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30| pfi | Middle East Report 2010 Emirates Steel


0 The financing structure needed to be developed immediately after the peak of the financial crisis, at a time when bank liquidity was extremely tight, especially for transactions in challenging sectors such as steel. Furthermore, the UAE was facing a economic downturn (especially the construction sector in Dubai); 0 The nature of Emirates Steel’s output results in an appreciable level of merchant risk. In addition, steel prices, which are inherently cyclical, experienced increased volatility following the global economic crisis; 0The global steel sector was restructured at the beginning of 2010 (the leading iron ore producers unilaterally changed the raw material pricing mechanism); and 0 The expansion project was provisionally financed with bridge loan facilities, the maturity of which established a firm deadline by which this complex and multi-sourced project financing needed to be completed. Maximising the liquidity and minimising the financ- ing cost of the transaction in such a context was clearly the key challenge for the Emirates Steel financing team. As described by James Finucane, project finance man- ager at Emirates Steel, the deal required a pragmatic approach.


“Throughout the financing process it was necessary to react to changing market conditions within the local and the international financial markets,” said Finucane. “We had to work closely with our key relationship banks and also draw upon the support of our sponsor, GHC. By adopt- ing a flexible approach married with the strength of our project, Emirates Steel was able to maximise liquidity and minimise the overall financing costs.”


Project economics


Beyond these hurdles, the underlying business of Emirates Steel benefits from a number of favourable economic fac- tors, on the basis of which Emirates Steel built the struc- ture of the financing: 0 Emirates Steel benefits from strong government support, as an indirectly wholly-owned subsidiary of GHC, which is itself wholly-owned owned by the Government of Abu Dhabi; 0The expansion project will transform Emirates Steel into a vertically integrated steel producer, whereby it will complete its evolution from a simple and relatively low value-added processing operation into a sophisticated, highly productive and high value-added manufacturing business. On a UAE-delivered basis (delivery costs being added) it has been calculated that Emirates Steel will fall within the first (ie, lowest) percentile of the global cost curve; 0 The highly competitive nature of the plant is further enhanced by the use of proven technologies and the substantial economies of scale and synergies associated with the combination of the Phase 1 and Phase 2 expansion projects, which will transform Emirates Steel’s production facilities into a world-scale asset;


0 The EPC contracts, comprising the Phase 1 and Phase 2 EPC contracts, have all been signed on a lump sum turnkey basis with Danieli, one of the largest and most reputable suppliers of equipment and plant to the global metals industry; and 0 Emirates Steel has been successfully producing and selling steel for almost 10 years. It has gained consider- able expertise through the use of state of the art tech- nologies and the employment of highly qualified personnel. This mutually beneficial combination has resulted in the achievement of record production levels and the establishment of strong customer relationships with local and regional steel traders and end-users.


The structure


The senior debt facilities have a seven year door-to- door tenor.


While capitalising on the plant’s robust intrinsic strengths, the Emirates Steel financing team, together with financial adviser Natixis and legal adviser Denton Wilde Sapte, has developed an innovative and ambi- tious financing structure combining highly diversified funding sources to ensure that the required debt amount was raised at the most competitive pricing achievable despite adverse economic conditions. Total cost of the expansion project amounted to US$2.5bn. GHC and Emirates Steel sought financing on a 60:40 senior debt to equity ratio and successfully raised a total of US$1.6bn of senior facilities (and additional sub- ordinated facilities).


Maximising bank market liquidity for the transaction was achieved through the development of an advanced financing strategy, with four distinct facilities targeting separate investor groups: At the Emirates Steel level:


0 A US$733m conventional limited recourse senior project finance facility targeted at the local and regional bank market; 0 A US$367m senior Sharia-compliant Islamic limited recourse project financing (Ijara) targeted at local and regional Islamic institutions; and 0 A total of US$600m of subordinated working capital facilities raised on a bilateral basis with core local rela- tionship banks; At the GHC level: 0A US$500m ECA-covered facility (SACE) targeted at the international bank market. The senior debt facilities have a seven-year door-to-door


tenor, which was established as the optimum term follow- ing a preliminary market sounding. Furthermore, the repay- ment profile was sculpted with a back-ended profile in order to accommodate the ramp-up period and, in common with similar capital-intensive regional projects, the sponsor, GHC, provided a completion guarantee to be released upon the satisfaction of comprehensive technical and financial tests. The US$733m conventional project financing was entirely subscribed by local and regional banks. Restrict-


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