The $2.2 billion dual-tranche Islamic and conventional 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 last year – closed against the back­drop of volatile steel prices and tight bank liquidity. The deal featured innovation and flexibility in its shari’a compliant structuring of a major financing with cash sweeps, deferrals and inter-creditor agree­ments. It also reached financial close with more than 2x oversubscription on the commercial debt and 4x on the Islamic debt: the Islamic tranche closed in just eight weeks.

Sponsored by General Holding Corpor­ation (100%) – which is wholly owned by the Government of Abu Dhabi – 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.

The debt was raised via a three-stage funding programme, which re-financed $1.2 billion of bridge loans raised in 2008. The new facility comprises 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 provided by National Bank of Abu Dhabi (NBAD) and Union National Bank. Tenor on the senior debt is seven years and three months with a two year and six month grace period. Pricing is undisclosed, but commitments fees were 225bp.

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 re­lationship banks. The final group of six mandated lead arrangers included NBAD, 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 – Abu Dhabi Islamic Bank and Al Hilal Bank.

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 was more than four times oversubscribed. Competition for this portion of debt was intense and 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. 

Status: Financial close 25 August 2010
Size: $2.2 billion
Location: UAE
Description: Financing of a steel plant expansion
Sponsors: General Holding Corporation PJSC; GHC 100% via its subsidiary Abu Dhabi; Basic Industries Corporation (ADBIC))
Financial adviser: Natixis
Equity: $900 million
Debt: $1.1 billion
Commercial lead arrangers: National Bank of Abu Dhabi, Union National Bank, First Gulf Bank, Bank of Baroda, Al Khalij Commercial Bank, Al Khaliji Commercial Bank, Arab Banking Corporation
Islamic lead arrangers: Abu Dhabi Islamic Bank, Al Hilal Bank, National Bank of Abu Dhabi
Sponsor legal counsel: Denton Wilde Sapte & Co
Commercial lender legal counsel: Allen & Overy
Islamic lender legal counsel: Ashurst
Lender technical and environmental adviser: Hatch
Insurance adviser: JLT Group
Market adviser: CRU
EPC and equipment: Danieli & C Officine Spa