Mixing with the locals
In September 2006, a syndicate of Nigerian banks lead by Citigroup successfully closed a US$205mn equivalent financing for a 2.5 metric tons per annum (mtpa) greenfield cement plant and a 47MW power plant. The deal was a landmark transaction for Nigeria and achieved the longest tenor for a syndicated financing in naira, the Nigerian local currency. The tenor stretches to nine years, up from a previous benchmark of seven.
The project sponsors are Egyptian Cement Company (Holcim and Orascom Construction Industries-OCI) (70%) and Flour Mills of Nigeria (30%). The total project cost of US$428mn is financed with the debt of US$205mn and shareholder contributions of US$223mn from the sponsors.
FL Smidth (FLS) of Denmark, for the cement plant, and Wartsila of Finland, for the power plant, are the primary contractors, together with OCI Nigeria for the civil works.
The project economics were attractive to all parties, claims Citigroup, due to:
- A significant shortage of domestically produced cement, leading to high prices.
- A recent regulation proposing a ban on imports of bulk cement.
- An abundance and quality of key raw materials, particularly limestone.
- An increased pace of infrastructure development in Nigeria.
The transaction attracted high demand from Nigerian banks looking to invest in well-structured projects, says Citigroup. In the event, the facility was oversubscribed by over 25% and set a new benchmark for naira-denominated financings.
The following local banks committed to the deal: Afribank Nigeria (US$19mn); Diamond Bank (US$12mn); Ecobank Nigeria (US$10mn); First Bank of Nigeria (US$17mn); Guaranty Trust Bank (US$39.5mn); IBTC Chartered Bank (US$10mn); Nigeria International Bank (Citigroup) (US$30mn); Union Bank of Nigeria 10mn); Zenith Bank (US$57.5mn).
One Nigerian source claims that when the sponsors first approached banks for finance, the plan was to raise only 45% of funds in naira from Nigerian banks and 55% in US dollars from export credit agencies (ECAs), development finance institutions (DFIs), and international banks. But because of a direct consequence of the increased lending capacity built up by Nigerian banks recently, it was decided to solely use local lenders.
The financing benefits from a project finance-type security package. The security package comprises a pledge of shares and a fixed and floating charge on assets and accounts.
The principal risk for this sector, claims Citigroup, is that of a weakened demand for cement that could arise from a collapse of the economy and depletion of consumer purchasing power. In the short term, the economy faces challenges from upcoming general elections in 2007, which could result in a new government with different economic policies from the outgoing regime. “The risk of sociopolitical unrest also exists,” states the bank. “Our view is that a new government will be elected in 2007, and will continue economic reforms.”
“Regardless of this short-term political volatility, the cement sector remains very strong, with growing consumer demand,” adds Citigroup. “The probability of a weakening in demand for cement over the short to medium term is considered to be very low, given the relatively low per capita consumption of cement in Nigeria in comparison to other oil and gas developing countries. The outlook for the industry is quite good, with strong demand driven by heavy spending on infrastructure construction and development.”
Borrower and sponsor: United Cement Company (Unicem)
Split into: Tranche A – US$57mn (US$20mn; US$37mn); Tranche B – US$148mn (US$94.5mn; US$53.5mn) equivalent naira facility
Mandated lead arranger: Citigroup
Lenders: Afribank Nigeria; Diamond Bank; Ecobank Nigeria; First Bank of Nigeria; Guaranty Trust Bank; IBTC Chartered Bank; Nigeria International Bank (Citigroup); Union Bank of Nigeria; Zenith Bank
Tenor: 4yr US$20mn; 7yr US$37mn; 7yr naira US$94.5mn; 9yr naira US$53.5mn
Margin: 400bp over floating rate benchmark
Law firms: White & Case (borrower); Aluko & Oyebode (borrower); Milbank Tweed (lenders); UUBO (lenders)
Contractors: FL Smidth (FLS); Wartsila
Date closed: September 2006