The $1.08 million financing for United Steel Company – SULB – was the first export credit agency-backed financing to close in Bahrain for nearly ten years, though this was not the sponsors’ initial preferred financing route. The eventual deal was something of hybrid between a project and export financing, but more noteworthy is that the sponsors were able to raise such a large quantum of debt from a mixture of sources and all at a competitive tenor.

SULB is a joint venture between Foulath, the holding company for several sovereign investors, including the Gulf Investment Corporation, and the Japanese steelmaker Yamato The project entails the construction of a 1.3 million square metre steel plant. This comprises a direct reduction iron ore plant with a nameplate capacity of 1.5 million tonnes per year (tpy) and design capacity of 1.8 million tpy, a melt shop with a nameplate capacity of 800,000 tpy and design capacity of 1.2 million tpy, and a heavy section rolling mill with nameplate capacity of 600,000 tpy and design capacity of 1 million tpy.

The project is located in the Hidd industrial region of Bahrain and is designed to fulfil the increased demand for steel from neighbouring Gulf states. Construction on the project is already underway and is expected to be completed next year. Once completed it will be part of the Middle East’s first ever fully integrated steel production facility, with manufacturing capability stretching from iron ore pelletising through to final product.

The Hidd region has been an important industrial hub in Bahrain ever since the Gulf Investment Corporation commissioned one of the earliest pelletising plants in the region, Gulf Industrial Investment Co (GIIC) in 1984. Several associated industries have sprung up as offshoots of GIIC since then, and the new steel production facility will use feedstock from the neighbouring GIIC plant.

Although steel prices have been volatile, rebar consumption has been high for most of last year in the GCC region because of a consistent construction boom, which is part of the reason why the sponsors were able to obtain such attractive tenor without any long-term offtake agreements. The Middle East is currently a net importer and the new plant will replace roughly 20% of the 4 million tonnes of annual imports into the region.

The sponsors signed the financing in September 2011 but only managed to close the financing six months afterwards, partly because of the intricacies of complying of local laws and regulations governing the financing’s security package and also because of the peculiarities of the documentation, which featured a separate facility agreement for each of the tranches, along with an umbrella common terms agreement.

The deal closed in March last year as $373 million in long-term debt, split equally between the two lead arrangers, BNP Paribas and Societe Generale. The financing breaks down into a $104 million 12-year loan guaranteed by Hermes, a $159 million 12-year loan, guaranteed by K-Sure, a $70 million 12-year loan guaranteed by SERV, and finally a $40 million 7-year uncovered loan.

The appearance of SERV, the Swiss export risk insurer is on the back of SMS Concast’s role as equipment supplier. The sponsors held preliminary discussions with both JBIC and Nexi because Kobe Steel is supplying equipment to the project, but are understood to have preferred the terms on offer from the European and Korean ECAs instead.

The sponsors had not initially wanted to use ECA-backed debt, and had held talks with Japanese lenders Mizuho and SMBC about providing a traditional project financing. But since the sponsors were looking at closing long-term debt they needed political and commercial cover from the ECAs to attract bank support. Given the funding constraints on international lenders, not mention the after-effects of political instability in the region and Bahrain, the ECA route offered by far the best chance of meeting the sponsors’ tenor expectations.

The three ECAs are providing lenders with 95% political risk and 95% commercial risk insurance. There are also a slew of other lender-friendly terms, including a full repayment guarantee in addition to the standard security package, that were designed to get lenders on board. The sponsors are also providing $705 million in equity, which was designed to give the project sufficiently low leverage to attract lenders.

The SULB steel financing is an important deal for the region insofar as it will serve its increased rebar demand. It also shows that with strong sponsor support and with enough ECA backing, complex projects in unsettled markets can close long-term debt packages. 

United Steel Company Bsc
STATUS
Signed 30 September 2011, financial close 28 March 2012
SIZE
$1.08 billion
DESCRIPTION
Financing for the construction of a steel plant in the Hidd industrial region of Bahrain
SPONSORS
Foulath (51%),
Yamato Kogyo (49%)
EQUITY
$705 million
DEBT
$373 million
MANDATED LEAD ARRANGERS
BNP Paribas, Societe Generale
ECAS
Hermes, K-Sure, SERV
SPONSORS’ LEGAL ADVISER
Baker & McKenzie (international); Hassan Radhi & Associates (local)
LENDERS’ LEGAL ADVISER
Clifford Chance (international); Zu’bi & Partners Attorneys & Legal Consultants (local)
EPC CONTRACTOR
Samsung Engineering Corp
OTHER CONTRACTORS
SMS Meer, SMS Concast