Shanghai Krupp: wheels of steel
Total financing for the project company, Shanghai Krupp Stainless Co. (SKS), in Phase II.1 is $259.8 million. This total includes equity of $103.92 million and a debt package consisting of a $90.5m loan from KfW and a $65.38m loan (RMB equivalent) from a consortium of PRC banks led by Agricultural Bank of China, and including Bank of China, China Construction Bank and Industrial and Commercial Bank of China. The KfW loan is ten years with 20 semi-annual repayment installments. The PRC loan is 8.5 years, also repaid semi-annually.
Phase II.1 of the project will involve the expansion of the annual capacity of the existing cold-rolling mill, built in Phase I by 218,000 tons per annum, and the construction of an annealing and pickling line.
The stainless steel material used by SKS comes from ThyssenKrupp facilities in Germany. On the buy side, almost all the purchasers of SKS product are producers of household goods and construction companies in mainland China. Payment is made either in advance or on normal trade finance terms.
One of the most notable elements of the financing is how the Phase II.1 financing is interlinked with the original Phase I financing which closed in September 1999.
According to Andrew Hart, a partner at Freshfields Bruckhaus Deringer in Hong Kong (Freshfields acted for KfW and IFC) the security had to be structured in such a way as to ensure that the Phase II.1 lenders had parri passu rights to the common security, without losing the priority already achieved by the Phase I lenders.
The sponsor support arrangement involves varying levels of support for different phases, but all the phase financings are expected to have completion guarantees. Post completion, the financings are limited recourse with some partial cash support. The financings are also being arranged, says Hart, in such a way that the different projects, as they come on line, are regarded as an integrated whole for financing purposes. Therefore, all operational phases of the project will support each of the different phase debt obligations.
In addition, the Phase II.1 transaction is noteworthy as one of the first deals in which China's largest four banks have participated as a consortium in a project which is already partly complete and partly financed. ?This is the first time that they have come into a second stage and then got to work independently analysing the intercreditor issues instead of piggy backing on existing documentation. That's a sign of an increasingly sophisticated attitude to these project deals,? says one commentator. Also, in a rare move, the PRC banks hired an international law firm (Clifford Chance) to represent them in the intercreditor negotiations, in recognition of the fact that the complex nature of the negotiations demanded representation from an international law firm.
Phase I of the project involved the construction, equipping, financing and operation of a cold rolling mill for stainless steel flat products with a capacity to produce 72,000 tons of bright annealed stainless steel per annum. Total financing for Phase I was $294.8 million. The debt financing package consisted of a $98.9 million loan from IFC and a $78.1 million loan from KfW.
The IFC loan was eventually split into an A loan of $30 million, kept on IFC's books, and a B loan of $68.8 million which was sold down to other lenders. They were IKB (taking $5 million), Credit Lyonnais ($5 million), Deutsche Bank ($13 million), Dresdner Bank ($14.8 million), DZ Bank ($8 million), HVB Group ($8 million), Mizuho ($5 million), SEB AG ($5 million) and WestLB ($5 million). IFC remains the lender of record for the B loan and is included in the Phase II.1 deal as a first phase Lender, but the institution is not lending in this current financing.
According to Kreuser, the Phase II.2 financing (which will fund a steel melt shop and a hot rolling facility) will be smaller than Phase II.1. The company expects to finalise the documents for the next financing at the beginning of 2004. Whether IFC, KfW and the same Chinese banks that have participated in the financings to date will be involved in the Phase II.2 deal is still open to question. ?We still have to discuss participation in the next phase financing with the existing creditors,? says Kreuser. He says there is a good chance that the new facilities will use equipment from Germany and other European countries, raising the possibility of further involvement from KfW and other European export credit agencies. The sponsors are not advised by an external financial adviser for the project.
SKS began life in April 1998 on the basis of the joint venture contract signed at the end of 1997. The Chinese market for stainless steel flat products is estimated at approximately 1.5 million tonnes per year, almost as large as the US market. It also remains one of the fastest growing in the world. China is currently still importing over 70% of flat stainless steel.
According to Kreuser, Phase II.1 is scheduled to go into operation by autumn of 2004. The final (Phase 3) part of the cold-rolling mill will increase the capacity to 268,000 tons per year by the end of 2005. The overall development should be completed by the end of 2006.
Shanghai Krupp
Stainless Co.
Status: Closed
Cost: $259.8 million
Location: Huangpu River, Shanghai
Description: Transaction financing the expansion of a stainless steel cold rolling mill
Sponsors: ThyssenKrupp (60%) and Baosteel through its subsidiary Shanghai Pudong Iron & Steel (40%)
Debt: $155.88 million
Debt participants: KfW, Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China.
Lawyers: (counsel to IFC and KfW) Freshfields Bruckhaus Deringer; (International counsel to Chinese banks) Clifford Chance; (Chinese counsel for PRC Banks) Jin Mao; (Chinese counsel for sponsors) Fang Da
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