Further details have emerged on the financing for Egyptian LNG (ELNG) which was agreed on 5 July between BG Group and financiers (MEES, 11 July). The deal’s structure is similar to the financing for Train 1, which appointed its mandated lead arrangers (MLAs) in January 2003, with a focus on achieving the best pricing possible, rather than the best covenants. It appears that the mandate was achieved, given that the margins were much lower than ELNG Train 1 and possibly the lowest ever seen in an Egyptian project financing. Changes from the Train 1 financing were adopted only where absolutely necessary in what can be described as a ‘bond style’ execution, with ELNG going to the banks that participated at the higher financial commitment levels in Train 1 with similar documentation. However, the unusual step of appointing a group of ‘pathfinder’ banks was taken by financial advisor Société Générale. These comprised Calyon, HSBC, Standard Chartered and Egypt’s Commercial International Bank, which were appointed in August 2004 and undertook the burden of due diligence on the deal and also committed to provide $50mn.
ELNG Train 2 could have closed at the end of 2004, but was held up in November through March 2005 by commercial issues. MEES understands that some banks were concerned by the switch in the supply location. BG Gas Marketing had bought the entire 3.6mn t/y of Train 2 and planned initially to supply LNG to the Lake Charles terminal in the US. It then switched supplies to Italy’s Brindisi terminal once construction was completed. The project could easily had sold gas to the US market for the full term and repaid all of the debt. But, according to one banker, some banks were concerned that the switch might cause a hiatus, with capacity lost at Lake Charles before Brindisi was ready to start receiving supplies. The sponsors subsequently clarified their position to appease the banks. There was also some concern that the US market could undergo periods of low pricing, as seen in the 1980s and 1990s; but there has been a fundamental change in the US gas market which makes a return to oversupply very unlikely, said a banker. “Egypt Train 2 looks as competitive as any project, possibly other than Trinidad,” he said.
The hold-up while commercial issues were sorted out worked in ELNG Train 2’s favor because margins have been moving down as banks, awash with liquidity, have been in stiff competition for deals (See MEES Agenda: International Banks Seen Forcing Gulf Project Margins Lower, MEES 11 July). The margins on ELNG Train 2 were 60-150 bps compared to ELNG Train 1’s 85-235 bps (MEES, 11 July). Project specifics have also played a role in bringing down margins. “Train 1 was the first of its kind, but banks became comfortable with the project because it performed well,” a banker said. “There was also concern that Egypt’s bureaucracy would throw up obstacles, but this has not happened.” He pointed out that with a more progressive government now in place, the climate for investment in Egyptian projects looked even more favorable. “Banks had some concern about political risk but the new government is more positive,” he said, adding that the continued participation of the European Investment Bank in ELNG brought added comfort. Furthermore, he said “gas prices are more than double the anticipated level.”
