The $2.2 billion financing of the Emirates Steel Expansion project – the single largest steel financing in the Middle East to date and one of the largest project financings in the region this year – reached financial close in August. With more than 2x oversubscription from lenders on the commercial debt and 4x on the Islamic debt, as Stephen Pope, CFO of Emirates Steel, says, “the deal demonstrates that a dynamic and multi-sourced funding approach can get even the largest steel projects financed very competitively.”

Sponsored by General Holding Corporation (100%), which is in turn wholly owned by the Government of Abu Dhabi, Emirates Steel’s financing needs were substantial, totalling $2.2 billion including working capital facilities.

In structuring the project financing there were a number of key considerations to be taken into account. The structure needed to be developed immediately after the height of the financial crisis, at a time when bank liquidity was particularly tight, especially for transactions in the more challenging sectors, such as steel (the nature of Emirates Steel’s output results in an appreciable level of merchant risk).

Steel prices, which are inherently cyclical, experienced increased volatility following the global economic crisis. The global steel sector was also re-structured at the beginning of 2010, when the leading iron ore producers unilaterally changed the raw material pricing mechanism.

The expansion project was provisionally financed with bridge loans, the maturity of which established a firm deadline for implementation of the long-term project financing. Natixis acted as financial advisor to Emirates Steel and GHC. “Maximizing the liquidity and minimizing the financing cost of the transaction in such a context was the key challenge to overcome”, says Jean-Marc Mangiavellano, Project Finance Regional Head at Natixis Dubai.

The debt was raised via a three-stage funding programme, which re-financed $1.2 billion of bridge loans that were raised in 2008 at both the Emirates Steel and General Holding Corporation levels. The financing comprised a $733 million commercial project loan raised at the Emirates Steel level; a $367 million Shari’a compliant Islamic tranche raised at the Emirates Steel level; a $500 million SACE-covered term loan raised at the GHC level; and $600 million of subordinated working capital facilities arranged on a bilateral basis.

The senior debt facilities have a seven-year door-to-door tenor, which was established as the optimum term following a preliminary market sounding. The repayment profile is back-ended to accommodate the ramp-up period. There is also an option to defer part of the principal repayments during a down cycle and, conversely, a partial cash sweep starting after completion to accelerate principal repayment during a high steel price environment. Consistent with similar capital intensive projects in the region, the sponsor, GHC, provided a completion guarantee to be released upon the satisfaction of comprehensive technical and financial tests.

The project’s debt-to-equity ratio of 60/40 is in line with industry benchmarks. The debt service coverage ratios (DSCR and LLCR) are strong – above 3x – and the structure also incorporates a six-month liability reserve account to support the repayment profile through potential steel market troughs.

The $733 million conventional project financing was entirely subscribed by local and regional banks. Restricting the conventional loan to local and regional lenders enabled Emirates Steel and GHC to take advantage of favourable terms and conditions offered by existing close relationship banks. The final group of six mandated lead arrangers (MLAs) included National Bank of Abu Dhabi, as global coordinating bank, together with Union National Bank, First Gulf Bank, Bank of Baroda, Arab Banking Corporation and Al Khaliji Bank.

The Islamic facility was structured as a standard forward lease (Ijara). The Islamic institutions acquired the assets (already built in the case of the Emirates Steel financing) and leased them back to Emirates Steel. The sponsors chose to maximize the size of the Islamic tranche, which supported the national objective of promoting Shari’a compliant borrowing. The facility was fully subscribed by the local institutions and MLAs on the transaction – Abu Dhabi Islamic Bank and Al Hilal Bank.

“The syndication of these two facilities proved to be extremely successful and the total project finance facilities of $1.1 billion were more than two times oversubscribed”, says James Finucane, Project Finance Manager at Emirates Steel.

Supporting the project finance facilities is a $500 million 100% SACE-covered facility at the GHC corporate level, which was provided by International lenders and supported by comprehensive SACE cover for both commercial and political risks. This was offered to International lenders and was more than four times oversubscribed. Competition for this portion of debt was intense and bids were extremely competitive, with the result that GHC was able to obtain particularly attractive terms from HSBC, which was appointed sole MLA. The SACE Facility pricing helped minimize the project’s all-in financing cost.

Finally, a further $600 million of bilateral subordinated working capital facilities, sized with reference to a combination of current trends in the steel industry and the scale and integrated nature of the expanded plant, were negotiated directly between Emirates Steel and its core local banks, to ensure that the most competitive terms could be achieved.

Financing for the Emirates Steel Expansion project was first launched in 2006. The final funding structure is unrecognisable from that originally envisaged. The sound underlying business rationale of Emirates Steel – to turn a simple rolling mill into a world scale high value-added integrated steel complex – was widely acknowledged. However, the announcement of a second phase expansion, the global financial crisis and the restructuring of the global steel industry, all of which occurred during the financing process, resulted in a more innovative and multi-sourced financing than originally anticipated.

The funding mix implemented by the Emirates Steel financing team, its financial advisor, Natixis, and its legal advisor, Denton Wilde Sapte, ensured sufficient liquidity for a financing of $2.2 billion in a notoriously cyclical sector and was key to the success of the transaction.

This financing demonstrates, as Jean Cheval, Global Head of Debt and Finance in Natixis puts it that “a combination of strong and deep knowledge and understanding of the local market conditions, adaptability, innovation and trust can overcome the most difficult obstacles” and ultimately led to the unprecedented success of the Emirates Steel Expansion project financing.

Emirates Steel Industries

Status: Financial close 25 August 2010

Size: $2.5 billion

Location: Abu Dhabi, United Arab Emirates

Description: Financing of a steel plant expansion

Sponsors: General Holding Corporation PJSC

(GHC 100% via its subsidiary Abu Dhabi

Basic Industries Corporation (ADBIC))

Equity: $900 million

Debt: $1.1 billion senior project finance facilities

($367 million Islamic debt and $733 million commercial debt) and $600 million subordinated working capital facilities

Commercial MLAs: National Bank of Abu Dhabi (Documentation and Global Coordinating Bank, Commercial Facility Agent, and Intercreditor Agent Security Agent); Union National Bank (Account Bank); First Gulf Bank; Bank of Baroda; Al Khalij Commercial Bank; Al Khaliji France, Dubai Branch; Arab Banking Corporation

Islamic MLAs: Abu Dhabi Islamic Bank (Islamic Documentation and Coordinating Bank, and Islamic Facility Agent); Al Hilal Bank

Agency, Commercial Facility Agent: National Bank of Abu Dhabi

Islamic Facility Agent: Abu Dhabi Islamic Bank

Sponsor Financial Adviser: Natixis

Sponsor Legal Adviser: Denton Wilde Sapte & Co

Commercial Lender Legal Adviser: Allen & Overy

Islamic Lender Legal Adviser: Ashurst

Lender Technical and Environmental Adviser: Hatch

Insurance Adviser: JLT Group

Market Adviser: CRU and shipping advisor: Drewry

EPC and Equipment: Danieli & C Officine Spa