Conformed Copy - L2919 - Fertilizer Sector Loan - Project Agreement

Page 1 CONFORMED COPY LOAN NUMBER 2919 ME (Fertilizer Sector Loan) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and FERTILIZANTES MEXICANOS, S.A. Dated June 13, 1988 LOAN NUMBER 2919 ME PROJECT AGREEMENT AGREEMENT, dated June 13, 1988, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and FERTILIZANTES MEXICANOS S.A. (FERTIMEX). WHEREAS (A) the Bank has received a letter dated February 25, 1988, (the Fertilizer Sector Policy Letter) from the UNITED MEXICAN STATES (the Guarantor) describing a program of actions, objectives and policies designed to achieve adjustments to, and restructuring of, the Guarantor's fertilizer sector (hereinafter called the Program), declaring the Guarantor's commitment to the execution of the Program and requesting assistance from the Bank in financing imports, works and services required during such execution; (B) by an agreement (the Loan Agreement) of even date herewith between NACIONAL FINANCIERA, S.N.C. (the Borrower) and the Bank, the Bank has agreed to make available to the Borrower an amount in various currencies equivalent to two hundred sixty-five million dollars ($265,000,000), on the terms and conditions set Page 2 forth in the Loan Agreement, but only on condition that FERTIMEX agree to undertake such obligations toward the Bank as are set forth in this Agreement; (C) by an agreement (the Guarantee Agreement) entered into between the the Guarantor and the Bank of even date herewith, a guarantee of the Loan has been extended to the Bank on the terms and conditions set forth in the Guarantee Agreement; (D) by a subsidiary agreement (the Subsidiary Loan Agreement) to be entered into between the Borrower and FERTIMEX, the proceeds of the loan provided for under the Loan Agreement will be made available to FERTIMEX on the terms and conditions set forth in said Subsidiary Loan Agreement; and WHEREAS FERTIMEX, in consideration of the Bank's entering into the Loan Agreement with the Borrower, has agreed to undertake the obligations set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Loan Agreement, and the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project Section 2.01. FERTIMEX declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Loan Agreement, and to this end, shall carry out the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and industrial practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for the Project. Section 2.02. Except as the Bank shall otherwise agree, pro- curement of the goods, works and consultants' services required for the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 4 to the Loan Agreement. Section 2.03. Except as provided in the Loan Agreement, FERTIMEX shall carry out the obligations set forth in Sections 9.04, 9.05, 9.06, 9.07, 9.08 and 9.09 of the General Conditions (relating respectively to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition) in respect of Parts B and C of the Project. Section 2.04. (a) FERTIMEX shall: (i) enter into and duly perform all its obligations under the Subsidiary Loan Agreement referred to in Section 3.01 (b) of the Loan Agreement; (ii) enter into and duly perform all of its obligations under the FERTIMEX Convenio referred to in Section 3.05 (i) of the Guarantee Agreement; and (iii) enter into and duly perform all of its obligations under the PEMEX Agreement referred to in Sec- tion 3.05 (ii) of the Guarantee Agreement. (b) Except as the Bank shall otherwise agree, FERTIMEX shall not change or fail to enforce any provision of the Subsidiary Loan Page 3 Agreement, the FERTIMEX Convenio or the PEMEX Agreement. Section 2.05. (a) FERTIMEX and the Guarantor, pursuant to Section 3.09 of the Guarantee Agreement shall, on a twice-yearly basis and at the request of any party, exchange views with the Bank with regard to progress of carrying out the Project, the Program and the actions referred to in the Schedule to the Guarantee Agreement; (b) FERTIMEX shall promptly inform the Bank of any condition which interferes or threatens to interfere with the progress of the Project, the accomplishment of the purposes of Loan, or the performance by FERTIMEX of its obligations under this Agreement, the Subsidiary Loan Agreement, the FERTIMEX Convenio and the PEMEX Agreement. Section 2.06. FERTIMEX in conjunction with the Guarantor, shall: (a) by June 30, 1988, complete the first phase of the study, described in Part C.1 of the Project, under terms of reference satisfactory to the Bank, and promptly thereafter discuss the results thereof with the Guarantor and the Bank; (b) based on such discussions, make recommendations, acceptable to the Guarantor and the Bank, for withdrawal from consignment and retail operations in areas identified for immediate action and begin such withdrawal by no later than September 30, 1988; (c) by December 31, 1988, complete the second phase of such study, under terms of reference satisfactory to the Bank, and based on the results of such study, propose a plan of action, acceptable to the Bank, to withdraw from fertilizer retail and consignment operations; (d) by March 31, 1989, and as part of such plan of action, cease FERTIMEX fertilizer consignment and retail operations with aggregate sales volume equivalent to no less than 10% of all FERTIMEX sales of solid fertilizers in 1987; and (e) by December 31, 1992, complete the carrying out of such plan of action. Section 2.07. FERTIMEX shall: (a) by June 30, 1988, initiate the study described in Part C.2 of the Project, under terms of reference satisfactory to the Bank; (b) by December 31, 1988, complete the first phase of such study and provide the results of such study to the Guarantor and the Bank for review and comment; (c) by March 31, 1989, exchange views with the Guarantor and the Bank on recommendations for, and the selection of, an option for improving the medium- and long-term organizational structure of FERTIMEX; (d) by September 30, 1989, and based on the recommendations resulting from such exchange of views, complete the second phase of such study, under terms of reference satisfactory to the Bank, and propose a plan of action, acceptable to the Bank, for carrying out such structural improvements, including a time schedule for implementation; and (e) implement the plan of action in accordance with such timetable. Section 2.08. FERTIMEX shall, by August 31, 1988, complete the study described in Part C.3 of the Project, and promptly thereafter discuss the results of the study with the Bank. Page 4 Section 2.09. (a) FERTIMEX shall carry out an investment program, acceptable to the Bank, to achieve optimum fertilizer production and distribution, which shall limit investments in the fertilizer sector to those that are economically viable. (b) For the purposes of this Section, an economically viable investment is an investment with an estimated minimum internal economic rate of return of 10%, with the exceptions specified in the FERTIMEX Convenio, determined in accordance with assumptions, criteria and methodology acceptable to the Bank. (c) FERTIMEX agrees that it shall provide, by June 30 of each year, a report of proposed investments for the next coming fiscal year to the Bank for its review and comment. Section 2.10 (a) FERTIMEX shall carry out a program, accept- able to the Bank, of closing plants which shall, by December 31, 1989: (i) reduce its production capacity of fertilizer finished products by 938,700 metric tons; and (ii) reduce its production capacity of fertilizer intermediates by 178,550 metric tons. Such Plant Closure Program shall be carried out in accordance with a time schedule acceptable to the Bank. (b) As part of such Plant Closure Program, FERTIMEX shall: (i) carry out and complete, by not later than June 30, 1989, a study of alternate uses and markets (other than for fertilizer production), for sulfuric acid produced by FERTIMEX's Guadalajara and Queretaro plants; and (ii) close the plants referred to in subparagraph (i) above by not later than June 30, 1990, in the event financially viable alternate uses and markets for such sulfuric acid have not been identified. For purposes of this Section, the term "financially viable" means that the Bank has been provided with evidence, satisfactory to the Bank, that net revenues from projected sales of sulfuric acid produced by such plants for the alternate uses and markets identified, are at least equal to the sum of all expenses related to operations; the terms "net revenues" and "expenses related to operations" have the same meanings as so defined in Section 4.02 of this Agreement. (c) FERTIMEX shall, as part of such Plant Closure Program, close, by December 31, 1989, its ammonium sulfate plant at Coatzacoalcos, unless it has entered into a written contract to supply on a long-term basis, by-product sulfuric acid at a price such that the total production costs for such plant, per ton of ammonium sulfate, is less than or equal to the import price for bulk standard ammonium sulfate (C.I.F. Coatzacoalcos from U.S. Gulf). For purposes of calculating total production costs, ammonia shall be priced at its export price, determined using the average of F.O.B. Coatzacoalcos prices for ammonia quoted in international publications, acceptable to the Bank, for the six months preceding such calculation of total production costs. Section 2.11. FERTIMEX shall take all measures necessary or appropriate to ensure that investments financed out of the proceeds of the Loan are constructed and operated in a manner that shall comply with emission and pollution control procedures and environmental protection standard, satisfactory to the Bank and consistent with the environmental laws and regulations of the Guarantor. Section 2.12. FERTIMEX shall provide, or cause to be provided, to the Borrower, in a timely manner, all documents and records in respect of the expenditures financed out of the proceeds of the Loan under Part A of the Project required to enable the Borrower to comply with the provisions of Section 4.01 of the Loan Agreement. ARTICLE III Management and Operations of FERTIMEX Page 5 Section 3.01. FERTIMEX shall carry on its operations and conduct its affairs in accordance with sound administrative, financial and industrial practices under the supervision of qualified and experienced management. Section 3.02. FERTIMEX shall at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound engineering, financial and agricultural practices. Section 3.03. FERTIMEX shall take out and maintain with responsible insurers insurance against such risks and in such amounts as shall be consistent with appropriate practice. ARTICLE IV Financial Covenants Section 4.01. (a) FERTIMEX shall maintain, or cause to be maintained, records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition, including separate records and accounts reflecting the resources and expenditures in respect of Parts B and C of the Project. (b) FERTIMEX shall: (i) have the accounts referred to in (a) above and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with generally accepted auditing standards and proce- dures consistently applied, by independent and qualified auditors; (ii) furnish to the Bank as soon as available, but in any case not later than six months after the end of each such year: (A) certified copies of its financial statements for such year as so audited, and (B) the report of such audit by said auditors of such scope and in such detail as the Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concern- ing said accounts and financial statements, as well as the audit thereof and said records, as the Bank shall from time to time reasonably request. (c) For all expenditures in carrying out the Project and with respect to which withdrawals from the Loan Account were made on the basis of statements of expenditure, FERTIMEX shall: (i) maintain, or cause to be maintained, in accordance with paragraph (a) of this Section, separate records and accounts reflecting such expenditures; (ii) retain, or cause to be retained, until at least one year after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made, all records (con- tracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; (iii) enable the Bank's representatives to examine such records; and (iv) ensure that such records and accounts are included in the audits referred to in paragraph (b) of this Section and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during such Page 6 fiscal year, together with the procedures and in- ternal controls involved in their preparation, can be relied upon to support the related withdrawals. Section 4.02. (a) Except as the Bank shall otherwise agree, FERTIMEX shall not incur any debt unless a reasonable forecast of the revenues and expenditures of FERTIMEX shows that the estimated net revenues of FERTIMEX for each fiscal year during the term of the debt to be incurred shall be at least equal to the estimated debt service requirements of FERTIMEX in such year on all debt of FERTIMEX including the debt to be incurred. (b) For the purposes of this Section and, when applicable, Sections 4.03 and 4.04 of this Agreement: (i) the term "debt" means any indebtedness of FERTIMEX maturing by its terms more than one year after the date on which it is originally incurred; (ii) debt shall be deemed to be incurred: (A) under a loan contract or agreement or other instrument providing for such debt or for the modification of its terms of payment on the date of such contract, agreement or instrument; and (B) under a guarantee agreement, on the date the agreement providing for such guarantee has been entered into; (iii) the term "net revenues" means the difference between: (A) the sum of revenues from all sources related to operations and net non-operating income, including transfers from the Guarantor for purposes other than for capital expenditures; and (B) the sum of all expenses related to operations including administration, adequate maintenance, taxes and payments in lieu of taxes, but excluding provision for depreciation, other non-cash operating charges and interest and other charges on debt; (iv) the term "net non-operating income" means the difference between: (A) revenues from all sources other than those related to operations; and (B) expenses, including taxes and payments in lieu of taxes, incurred in the generation of reve- nues in (A) above; (v) the term "debt service requirements" means the aggregate amount of repayments (including sinking fund payments, if any) of, and interest and other charges on, debt; (vi) the term "reasonable forecast" means a forecast prepared by FERTIMEX not earlier than twelve months prior to the incurrence of the debt in question, which both the Bank and FERTIMEX accept as reasonable and as to which the Bank has notified FERTIMEX of its acceptability, provided that no event has occurred since such notification which has, or may reasonably be expected in the future to have, a material adverse effect on the financial condition or future operating results of FERTIMEX; and (vii) whenever for the purposes of this Section and Sections 4.03 and 4.04 of this Agreement, it shall Page 7 be necessary to value, in terms of the currency of the Guarantor, debt payable in another currency, such valuation shall be made on the basis of the prevailing lawful rate of exchange at which such other currency is, at the time of such valuation, obtainable for the purposes of servicing such debt, or, in the absence of such rate, on the basis of a rate of exchange acceptable to the Bank. Section 4.03. Except as the Bank shall otherwise agree, FERTIMEX shall not incur any debt, if after the incurrence of such debt the ratio of debt to equity shall be greater than 40 to 60. For purposes of this Section, the term "equity" means the sum of the total unimpaired paid-up capital, retained earnings and reserves of FERTIMEX not allocated to cover specific liabilities. Section 4.04. (a) Except as the Bank shall otherwise agree, FERTIMEX shall maintain a ratio of current assets to current liabilities of not less than: 1.1 during 1988; 1.2 during 1989; 1.3 during 1990; 1.4 during 1991; and 1.5 during 1992 and thereafter. (b) Before September 30 in each of its Fiscal Years, FERTIMEX shall, on the basis of forecasts prepared by FERTIMEX and satisfactory to the Bank, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Bank the results of such review upon its completion. (c) If any such review shows that FERTIMEX would not meet the requirements set forth in paragraph (a) for FERTIMEX's fiscal years covered by such review, FERTIMEX shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its prices) in order to meet such requirements. (d) For the purposes of this Section: (i) The term "current assets" means cash, all assets which could in the ordinary course of business be converted into cash within twelve months, including accounts receivable, marketable securities, inventories and pre-paid expenses properly charge- able to operating expenses within the next fiscal year. (ii) The term "current liabilities" means all liabili- ties which will become due and payable or could under circumstances then existing be called for payment within twelve months, including accounts payable, customer advances, debt service require- ments, taxes and payments in lieu of taxes, and dividends. ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect on the date upon which the Loan Agreement becomes effective. Section 5.02. This Agreement and all obligations of the Bank and of FERTIMEX thereunder shall terminate on the date on which the Loan Agreement shall terminate in accordance with its terms, and the Bank shall promptly notify FERTIMEX thereof. Section 5.03. All the provisions of this Agreement shall Page 8 continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telegram, cable, telex or radiogram to the party to which it is required or permitted to be given or made at such party's address hereinafter specified or at such other address as such party shall have desig- nated by notice to the party giving such notice or making such request. The addresses so specified are: For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 440098 (ITT) Washington, D.C. 248423 (RCA) or 64145 (WUI) For FERTIMEX: Fertilizantes Mexicanos, S.A. Morena 804, Piso 11 03020 Mexico, D.F. Mexico Telex: 01773018 Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of FERTIMEX, may be taken or executed by the Director General or such other person or persons as the Director General shall designate in writing, and FERTIMEX shall furnish to the Bank sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 6.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collec- tively but one instrument. IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Barber B. Conable President Page 9 FERTILIZANTES MEXICANOS, S.A. By /s/ Alfredo Acle Authorized Representative