Egyptian banks back EHC

IFR Middle East Report 2011
11 min read

Local is going large in the financing of Egypt Hydrocarbon Corporation’s ammonium nitrate facility. By James Bishop, chief financial officer, Carbon Holdings and Clare Kimber, energy, infrastructure and project finance practice, White & Case.

With Egypt in the eye of the storm, it was widely expected that, in the aftermath of the Arab Spring, the already-static Egyptian project finance market would tail off even further. In fact, the private sector’s self-imposed moratorium on investment activity that was expected to ensue has not materialised. Instead, investors’ appetite for project finance deals in Egypt has gone from strength to strength, buoyed by a number of successful financings in the region. This has been made possible, in large part, by the liquidity of Egyptian banks.

Foremost among these projects is the US$298m debt financing for Egypt Hydrocarbon Corporation’s ammonium nitrate plant located at Ain Sokhna near the Suez Canal on the Red Sea coast of Egypt. The deal, which signed on November 22 2010, is shortly to reach financial close.

Funded entirely by the local bank market, the EHC project represents the enthusiasm, and the ability, of Egyptian banks to take project risk in the expectation of solid returns based on sound industrial projects. Moreover, as one of three projects being developed by EHC’s main sponsor, Carbon Holdings, the ammonium nitrate facility represents the first stage in the development a multi-billion dollar petrochemicals complex that is tipped to transform the Egyptian petrochemical industry beyond recognition. Local is going large.

The EHC project

The project consists of the construction and operation of a plant for the production of low density ammonium nitrate. It comprises a nitric acid unit and ammonium nitrate unit, together with associated infrastructure and facilities including storage tanks, pipelines and utilities. Once complete, the plant will convert the ammonia feedstock into 850 metric tons per day (mtpd) of nitric acid. This will then be processed to produce 1,060 mtpd of mining grade ammonium nitrate (MGAN), for use in the mining and construction industries.

The MGAN produced by EHC will be primarily for export to foreign markets. Here, the geographical location of the project near the Suez Canal is expected to come into its own. It has strategic access to mature markets in Europe and North America, coupled with a freight cost advantage in supplying the high growth Asian and MENA markets.

Global demand for MGAN has been forecast to outstrip supply between now and 2020, meaning there is significant scope for EHC to plug the gap. The fact that there is only one other ammonium nitrate plant in Africa (at Secunda in South Africa) is seen as a huge advantage in this respect.

Major players

The project company, EHC, has strong sponsor support in the shape of its shareholders. This includes Carbon Holdings, the key force behind the Egypt Basic Industries Corporation (EBIC) ammonia project. EHC’s other shareholders are Egypt Kuwait Holdings, Hayel Saeed Anam Group, Saudi Economic and Development Company and Tri Ocean Energy.

The EPC contractor for the plant is Uhde GmbH, a wholly owned subsidiary of ThyssenKrupp AG, which will deliver the plant on a lump-sum turnkey basis. The notice to proceed was issued on August 20 with start-up scheduled for 2013. Long-term feedstock and offtake contracts have been executed with Transammonia, a worldwide group specialising in the international trade of ammonia and its derivatives.

Local bank financing

Throughout the development of the financing strategy for the EHC the financial adviser, Royal Bank of Scotland, maintained a dialogue with both the international and the local bank markets. At the beginning of 2010 it became apparent that the liquidity and credit appetite in the Egyptian market would make this the preferred route, with highly competitive terms including pricing and tenor. This was despite the requirement to finance in US dollars rather than Egyptian pounds.

On the back of their keen interest in the project, Ahli United Bank SAE, Banque Misr SAE and Commercial International Bank (Egypt) SAE were signed up as mandated lead arrangers and underwriters in November 2010. The MLAs are expected to launch the transaction into syndication before the end of 2011 and remain confident of a favourable recepition in the market, with no major changes made to the structure of the transaction since it was signed in 2010. The debt has a door-to-door tenor of 10 years and is based on a traditional project finance structure.

With European banks suffering due to the eurozone debt crisis, and Basel III imposing stricter capital requirements as regards long-term lending, many in the market believe that we can expect to see more entirely regionally-funded projects in the future. Emerging market institutions are viewed as well placed to step into the shoes of traditional commercial banks, which are becoming increasingly cautious about their balance sheet exposure to long-term loans.

Sponsor support and risk mitigation

The project benefits from strong sponsor support. While no traditional completion guarantee has been offered, completion support of the kind seen in the EBIC project is being provided. For example, the sponsors have demonstrated their willingness to take on a degree of project cost risk by way of shareholders’ undertakings to cover cost overruns up to a capped amount.

The lenders have also been reassured by the involvement of a reputable and creditworthy EPC contractor in the form of Uhde, one of the leading engineering companies in the design and construction of chemical and industrial plants. The EPC contract, which is set to international standards, mitigates construction risk in several ways. These include the lump-sum turnkey nature of the contract, which provides greater certainty in terms of calculating any cost overruns and in terms of placing delivery risk on the contractor. In addition, a significant performance bond and a parent company guarantee from ThyssenKrupp AG are being provided.

The security package put in place has also reassured lenders. It includes share pledges over shares in EHC, mortgages over land, assignments of certain project documents and pledges over the project company’s bank accounts. The negotiation of tight change of control provisions was also crucial for the MLAs, which were keen to tie EHC’s major shareholders to the project and to have clear visibility on potential transferees.

There is no doubt about the sponsors’ commitment to the project. Going forward, by taking operation and maintenance in-house, EHC aims to draw on its experienced management team to run the plant. This includes personnel who have been involved in the widely successful EBIC project, which in 2005 was the first industrial project finance transaction in Egypt to receive US Ex-Im support through a US$229.8m guarantee.

Full steam ahead

EHC’s ammonium nitrate plant forms part of a wider plan by Carbon Holdings to develop four greenfield projects on the Ain Sokhna site. The next in the pipeline is a 3.5m metric tons per annum (mtpa) olefins naptha cracker complex (the first in Egypt) for the production of a broad slate of basic petrochemicals including an estimated 1.35m mtpa of polyethylene.

The estimated total project cost is US$3.5bn, with a significant portion of this funded through a project finance facility. Lenders’ technical, legal and market consultants have been appointed and, with RBS again advising the sponsor, export credit agencies are being encouraged to cover a significant proportion of the debt. While negotiations on the financing term sheet are yet to begin, it is hoped that both US Ex-Im and the South Korean ECAs will contribute a substantial amount on the back of the EPC contract being awarded to Shaw Group and SK Engineering & Construction.

US agencies are evidently keen to support the development of the petrochemicals industry in Egypt, which they see as a win-win situation in terms of promoting opportunities for the export of US goods and services and contributing to Egypt’s economic growth.

In 2009, the US Trade and Development Agency (USTDA) sponsored the feasibility survey for the naphtha cracker project. In June this year, it hosted, in Washington, the ceremony at which Carbon Holdings signed a series of agreements relating to the construction and operation of the cracker complex. These included memoranda of understanding with Shaw Energy and Chemicals and SK Engineering & Construction, offtake agreements with Vinmar International and Transammonia and a technology licence agreements with both Shaw Group and Univation Technologies.

The third project is a 200,000 barrels per day oil refinery, which will produce, among other products, the naphtha feedstock for the naphtha cracker project mentioned above.

Also under development is a methanol and ammonia complex, which is intended to produce 6,000 mtpd of methanol and 2,000 mtpd of ammonia.

Clearly, there is scope for integration between Carbon Holdings’ four projects. Complementary by nature, the projects will sit along side each other at the Ain Sokhna site, which is being set up to enable sharing of basic services. The overall result of such synergy is that lenders and investors to each individual project will benefit from substantial cost savings.


For the region, the knock-on effects of these projects are clear. Some 3,000 people will be employed during peak construction at the ammonium nitrate plant, and 500 thereafter during the operational phase. Combined with the naphtha cracker project and the methanol and ammonia project, the total number of people who will be employed during a five-year construction phrase has been put at 20,000, with 2,000 skilled labourers employed on a permanent basis. Local suppliers are also expected to benefit on the procurement side. It has been estimated that US$1bn to US$1.5bn will be spent on locally manufactured goods and services for the construction of the olefins complex alone.

Basil El-Baz, chairman and CEO, Carbon Holdings, is on file as saying that the project “shows the confidence that we have in Egypt, not only in the economy of Egypt, but the path that the country will take”. With its positioning, natural resources, motivated domestic bank market and greater-than-ever desire for growth, his vision, for an industrialised Egypt backed by project finance, seems just around the corner.