Emirates Aluminium: Bank, bridge and bond

Emirates Aluminium (Emal) is the largest project financing in the UAE to date and, once complete, the project is expected to be the largest single site aluminium smelter in the world. Despite its size, the bank deal was launched on October 9 and closed very quickly just over three months later.

Emirates Aluminium is a joint venture owned by Mubadala Development and Dubai Aluminium (Dubal). The $4.875 billion limited recourse bank financing comprises a $1.805 billion 16-year term loan, a $270 million letter of credit facility and a $2.8 billion six-year equity bridge loan. A further financing for Emal of up to $2 billion is expected during the construction of the smelter, bringing the total financing of Phase 1 to almost $7 billion. Completion is due in 2010.

The lead arrangers are BNP Paribas, Calyon, Royal Bank of Scotland and Standard Chartered (all bookrunners), SMBC Mashreqbank and Abu Dhabi Commercial Bank. EDC, EFIC, Citibank (financial adviser with Sullivan and Cromwell), National Bank of Abu Dhabi, Goldman Sachs and Emirates Bank International are also participating.

A $2 billion bond launch will follow, led by Citibank, Goldman Sachs and National Bank of Abu Dhabi. The bonds will be split between 20 and 30-year bullets – the issuance is structured this way to provide greater debt quantity and increase shareholder returns. Given the turbulence in the capital markets it was decided to postpone the bond, as the funds are not needed immediately and to avoid negative carry. The proceeds from the bond are likely to be needed by year 3 of the 2.5 year construction period.

The deal structure sets down a new benchmark: not only does the financing feature a sizeable equity bridge loan – a facility that is usually confined to the power sector – but innovatively, the bonds rank senior to the bank debt.

A bond and bank solution was put forward as the best solution for the $7 billion project as there was no appetite among the sponsors for the ECA route. The sponsors put up completion support for the bank portion; however they were unwilling to disclose sufficient financial information for the capital markets.

Without providing sponsor support to the bonds, the solution to ensure a competitive cost of funds was to rank the bonds senior to the bank debt during construction, with banks and bonds ranking pari passu in operation. Banks were willing to accede to this, given the sponsor guarantee.

The bonds were able to achieve a single 'A' rating because of their seniority and the healthy loan-to-value of $2 billion liability in a $7 billion project.

The project itself involves the construction of a primary aluminium smelter to be situated in the Khalifa Port & Industrial Zone, Abu Dhabi, related infrastructure, including aluminium smelting and casting facilities, raw materials handling facilities, unloading and loading facilities, storage facilities and a 2,000 MW captive power plant dedicated to generate electricity for the project. KPIZ is Abu Dhabi's first free zone and Emal is its flagship tenant.

On 28 January Emal announced that it had awarded the power plant contract (Power Island Contract) to General Electrical. The contract has an estimated value of AED1.8 billion and involves the provision of equipment for a natural gas fired combined cycle plant with supplemental duct firing and dual fuel.

Phase 1 will have an initial nameplate production capacity of around 700,000tpa. Upon completion of the additional potlines contemplated in Phase 2, Emal will be the largest single site aluminium smelter in the world with total annual production capacity of 1,400,000 tons of aluminium. The financing allows for the deal to be upsized along the same terms to fund the expansion.

The Emal transaction sets a new template for multi-sourced financing that seems destined to be replicated given the ever-increasing scope of projects in the region. Perhaps all large financings will go the way of construction and be phased over several months. Also, one welcome, unintended side effect of the financial disclosure issue is that the sponsor's contingent commitment falls from $7 billion to $5 billion.

Emirates Aluminium Smelter
Status: Financial close 12 December 2007
Description: $4.875 billion debt backing aluminium smelter in Abu Dhabi free zone, UAE
Sponsors: Dubal and Mubadala Development Company
Mandated lead arrangers: BNP Paribas, Calyon, Royal Bank of Scotland and Standard Chartered (all bookrunners), SMBC, Mashreqbank, Abu Dhabi Commercial Bank, EDC, EFIC, Citi, National Bank of Abu Dhabi, Goldman Sachs and Emirates Bank International
Financial adviser: Citigroup
Legal advisers to sponsors: Sullivan & Cromwell; Allen & Overy (UAE counsel to Emal)
Legal advisers to lenders: White & Case (common international counsel to lenders) and Hadef Al-Dhahiri & Associates (common UAE counsel)