SteelCorr and Severstal have closed a $880 million financing package backing the construction of one of the first new steel projects in the US in over a decade. The financing – a mixture of commercial bank debt, export financing and B loan debt – is an ambitious blending of financing techniques from several industries. That it succeeded in a country where the steel industry is usually described as declining is all the more astonishing.

The deal – the financing of a mini-mill in Columbus, Mississippi – illustrates some of the changes sweeping across the heavy industries of the United States. It also exploits them, turning the products of the old-line industry of the northern US and Rust Belt into crucial inputs for the new industries springing up in the south of the US.

SteelCorr's founder is John Correnti, the former CEO of Nucor, which pioneered the development of mini-mills in the US. Nucor, which is now the largest steelmaker in the country, took scrap metal and unfinished iron and turned it into high-end steel products for use in industries such as carmaking. It replaced a model based on integrated production, whereby steelmakers would normally make iron, and then turn that into steel, all at the same site.

Both iron and steelmaking have largely migrated overseas, where sometimes raw materials, and definitely labour, are cheaper. In this, the industry has mirrored carmaking, where overseas producers have cut into the market share of their US counterparts.

However, several overseas producers have also set up operations in economically depressed parts of the US, benefiting from lower wages and state incentives. And the mini-mill, which uses electric arc furnace technology, is an ideal counterpart to the new carmaking sites, taking the scrap metal and unfinished iron from the declining regions of the north and using it in the service of the new carmakers.

SteelCorr realised that if it kept costs as low as possible and produced a sophisticated enough product for its customers nearby, then it could displace imports from overseas.

SteelCorr retained Global Principal Partners, an advisory firm formed by former McDonald Financial Group personnel that left following its takeover by Key Bank, and law firm Baker & Hostetler to help it put together a financing. The two assisted in early procurement, as well as the selection of OAO Severstal of Russia as a partner. Severstal has good relationships with European lenders, and also bought Rouge Steel, the former steel operations of the Ford Motor Company, in 2003.

Moreover, the sponsors also lined up SMS Demag to provide equipment to the venture, which brought with it German export finance cover. But the deal has a credit that is unusual, and would give project lenders cause for caution. It does not have a formal engineering procurement and construction contract, and its output will not be fully contracted.

In the circumstances, the developer scrambled to raise capital from all available sources, with the most significant part of the financing arranged by GE Commercial Finance. GE sourced the senior debt, equivalent to roughly half the plant's capital cost, in part because of its distribution and documentation capabilities.

The senior debt breaks down into a $227 million tranche, for which KfW arranged comprehensive commercial cover from Euler-Hermes, 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 (an Ohio-based lender to the steel industry), RZB, and a number of unnamed hedge funds.

The senior debt is broken down pro rata into three tranches, which will fund as and when various pieces of equipment must be paid for. These have exactly the same security position and 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 will 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 in money from the State of Mississippi. The state agreed a package of roughly $110 million in loans and grants in March 2005. But after Hurricane Katrina, the state looked to scale back its support, given the devastation that the state suffered.

So, over September, the lenders and equity agreed to increase their contributions so that the state would not have to put up as much. The eventual contribution from the state, which governor Haley Barbour signed on 29 September, consisted of $36 million in grants, and a state-backed second lien loan of $60 million. RZB is funding this loan, although as far as RZB is concerned its risk is purely that of the state.

This mixture of funding sources presented several challenges, not least of which was the fact that the plant does not have any contracts beyond around 10% of the output being presold to an unnamed Japanese trading company at market price. The rest is sold either on an ad hoc basis to local producers, or on a spot basis, although Severstal provides limited price support.

The project's main inputs include scrap metal, whose price broadly correlates with that of the finished product, labour, whose costs are lower in the southern US, and electricity. In the last instance, the sponsors have signed a long-term, and very reasonably-priced power supply contract with the Tennessee Valley Authority. Combined with a debt service reserve, and the prediction that SeverCorr will be the most efficient plant in the country, and lenders can rest a little more easily with their commitments.

The southern US is a huge market for steel – 6 million tonnes go into making 4 million cars per year. The sponsors, which provided $220 million in equity split between management, Severstal, the advisory firms and private investors, could be looking at an expansion project very soon. The 1.5 million tonnes per year project could be doubled in size quite quickly, although management, which is overseeing construction itself to save roughly $30 million in EPC margins, will be busy until 2007.

SeverCorr
Status: Closed 3 October 2005
Size: $880 million
Location: Columbus, Lowndes County, Mississippi
Description: 1.5 million tonnes per year steel mini-mill
Sponsors: SteelCorr, Severstal
Senior debt arranger: GE Capital
Financial adviser: Global Principal Partners
Developer legal: Baker & Hostetler
Sponsor legal: Skadden Arps Slate Meagher & Flom
Lender legal: Dewey Ballantine
Independent engineer: Hatch Mott MacDonald