The $1.727 billion MMK Atakas steel project reached financial close in a fragile commodities market (many steel projects had been delayed or cancelled) and at a time of enormous financial uncertainty – but in that the financing was not alone.

What distinguishes the deal from others is the financial engineering – a hybrid cashflow-based project finance type structure with full recourse to the corporate sponsors, and the bank club and ECA (SACE) taking on an element of merchant risk in the volatile steel sector over a 10 year tenor, in itself a major achievement given the lending climate.

MMK Atakas is a joint venture founded in 2007 between Russia's OJSC Magnitorsk Iron and Steel Works (MMK) and Turkish coal trader Atakas Group for the development of an integrated flat steel making complex at two sites – Iskenderun (southern Turkey) and Kocaeli (western Turkey).

The expertise of MMK in the steel industry inside Russia and Atakas' domestic knowledge of the distribution and supply channels provided comfort to the lenders. Furthermore, despite the recent global downturn in the steel industry, the rationale for the project is strong: Turkey has a major steel supply deficit and the project is expected to have a competitive advantage due to its ability to directly meet both growing domestic and Middle East demand and its reach to Russian and South-East European markets for continuous scrap supply.

Designed for an annual capacity of 2.3 million tons of flat steel, the project will be a state of the art complex incorporating one of the biggest electric arc furnaces in the world. Construction is on schedule and expected to be completed by December 2010.
The deal was initially mandated to BNP Paribas, Garanti and ABN Amro/RBS in June 2008. BNP and ABN put up a $260 million bridging loan in October 2008 to back start-up construction and the mandate was renewed and updated in April 2009 to reflect the financial and commodities market turmoil of last year. IsBank joined as fourth MLA in July 2009 followed by financial close on 16 November and first disbursement on 20 November.

The project is financed on a 63:37 debt-to-equity ratio: Excepting excess cash flows produced during the different project phases, equity on the project is expected to be $464 million in total.

The $1.034 million 10-year debt facilities comprise a Eu384 million ($538 million) SACE backed export credit facility – arranged by BNP Paribas (50%), SACE and RBS/ABN Amro (50%) and insured by SACE – to finance the main supply contract with Danieli & C. Officine Meccaniche SpA along with associated financing costs; a $450 million commercial facility arranged by Garanti (62 %) and IsBank (38 %) for the financing of other capital expenditures and project costs; and a $60 million working capital facility arranged 50/50 by Garanti and IsBank for financing of operating costs. Repayments are in equal semi-annual instalments with the first repayment due 15 July 2011 and the final on 15 July 2019.

Given the mix of domestic and international creditors, the mix of debt (commercial, ECA, working capital and hedging providers accessing the security package) and two separate guarantors supporting different debt packages post completion, the three layers of debt required a complex set of intercreditor arrangements and unique security structure to make all the financial institutions comfortable.

Because the borrower is a newly established JV, all the facilities are secured by MMK Atakas' assets, shares, future revenues and off-shore and on-shore accounts. In addition, the SACE-backed tranche is supported by MMK and Atakas Group joint and several guarantees pre-completion, and then solely by an MMK Group guarantee after completion.

The guarantees on the commercial and working facilities are similar, with both supported by MMK and Atakas Group joint and several guarantees pre-completion, but only an Atakas Group guarantee after completion.

The parent company completion guarantees are a very necessary comfort given there is no single turnkey EPC contract for the project and that the sponsors have adopted a self-managed approach – the project itself assumes responsibility for the overall supervision of the works and coordination between the different construction packages and different contracts.

Taken altogether, the MMK Atakas financing is a benchmark transaction for the steel making industry and demonstrates that there is still bank appetite for quality assets despite the troubled financial and commodities markets. Securing major well-priced project loans at a time of a lack of liquidity, a spike in debt pricing and a frozen debt market is a significant achievement in itself. Add to that the structural innovation and project rationale and MMK Atakas becomes a key transaction of 2009.

MMK Atakas
Status: Signed 28 October 2009; financial close 16 November 2009
Description: Hybrid corporate/project financing for construction of $1.7 billion steel manufacturing complex
Sponsors: OJSC Magnitogorsk Iron & Steel Works (50%+1 share), Atakas Group
Mandated lead arrangers:
IsBank; Garanti Bank; BNP Paribas; Sace; Royal Bank of Scotland
Financial adviser: Ernst & Young
Sponsor legal counsel:
Norton Rose Studio Legale; Herguner Bilgen Ozeke
Lender legal counsel: Clifford Chance; Pekin & Pekin
Technical consultant: McLellan and Partners
Environmental Advisor to the Sponsors: Golder Associates
Insurance Advisor to the Sponsors: Marsh
Insurance Advisor to the MLAs: Miller
Financial Model Provider: Ernst & Young