Egyptian General Petroleum closed one of the largest future flow securitizations ever out of emerging markets last week, according to a source on the deal. U.S. investors gobbled up 70% of the mammoth $1.55 billion deal, casting aside concerns of terrorism in the Middle East as mostly irrelevant to this transaction. The company's track record on that front probably helped pre-empt the potential concerns, said another source familiar with the issuer. "Historically, Egypt hasn't had any interruption of shipment because of terrorism," he added.
The structure was split into three tranches. Sized at $400 million, the six-year A1 notes, wrapped by MBIA, priced at 4.623% or 75 basis points over three-year Treasurys. The A2 notes, totaling $250 million, were wrapped by XLCA and priced at 4.633% or 76 basis points over, a touch wide of the A1 piece despite having a shorter five-year maturity. Coming unwrapped, the six-year A3 class, sized at $904 million, priced to yield 5.265% or 140 basis points over. Moody's Investors Service and Standard & Poor's rated the unwrapped piece Baa1' and BBB', respectively. At both agencies the unwrapped tranche pierced the sovereign ceiling of Ba1' and BB+', respectively.
BNP Paribas, Merrill Lynch and Morgan Stanley were joint leads, with Morgan also acting as global coordinator and structuring adviser. Skadden, Arps, Slate, Meagher & Flom provided legal counsel for the issuer, while Latham & Watkins advised the arrangers. Backed by crude oil and naphtha forward sales, the deal settled on July 20, 2005.
In the run-up to the roadshow, industry players reasoned that Banque Misr, EFG-Hermes, HC Securities, and National Bank of Egypt were brought on as distributors to push the deal in the Gulf region. But the final distribution would appear to belie that theory, as investors from the Gulf accounted for no more than 5% of allocation, just a sliver of the 70% sold to U.S. buyers. Their underwhelming presence was actually not surprising, according to the source on the deal. Gulf investors "either buy equity or high-grade paper," he said. "They normally don't buy triple-B or high yield."
European investors bought the other roughly 25% of the transaction. Among the buyers were investors that typically buy straight corporate paper, in addition to those versed in future flow transactions, said the source on the deal. He added that the deal appealed to buyers in part for the corporate's strengths like an impeccable credit history and longstanding relationships with leading global oil names through joint ventures.
The structure traps about 5% of the issuer's estimated crude output and 27% of its estimated naphtha output. Among the deal's structural enhancements is an offtake and price hedge provided by Morgan Stanley Capital Group, which has agreed to purchase all the required shipping crude oil and naphtha products from the issuer, setting a price floor for both products. A variety of oil products can be delivered under the structure. Nevertheless, Moody's described the hedge as "imperfect" in a release.
Egyptian General Petroleum is wholly state-owned. While the risk of sovereign interference is mitigated by the structure and disincentives to intervention, it is not absent from this transaction, according both Moody's and S&P.
The transaction is understood to be the second largest future flows deal ever from an emerging market. The first was from Petroleos de Venezuela, which issued a $1.8 billion oil-backed deal in 1998. PdVSA has been out of the securitization market for a number of years and indicated that it has no foreseeable plans to return when it bought back nearly all its outstanding oil-backed paper last year.
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