Eleme hybrid breaks new ground
The Indorama Eleme Fertilizer & Chemicals Ltd (IEFCL) Line 2 expansion financing is a landmark financing for Nigeria and Africa and demonstrates the depth of liquidity in the market for well-structured transactions with borrowers and sponsors that have a proven track-record of performance. By Gareth Hodder, partner, and Deji Adegoke and Dann Irving, senior associates, White & Case.
IEFCL owns and operates a world-scale urea fertiliser facility in Port Harcourt, Nigeria. The current plant consists of the world’s largest single train urea fertiliser facility, Line 1.
Line 1 was commissioned in June 2016 and the strong financial and operational performance of IEFCL in the period following commissioning of Line 1 formed the backdrop for the launch of the expansion financing for Line 2.
As at commissioning in 2016, the plant had a production capacity of 4,000 metric tons (MT) of nitrogenous fertilisers per day giving an annual production capacity of 1.4m MT.
On August 20 2018, the US$1bn expansion financing of the second train, Line 2, reached financial close. Once Line 2 is commissioned, the combined capacity of Line 1 and Line 2 (constructed in two phases at a total cost of US$2.3bn) will be 3m MT.
Nigeria is Africa’s largest economy and the 20th largest economy in the world. It is home to 200m people and a key emerging market. For years, Nigeria has imported billions of dollars’ worth of staple food, much of which is thought could have been grown in Nigeria.
Agriculture was the key driver of the Nigerian economy before the discovery of crude oil. According to statistics sourced from PWC publications, from 1960 to 1969 the sector accounted for 57% of GDP and generated 64.5% of export earnings.
Agriculture continues to be Nigeria’s single largest economic sector and engages a majority of its labour force but in 2016 only contributed 24.4% of GDP. The agricultural sector is concentrated on crop production, which accounts for 90% of output.
Fertiliser consumption has a direct correlation with agricultural productivity and natural gas is a key feedstock for nitrogenous fertiliser. Despite Nigeria having the world’s seventh largest gas reserves, natural gas was often under-utilised or flared. In addition, despite the availability of natural gas, there was a perception that there was insufficient fertiliser production.
It is against this backdrop that the Eleme fertiliser facility was conceived and delivered. The lead sponsor of the project is the Indorama Group and indirect shareholders include the Federal Government of Nigeria, the local government of Rivers State, where the project is located, and Nigeria’s national oil company, NNPC. The project is located in the 400-acre Eleme industrial complex, which already includes olefins, butene, polyethylene and polypropylene plants.
This transaction was structured as a two-phase project. In 2015, White & Case advised the lenders on the US$800m financing of Line 1 and in 2018, we advised the lenders on the US$1bn financing of Line 2.
The impact of the project has been transformational. The Indorama Eleme Complex has been a success story of public-private partnerships in Nigeria. Based on data from the African Development Bank, benefits of the project include:
* Import substitution of raw materials to more than 450 downstream industries;
* Increased crop yields of over 30%;
* Training of 200,000 farmers on the proper use of fertilisers expected to reach 2 million by 2021; and
* Creation of 50,000 jobs, and an annual contribution of US$2bn to Nigeria’s GDP.
Line 2 was designed so that its physical infrastructure and overall structure would substantially replicate the approach taken on Line 1 – construction and engineering of Line 2 will be undertaken by the same entities, a long-term gas feedstock agreement was entered into with well-recognised upstream players with a dedicated pipeline spur providing connectivity.
Support services provided by affiliates of the Indorama group in connection with Line 1 were extended to Line 2, including access to a jetty and the provision of power and utilities. Licensing arrangements were also based upon those agreed for Line 1.
As such, while Line 2 represents a discrete facility that will be constructed and operated independently from Line 1, the lenders were able to take comfort from a number of relevant factors including, (i) the experience gained by IEFCL and its contractors on Line 1 as well as the successful delivery of Line 1, (ii) the integrated supporting infrastructure and utilities; and (iii) the risk mitigation inherent in the ability to share gas supply across gas supply arrangements for Line 1 and Line 2 should the need arise.
Key areas of focus from a commercial agreement/project document perspective included the following:
* EPC interface related matters – Unlike Line 1, the design, engineering and construction package for Line 2 was not fully wrapped and instead IEFCL assumed interface risk. The expertise gained by IEFCL and its contractors during the Line 1 process as well as the successful delivery of Line 1 was an important factor when evaluating this structure;
* Offtake agreements – A common concern for lenders in greenfield project financings is merchant risk and/or other demand or usage risk. This risk is typically addressed by undertaking extensive due diligence of the relevant market, requiring a take-or-pay linked offtake agreement, a long-term power purchase agreement or long term marketing arrangements.
To mitigate this particular concern for IEFCL, as part of the Line 1 financing, IEFCL was required to have committed offtake agreements in place. In the context of Line 2, given (i) the demand (both current and projected) domestically for fertiliser,(ii) the fact that the product has a terminal market within and outside Nigeria and (iii) IEFCL’s experience with marketing and selling Line 1 production, enhanced flexibility with respect to offtake arrangements was permitted, such that IEFCL is only required to procure that 40% of the production is subject to committed offtake agreements; and
* Gas supply agreement – Like on Line 1, the gas feedstock supply agreement was based broadly on the Nigerian gas aggregator’s (GACN’s) standard form gas supply and aggregation agreement (GSAA). A detailed analysis of the various risks and mitigants in the standard form was undertaken.
The development of bankable industry standard forms in this market highlights the sophistication of the participants in-country and the level of comfort that stakeholders have with the regulatory and commercial framework in Nigeria. Similarly, IEFCL’s strong operational history in managing its gas feedstock under Line 1 was an important consideration in the assessment of the envisaged arrangements.
The lender group for the Line 2 financing consists of a syndicate of 20 financial institutions. It is led by the IFC and includes a number of development finance institutions (DFIs) such as African Development Bank, CDC Group PLC, Emerging African Infrastructures Fund, Proparco, FMO, DEG and the European Investment Bank.
The US$1bn of Line 2 debt consists of a combination of the IFC’s Managed Co-Lending Portfolio Program and direct loans from the IFC, commercial banks and DFIs.
The IFC B loan is a participation arrangement where the IFC retains a portion of the loan for itself and then sells the remaining portion to the participants. The borrower signs a single loan agreement with the IFC, and the IFC then signs participation agreements with the participants.
The managed co-lending portfolio programme is similar to an index fund. It builds a loan portfolio for investors that mirrors the IFC portfolio that it is creating for itself. The investors and the IFC sign an investment agreement, which determines the make-up of the portfolio based on agreed eligibility criteria.
The investors pledge capital upfront. The IFC then identifies eligible deals and allocates that capital based on the investment criteria. The IFC runs the project including appraisal, approval, commitment and ongoing supervision.
Key areas of focus from a financing perspective included the following:
* Integrated SPV expansion – Line 2 is a classic integrated SPV expansion, in that it is an expansion undertaken by the same project company as the base project, with both projects’ revenues and assets being integrated post-completion. This is similar to other notable integrated SPV expansion projects, such as Rabigh 2 and the €3.5bn Nord Stream Phase II financing (which reached financial close just one year after the Phase I financing).
* Hybrid structure – This transaction was a hybrid corporate/project financing. The project involved the financing of an operating business with positive cashflows and as such some of the more typical project finance covenants and other restrictions were not appropriate to the same degree – for example, restrictions on incurring third-party debt and incurring capital expenditure.
Conversely, the project also involved the construction of new greenfield facilities and the sharing of existing facilities between Line 1 and Line 2 so there was a degree of project and completion risk that needed to be mitigated using traditional project finance techniques such as sponsor support and an accounts agreement to regulate cashflow management.
Given the current climate with respect to crude oil prices, sponsors and financiers are increasingly looking to apply hybrid structures in order to maximise liquidity and as such it is important that legal advisers are familiar with advising on structures that require a blend of the features of project financing, high-yield debt issuances and leveraged acquisition financing.
* Intercreditor arrangements – The relationship between the Line 1 and the Line 2 lenders required a commercially focused approach. It was important that from an intercreditor perspective, Line 1 and Line 2 lenders enjoyed largely the same rights and were subject to the same obligations under the intercreditor agreement.
Given the number of DFIs involved in the transaction, managing DFI policy requirements in the context of voting rights was also a key area of focus. Similarly, the hybrid corporate financing covenant package meant that certain minimum protections for the project finance lenders had to be entrenched in the intercreditor agreement, irrespective of amounts outstanding to such lenders.
* Insurance– Since the Line 1 financing, there have been changes to the approach taken by the Nigerian insurance regulator with respect to granting security over insurance in Nigeria and this meant the approach to taking security had to be adapted. White & Case worked closely with local counsel in Nigeria, the lenders’ insurance adviser and the regulator to address this issue.
* Security– As with the general intercreditor arrangements, security sharing between the Line 1 and the Line 2 lenders required careful consideration and analysis. We worked closely with local counsel to structure the security package in a manner that protected the interests of both the Line 1 and the Line 2 lenders.
* Brexit and the use of English Law – Drafting to address EU bail-in legislation was included in the transaction documents at the request of a DFI. This is an area that should be closely monitored as the details of the transitional arrangements for Brexit continue to emerge.
The Line 2 expansion financing is a landmark transaction. We were able to use our experience advising on a number of other integrated SPV expansion financings to assist the lenders in navigating the complexity inherent in such transactions.
Expansion projects are clearly attractive for project sponsors as they allow sponsors to leverage a base project with established revenues and positive operational history to release equity alongside the opportunity to grow the existing operation.
Expansion projects are also attractive for lenders as they offer a number of benefits, including lower capital costs through achieving economies of scale across shared or common facilities and an established track record on which to base revenue projections. We expect that the number of expansion projects will continue to increase in the future.
Looking at this transaction in a broader context, given the projections for population growth in Nigeria and Africa, food security and youth employment are key areas that require investment and the Line 2 financing represents a recognition of this by the Indorama Group, DFIs, commercial lenders and the Nigerian state and federal government. Long may such forward thinking continue.