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
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,
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
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
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
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
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