PARIS — Egypt is seeking a bank loan to partially finance a prospective order for the Rafale fighter jet, a multimission frigate and missiles, an unusual financing deal likely to require high-level political support, two analysts said.
A deal with Egypt would enable a speedy export order seen as needed to relieve severe budgetary pressure on France, which is in a pressing search for foreign clients for Dassault and DCNS.
Egyptian officials have been in "discussions with banks" to find commercial lending that would allow paying France a 15 percent down payment for the military equipment, a market analyst said.
The talks have been held with French banks as Cairo seeks to raise the down payment required, a second analyst said. That client said down payment is one of the golden rules, answering the call to "show me the money," the analyst said.
Bank lending for arms purchases is not new, but the Egyptian search for funds is remarkable for the size and the speed in which the loan is sought.
Egypt wants to close the deal in time for a frigate and three Rafales to be present when a new stretch of waterway by the Suez Canal is opened in August, newsletter TTU has reported.
Coface, the French export credit guarantee department, Paris-based global credit insurerhas asked the commercial lenders to carry part of the funding on their own books rather than rely on the global credit insurer the French export credit guarantee department to provide insurance for the full amount, the first analyst said.
Coface would sign up on an Egyptian contract if the Treasury Department, which reports to the Economy Ministry, agreed to the deal. But there is reluctance in the Economy Ministry as Egypt is seen as a fragile economy, the first analyst said.
If Egypt fell behind on payment, the insurance from Coface would repay from the public purse the makers of the Rafale, frigate and missiles, which are Dassault Aviation, DCNS and MBDA, respectively.
A DCNS executive confirmed talks were being held with Egypt. Dassault, MBDA, Treasury and the Egyptian embassy declined comment.
Egypt's talks with the bankers slowed due to the accession of King Salman in Saudi Arabia after the death of his brother King Abdullah last month.
Saudi Arabia, Kuwait and the United Arab Emirates will deposit $10 billion in Egypt before the latter nation holds an investment conference next month, according to news website Al-Youm Al-Sabea, Reuters reported Feb. 5.
That financial support from the Arabian Gulf powers is fueled by a political determination to resist the Islamic fundamentalist movement threatening Egypt and those partner countries.
The bank talks on the Egyptian deal also include whether there is a "global contract" or specific contracts tied to the fighter jet, frigate and missiles, the first analyst said.
The Economy Ministry may be against the deal because of the financial risk, but defense officials would be in favor, as an export order would help maintain the domestic industrial base, said Jean-Pierre Maulny, deputy director at think tank Institut des Relations Internationales et Stratégiques.
"This is a major choice," he said. "If this is not done, there is an industrial risk."
The deal would likely be handled at the highest political level in France, in view of the financial stakes, he said.
"Egypt is not very credit-worthy on its own but, if any loan is explicitly backed by the French government, they will raise the money," said Sash Tusa, analyst at Edison Investment Research, said.
France's A French acceptance of a bank loan to fund Egypt would be a case of "spend to save," that is France supporting spending to save defense industry jobs, he said.
A third analyst said if Egypt seeks to borrow for the down payment rather than pay from its own funds, that gives gave a poor outlook for future payments.
The Egyptian economy has been fragile as tourism fell sharply and there has been unrest since the military overthrow of the elected government under the Muslim Brotherhood.
Egyptian President Abdel Fattah el-Sisi met his French counterpart François Hollande in September at the UN General Assembly meeting in New York, and there was an expression of interest and willingness in acquiring armaments, a diplomatic source said.
DCNS is set to declare a €300 million (US $343 million) net loss for 2014, and France has stretched out production of the frégate multimission (FREMM), or multimission frigate, under budgetary pressure.
France has written export sales of the Rafale into the multiyear budget law export sales of the Rafale, allowing from 2016 a cut in annual domestic delivery to four units from 11.
Paris has been in talks with India and Qatar for the Rafale, but a deal has yet to be signed with either.
One of the key issues holding up a sale to India has been New Delhi's request asking for Dassault to agree to certification of local production of the Rafale by state-owned Hindustan Aeronautics Ltd (HAL), a French source said. That certification means that if any equipment assembled by HAL were to fail, Dassault would act as guarantor for the system, the source said.
Debt rating agency Standard & Poor's lists Egypt with a B-, while Fitch upgraded in December from B- to B from B-, with a stable outlook. Moody's upgraded in October the outlook in October to stable from negative and held the government bond rating at Caa1.
"Key drivers for the outlook change to stable from negative are the stabilized political and security situation, the launch of government initiatives toward fiscal consolidation, signs of a growth recovery and an improvement in macroeconomic stability, and strong support from external donors," Moody's said in a statement.
A French Senate report said the average unit price of a 6,000-ton FREMM multimission frigate is €605 million (US $694 million), excluding development cost, using 2013 prices. That is based on a total program cost of €8.75 billion for the 11 French warships, of which nine are anti-submarine warfare and two air defense versions, the report said.
On the Rafale, the total program cost is €45.9 billion, excluding the development cost, with a unit price of €74 million for the B twin-seater, €68.8 million the C single-seater, and €79 million for the M naval version, based on 2013 prices, a French Senate report said.