Financing for an s300 ($299) million facility for the Mobarakeh steel complex in Iran will close at the beginning of March following the start of syndication in Milan on February 10. Solely underwritten by Fortis Bank, with a guarantee issued by the Italian export credit agency Sace covering 85% of the loan, the transaction is an important step for international financiers interested in the increasingly lucrative Iranian market.

Thierry Josz, deputy director of global export and project finance at Fortis Bank in Brussels says: "Iran badly needs foreign investment. The attitude of Iranian companies approaching the international debt market has changed enormously from the past. Their understanding of what is now a positive momentum makes them more aware of what steps are needed to attract the right level of interest abroad."

The transaction is being held as a template deal for Iran due to the willingness of the local Ministry of Finance to issue, for the first time, a guarantee on the project. This formula is likely to be applied to all projects involving buy-back structures and applicable to sectors such as oil & gas, steel or petrochemical products.

Massimo Pecorari, director of structured finance at Sace in Rome says: "The guarantee offered by the Iranian Ministry of Finance is a landmark for future deals. It took a long time before reaching a successful solution but it is always a pleasure to be able to negotiate with highly qualified counterparts as you find in Iran."

Prior to launch of syndication, Fortis Bank has been inviting European banks to join the transaction on a club basis, reportedly aiming only at those with good experience in the steel sector and exposure to Iran. A roadshow takes place on February 10 in Milan when syndication officially launches. Local sources confirm that Rome-based Mediocredito Centrale will join the deal at co-arranger level.

Carried out under a buy-back formula and comprising a full guarantee over the plant's export capacity issued by National Iranian Steel Company (Nisco), of which Mobarakeh Steel Complex is an affiliate, the facility will finance the expansion of an existing steel plant located 70km southwest of Isfahan in central Iran. The expansion will be carried over a period of three years, raising the plant's output from the current 3.4 million tonnes of steel a year to 4.2 million.

A commercial contract was agreed in Tehran on January 25, 2000 between Mobarakeh Steel Company and three Italian-based firms. An Italian subsidiary of Germany's SMS Demag, Compagnia Tecnica Internazionale (Techint) and Irasco, an Italian-based subsidiary of Nisco teamed up with Mobarakeh. Iran's minister of mines and metals, Ishaq Jahangiri signed the agreement between the negotiating parties.

Based on the buy-back contract, the most popular financing structure to be found in Iran, capital investment will be repaid through the sale of products. London-based Balli Group will be in charge of negotiating a number of agreements for the purchase of steel produced at Mobarakeh with the option of other trading groups joining in. The first installment would be paid 48 months after the finalization of the deal to purchase machinery and equipment.

Vincenzo Vaddaca, senior vice-president in marketing and business development at Techint in Milan says: "Buy-back is not an empty formula. In the case of Mobarakeh our evaluation of the commercial risks involved in the operation was relying on the company's positive record in the international markets. The rescheduling of Iranian debts over the last year combined with the positive effects given by the rise in the price of crude is opening the way for more international financing to Iran. If the Italian export credit agency, Sace, has been among the first in Europe to reopen, agencies from France, Germany and the UK will follow swiftly."

In 1999, the Italian export credit agency issued guarantees for a total of $2.2 billion worth of credit lines arranged by different Italian banks for the financing of projects in Iran. Those include a $1.2 billion line by Milan-based Mediobanca and a $1 billion line arranged by Mediocredito Centrale and Banca Commerciale Italiana.

Financing for Mobarakeh is not the first to be arranged internationally for the supply of equipment, materials and services to Iranian steel complexes. In 1998 Fortis Bank arranged with Societe Generale a $50 million facility for Nisco with the backing of Belgium's export credit agency, Office National du Ducroire. Back in March 1996, financing worth $660 million was arranged by Mediocredito Centrale, Banca Commerciale Italiana for the delivery of four steel mills in Iran to be supplied by Italy's Danieli to Mobarakeh steel complex.

Altogether, the s300 million financing demonstrates the interest of foreign sponsors and financiers in the Iranian industry beyond the oil sector. Fortis' Josz remarks: "Nisco and its affiliates have an excellent record making financing of such transactions possible. Like many other Iranian companies, they are committed to maintain credibility in the international markets by sticking to the contracts agreed and producing high-quality products.

"Iran is an attractive market for European-based companies and the buy-back formula is a good way for foreign financiers to avoid sovereign risk." Fortis Bank is now looking at a number of other investment opportunities in the country and is talking to senior representatives of Iran's National Petrochemical Company.