EAgrium - one of Egypt's largest first-time financing projects - closed at the end of last month with a project value of US$1.4 billion financed solely through equity and bank debt. The notable absence of assistance from multilateral or export credit agency support suggests overwhelming confidence among commercial banks in both the fertiliser market and Egypt in general

The project briefly topped Egypt's tables as the largest first-time financing before SEGAS Damietta LNG refinancing took its place. However, there have been some significant changes to Egyptian law recently that introduce a new pricing policy to phase out gas and electricity subsidies for energy-intensive industries. This may curb the trend for projects of EAgrium's proportions.

The new pricing policy came into effect last week and will progress gradually in phases. This law will see subsidies to smaller operating units sustained while larger facilities may be deemed ineligible. EAgrium itself will not be affected as it has been in the development stage for several years but investors may be less confident in investing in large projects in Egypt in the future as a result and large fertiliser projects may become a thing of the past.

The Project

EAgrium will be located on a 600,000 square metre site in Damietta's free zone on the Egyptian coastline [Transactions Database].

ThyssenKrupp was awarded a contract in May earlier this year to build the plant which will be operational by 2010 producing 1.2 million tons of urea per year.

The entire product is intended for the US market unless Echem - one of the sponsors of EAgrium - chooses to take up its opportunity to adopt part of the production capacity with the intention of marketing the fertiliser produced to the local market.

The Financing

EAgrium's sponsors are providing US$455.5 million in equity in the following structure:

• Agrium - 60 per cent
• EChem (Egyptian Chemicals Company) - 12 per cent
• EGAS (Egyptian Gas Company) - 12 per cent
• GASCO (Egyptian gas grid operator) - 9 per cent
• APICORP (Arab Petroleum Investments) - 7 per cent

The deal is divided into two tranches, both with a tenor of 15 years as follows:

• US$563.718 million international bank facility
• US$375.812 million Egyptian bank facility

The international banks underwriting US$93.95 million each:

• Apicorp
• Arab Bank
• BNP Paribas
• Export Development Canada (EDC)
• Intesa Sanpaolo
• Société Générale

Pricing on the international bank tranche starts at LIBOR plus 110bp pre-completion, falling to 100bp after completion and then rising to 130bp by the end of the term.

The local banks got a wider spread on their tranche, starting at 90bp before completion and rising to 115bp afterwards before climbing as high as 150bp at the end of the term. A debt-service coverage ratio of 1.5 is attached to the loan.

The local banks each putting US$93.95 million forward:

• Banque Misr
• Commercial International Bank
• National Bank of Egypt
• National Societe Generale Bank

The MLAs were appointed in February and include all the banks involved in the loan financing.

RBC Capital Markets acted as financial adviser to the sponsors while Allen & Overy and Baker & McKenzie were the legal advisers. Clifford Chance was the legal adviser to the lenders.

Conclusion

EAgrium is the first project in Egypt to achieve financing purely through equity and commercial bank loans (IJ News, 16 August 2007). Such confidence may be the result of perceived political stability in Egypt together with secure access to gas supplies, proximity to potential markets and cheap transportation costs.

The appetite of the bidders may also be attributable to the absence of institutions such as the IFC intervening in the financing or the success of projects in the last decade inspiring confidence.

In the last 12 months the country has witnessed a massive uptake in its projects. As Clifford Chance partner Jeremy Connick elaborates, 'We have noticed a significant increase in activity in Egypt and in ever larger financings. The fertiliser market has seen significant activity this year, but there is also activity in upstream gas and in mining.'

The port of Damietta is developing at an impressive rate. Projects such as EAgrium are prompting interest from developers eager to progress projects on the back of newly formed facilities. Damietta International Port Company is in the financing stage of its proposed US$1 billion cargo terminal.

Allen & Overy associate Will McAdam says, 'This is no doubt part of a wider plan of development in the country and the fact that EAgrium was oversubscribed (by both International and Egyptian banks) clearly demonstrates that there is a definite willingness to finance projects of this type within Egypt.'

However, while high investment is set to continue, the unprecedented size of individual projects including EAgrium and EMethanex may not continue to prove as popular as the effects of the new pricing policy to be enacted by the Egyptian government over the next three years become apparent.

The project at a glance