Ahmed Heikal is a bit taken aback. He and his partners Hisham El-Khazindar and Karim Sadek have put together what he says is a pro-shareholder plan that will see Qalaa Holdings shed USD 430 mn in foreign-curency debt. But some in the market are having a hard time getting their heads around the transaction — and others are questioning its mechanics, which they say are convoluted.

The crux of the story: Qalaa has long struggled to repay debt it took out to finance the construction of the Egyptian Refining Co., its multi-bn USD greenfield refinery in Mostorod, as well as the growth of its portfolio.

Debt payments have eroded Qalaa’s bottom line even as its businesses turned the corner after covid: Higher interest rates at home and abroad, combined with the depreciation of the EGP, saw Qalaa pay out EGP 7.1 bn in interest expenses last year alone, according to its 2023 earnings release (pdf).

So what is Qalaa’s management team proposing to do about it?

• Qalaa’s anchor shareholders, who together own 23.5% of the firm, have set in motion a series of transactions that will retire a USD 325 mn loan plus about USD 100 mn in accumulated interest that Qalaa had taken on. They’re effectively paying 20 cents on the USD to retire the outstanding portion of the debt plus accumulated interest;
• Other shareholders as of 27 May will have the chance to buy into the transaction, too, by joining a debt purchase offer. Subscription is optional and is pro-rata to their holdings in Qalaa;
• The catch: Shareholders who want to buy a piece of the debt will have pay in USD into an account held by Mashreq Bank in Dubai. (Editor's note: Subsequent to the publication of this story, the Financial Regulatory Authority announced that shareholders would be allowed to subscribe by paying in EGP in Egypt);
• All debt holders will then swap the debt they buy for EGX-listed shares in Qalaa Holding, with Heikal saying he, El-Khazindar, and Sadek are “long Qalaa” — the management team is agreeing to a two-year lockup post-transaction;
• The mechanism is slightly circuitous, but Heikal said the result is that shareholders will own a company with a much stronger balance sheet that’s better able to both pay dividends and invest in long-term growth.

We spoke with Heikal yesterday to get the inside track on the transaction and why he thinks it’s good for shareholders. Edited excerpts:

ENTERPRISE: Where did this all begin?

AHMED HEIKAL: It started in 2020, when we expected to see very strong inflows from ERC. We expected to make [redacted] loads of money. Instead, the bottom fell out of the oil market thanks to Covid-19, and we made [redacted] loads of losses. Nobody was consuming diesel, nobody was consuming aviation fuel. [Editor’s note: Oil prices turned negative for the first time in history on 20 April 2020.] That started a process that eventually saw us sit down with our syndicate of seven lenders and tell them, “We want to extend the loan out to 10 years from 2022.”

E: How many banks took you up on that?

AH: Four Egyptian banks said, “No, we’d rather take assets instead.” We did a valuation and, ultimately, paid them what they were owed — they took 18% of Taqa Arabia, some land worth EGP 600 mn, and EGP 600 mn in cash. Another Egyptian bank said, “Okay, we buy your story — we’ll amend the covenants and extend the loan if you provide additional securities,” which we did.

E: That process took how much off your balance sheet?

AH: About USD 200 mn between the asset sales and the amend-and-extend agreement with the one bank. That left us with USD 230 mn we owed to two foreign lenders — USD 131 mn in principal and a bit under USD 100 mn in accumulated interest.

They ultimately told us they couldn’t amend or extend. Their charters wouldn’t let them take assets and they weren’t willing to sit with the loan for another ten years, so we negotiated an agreement that would see us pay them a lesser amount to sell us the debt. We’re effectively paying 20 cents on the USD to cover the principal of the loan.

So, Qalaa is now in a position where it needs to come up with USD 28 mn in cash to get USD 230 mn worth of debt off our balance sheet. That’s USD 26.3 mn to acquire the debt and interest and about USD 1.7 mn in associated fees.

E: So what’s the transaction, exactly?

AH: We’re doing a promissory note. We’ve set up Qalaa Holding Restructuring I Ltd. (QHRI) to buy up to 100% of the USD 28 mn worth of debt. Citadel Capital Partners, the vehicle through which Hisham, Karim, and I own our equity in Qalaa, will buy 23.5% of the debt — and we’re opening it up to all other shareholders to participate pro-rata. For example, someone who owns shares equivalent to 0.1% of Qalaa can buy 0.1% of the debt.

Shareholders as of 27 May will then swap their debt for equity in Qalaa. And at the request of the Financial Regulatory Authority, we’re also extending that eligibility to people who sold Qalaa shares on 7-9 May. The swap will take place through a capital increase at EGP 5 per share once that’s approved by the general assembly scheduled for 30 May.

E: What if you don’t hit 100% coverage on the debt sale?

AH: Citadel Capital Partners will cover any portion that’s left on the table.

E: QHRI is a British Virgin Islands company. Why are you using an offshore special-purpose vehicle (SPV) to do the transaction? And what’s with the requirement that it be paid into a Mashreq Bank account in Dubai?

AH: First, we need to be able to give the two banks their money offshore — they don’t want it in Egyptian accounts, they want it fully repatriated. And secondly, can you imagine the KYC [know your client] nightmare associated with dealing with 10k shareholders if you’re a bank? The cleanest, simplest solution was for Citadel Capital Partners to set up an offshore vehicle to get this done — we’re all KYC’ed and it’s a much simpler transaction for us to buy the debt.

Second, banks in Egypt today will be reluctant to take the responsibility of having USD in their accounts and then transferring USD 28 mn abroad.

I know that’s not a very nice feature of the transaction, I do. But it is what it is: When it’s time to press the button and repay the banks, we need to know the money will move. I expect you’ll see a process of consolidation between now and 27 May, where shareholders who have the ability to pay USD offshore for the debt transaction will buy shares in Egypt in EGP from others who don’t have that ability.

E: So you’re not taking Qalaa’s ownership offshore?

AH: No, of course not. We made this very clear in our first disclosure. QHRI will convert the debt into EGP and assign it to each shareholder so they can subscribe to an EGP-denominated capital increase on the Egyptian Exchange. QHRI will be dissolved after this transaction.

E: What does your balance sheet look like after this transaction?

AH: Much, much stronger, I’ll say that. Total debt on the balance sheet will decline by about USD 1.1 bn this year as a combined result of this transaction, of USD 500 mn in ERC cash repayments, and other transactions that were disclosed recently. It could free up some USD 88 mn in interest expenses — money that falls straight to the bottom line. After this restructuring, Qalaa Holdings will be essentially without debt.

And we’re doing the capital increase at EGP 5 when the share price is at EGP 2.60, so this is value accretive to all shareholders. The net asset value of Qalaa Holding post this transaction will be a number of times higher than the current share price. That’s the real story here.

E: What’s next for Qalaa after this transaction?

AH: Nothing much changes, we’ll just be executing from a much stronger position. We’re still building export champions. We’re driving growth through small, incremental investments in subsidiaries. And we’re particularly interested in a handful of medium-sized, export-oriented, and predominantly green investments with high local value-added components — all of these will be executed at the subsidiary level.