Africas biggest project financing has closed after six years. The Mostorod refinery delivered an engineering, procurement and construction (EPC) contract robust enough to avoid the need for completion guarantees, showcasing a never-seen-before capital structure.
Mostorod went forward with no completion support because Egyptian General Petroleum Corporation and Egypt-listed private equity firm Citadel Capital, the project sponsors, were unable to guarantee capital.
The $3.7 billion (£2.4 billion) Egyptian Refining Company (ERC) financing is for the development of the Mostorod hydro-cracking refinery near Cairo. It included $1.135 billion of equity, $2.35 billion of senior debt and $225 million subordinate debt. The multi-source financing has shown that it is possible to close large and complex deals in Egypts politically challenging landscape.
For the ERC project to reach financial close in the uncertain political environment which exists in Egypt is a testament to the basic strength of the project and its importance to Egypt, said Tom Thomason, CEO of ERC, the project company.
The landmark project went ahead with the African Development Bank, the Japan Bank for International Cooperation (JBIC), the Export-Import Bank of Korea, European Investment Bank and Nippon Export and Investment Insurance all lending to a refinery without a full completion guarantee.
Katan Hirachand, managing director of energy project finance at Societe Generale, financial advisor to the sponsors said the financing was really unusual. It evolved dramatically over time where we had to find new lenders coming in after the Lehman crisis took hold, and liquidity in the commercial market had all but evaporated, he said.
A major factor behind the deal reaching completion was the robust drafting of the EPC contract, which required lawyers to work alongside both a technical and a financial advisor to tighten up any areas of risk.
Once the contract had been drafted, the success of the deal depended on Mitsui, the project contractor, buying into the concept.
Ultimately, Mitsui agreed to absorb more of the risk under the EPC. The company took on $200 million subordinate debt and also brought in JBIC as part of the unique funding structure.
Mostafa Sowelem, a managing director at Citadel Capital in Egypt said, "the unique feature of Mostorod is that we were able to bring together a broad range of equity investors, some of whom were financial investors and others strategic, in one complex project and come up with a cohesive arrangement that simultaneously met all of their different risk appetites and long-term strategic objectives."
Hirachand added that achieving a 17-year tenor for a deal of this nature was an incredible achievement, as was the sheer quantum of debt, which is a first for Africa.
Another notable feature of the trail-blazing deal was its use of mezzanine debt. Mostorod saw the African Development Bank (AFDB) provide mezzanine debt for the first time in its history. It also included EPC contractor mezzanine debt from Mitsui.
This might give the banks a longer term interest in the project being operational and could have helped to argue the case for Mitsui assuming a higher degree of risk under the EPC contract.
A difficult timeline
The multi-source project financing closed on June 14 and took six years to complete. It was originally scheduled to close in the middle of 2008. As well as the global financial crisis and upheavals in the Eurozone, the political unrest in Egypt presented another obstacle to the deals completion.
The project was devised during the Mubarek era and enjoyed strong support from the government. Following the January 25 revolution, the project again received political support from the post-revolution government.
Thomason said this sustained support was clearly understandable because it is an import substitution project which will provide much-needed diesel to the heart of the Egyptian marketplace.
Finding equity investors in the context of an extremely volatile domestic environment was a key challenge. The revolution in Egypt meant that the deal went from having a gap in its debt funding in 2008, to having a gap in its equity funding in early 2011.
Ultimately, the deal was saved and the equity gap filled by a combination of Citadel Capital putting in more money and bringing in Qatar Petroleum International (QPI) with a sizeable equity ticket.
Shearman & Sterling advised the project sponsor and the project company. Arab Legal Consultants provided local law advice to the project sponsor and the project company. Conyers Dill and Pearman acted for the project sponsor. Allen & Overy acted for the Asian lenders. Slaughter and May acted for the European lenders, with a separate team advising QPI. Helmy Hamza & Partners represented the lenders and QPI. Fulbright & Jaworski represented AFDB. Mayer Brown represented the direct foreign investors.