extraordinarily long by the standards of petrochemical projects given their innate revenue volatility and large number of moving parts. But ERC’s ability to rescue a struggling – if signed – deal from the jaws of revolution is one of the more inspring sagas in project development. 

Egyptian Refining Company
Status: Financial documentation signed 9 August 2010, financial close 14 June 2012
Size: $3.7 billion
Description: A 5 million tonnes per year second-stage refinery locatedin the Greater Cairo area, Egypt
Sponsors: Citadel Capital, Qatar Petroleum, EGPC, IFC, DEG, FMO, InfraMed
Debt: $2.35 billion senior debt, $225 million subordinated debt
Financial adviser: Societe Generale
Pathfinder banks: BTMU, CIB, Credit Agricole and HSBC
MLAs: Apicorp BTMU, CIB, Credit Agricole, HSBC, Societe Generale, Alhi United, QNB, KBC, KfW, and Standard Chartered
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