With no formal turnkey contract, fewer covenants than a typical project financing and only 10% of output contracted – the $882.3 million SeverCorr mini-mill steel project in the US appears an unlikely credit. Even more so, since the project is driven by a start-up company and the US domestic steel market faces stiff competition from cheaper imports.

But, "this deal is anything but a typical project financing," notes Dave Stickler, partner at Global Principal Partners, financial adviser to the project's sponsors. SeverCorr – sponsored by SteelCorr (a group of six Birmingham Steel and Nucor executives led by John Correnti, the former CEO of Nucor) and Russian steel manufacturer OAO Severstal – is a start-up project in the truest sense.

Based on their experience and reputation in the US steel industry, the SteelCorr founders managed to find both an equity partner in Severstal and raise the total $882 million start-up funding for their first plant – SeverCorr. Other than internet start-ups, that level of start-up financing is a rarity.

In Correnti's time at Nucor – now the largest steelmaker in the US – the company pioneered the development of mini-mills and replaced a model based on integrated production – whereby steelmakers would normally make iron, and then turn that into steel, all at the same site – with a system that takes scrap metal and unfinished iron and turns it into high-end steel products for use in industries such as carmaking.

SeverCorr employs the same rationale. The 1.5 million tonnes per year plant (expandable to 3 million) is being built in Columbus, Mississippi. When completed, and with its operations optimized, the project will be the first flat rolled steel mini mill in the world capable of manufacturing a full range of products, including those intended for exposed automotive applications.

The siting of the plant in the southern US is optimal, given the need for high quality steel production in the south and the growth of foreign car manufacturing in the region. SeverCorr is sitting in the middle of an area that produces one-third of the 12 million cars manufactured in the US per year, and with the major US manufacturers – Ford and GM – in trouble in their domestic market, that share of the market can only grow in the short term.

The southern states are also still the most depressed economies in the US and offer both lower-cost labour and state development grants. Furthermore, because SeverCorr has no EPC contractor – the management are responsible for construction and start-up – the project is making significant cost savings.

In addition to the business strategy behind the plant, the funding solution, in that it draws on multiple sources, is an innovation in the steel market. The financing is a true start-up, with repayment and return on investment entirely dependent upon future sales from the project – no direct credit support is being provided by any of the project sponsors.

The financing is a blend of techniques from different project sectors and at a basic level comprises $220 million of equity, $36.5 million of government grants and $565.8 million of debt split, between senior, mezzanine, export credit-backed, vendor financing and B loan facilities – in effect a multisourcing deal. Furthermore, the investors and lenders in the project have a global spread ranging from North America, Europe, Russia and Japan. In effect, the deal is risk spreading on a grand scale.

The most significant part of the financing was arranged by GE Commercial Finance, which sourced senior debt equivalent to roughly half the plant's capital cost.

The senior debt breaks down into a $227 million tranche, for which KfW arranged comprehensive commercial cover from Euler-Hermes (German equipment content is being supplied by SMS Demag) and in which Nord/LB, Commerzbank and KfW participated, and a $213 million uncovered commercial tranche. Participants in this facility included GE Capital, Nord/LB, Commerzbank, National City Bank, RZB, and a number of hedge funds. DSCRs have not been released but are said to be on, or close to, the norm for a US manufacturing plant.

The senior debt comprises three pro rata tranches, which will fund as and when various pieces of equipment must be paid for. These have both the same security position and same position in the repayment waterfall. The debt has a tenor of roughly eight years, including construction, a 14-month ramp-up period, and a five-year term, although it did not all fund at closing.

The capital structure also includes an $80 million mezzanine facility, of which $20 million is contingent, a $40 million B loan, which also includes the $20 million contingent piece, a $24 million vendor finance facility, and $96 million from the State of Mississippi consisting of $36 million in grants, and a state-backed second lien loan of $60 million. Bayerische Landesbank is funding this loan.

SeverCorr is a remarkable deal born of a remarkable set of confluences. Whether it would have funded in the same manner in a less liquid bank market is arguable. Nevertheless, the fact that a big-ticket manufacturing project got off the ground this way without changing its name to SeverCorr.com is proof that lenders and investors can still recognise entrepreneurial spirit in traditional markets.

SeverCorr
Status: Closed 3 October 2005
Sponsors: SteelCorr; OAO Severstal
Financial adviser: Global Principal Partners
Lead arrangers: GE Commercial & Industrial Finance (commercial debt), KfW (ECA debt)
Senior lenders: GE Commercial & Industrial Finance, KfW, Nord/LB, Commerzbank, National City Bank, RZB Finance
ECA cover: Euler-Hermes
Senior Sub lenders: SMS Demag, Corsair, Ritchie Capital
Sub debt: OAO Severstal
Government financing: Bayerische Landesbank,
the State of Mississippi
Sponsors' counsel: Skadden Arps Slate Meagher & Flom;
Baker & Hostetler
Lenders' counsel: Dewey Ballantine
Consultants: Hatch Engineering; CV Engineering