Emirates Aluminum's (Emal) US$7 billion project financing to construct the world's biggest smelter in Abu Dhabi - the largest single commercial financing to date for any project in the Gulf and comes as the latest example of how Gulf states are cashing in on their oil and gas reserves and investing in national infrastructure.

Located at Kalifa Port in Abu Dhabi's Taweelah Industrial Zone, it joins a number of similar projects in the Middle East that chose to establish their base in the region to cash in on the low energy costs.

As power represents almost one third of the cost of aluminium production, the location offers a strong competitive advantage in the market.

When the project is complete in 2010, it will have a capacity of 700,000 tonnes of aluminium per year.

It will require 2,600MW of energy, but the financing includes a facility to construct a gas-fired merchant power plant of 2,000MW, which will source feedstock from Abu Dhabi National Oil Company.

The two sponsors - state-owned Dubai Aluminium and Mubadala Development, the investment arm of Abu Dhabi's government - created the 50:50 JV company (Emal) to construct the smelter. Emal is providing US$2.8 billion in equity through a bridge loan, resulting in an debit:equity ratio of 60:40.

The entire debt element amounted to US$4.14 billion including:

• 11 MLAs providing a US$1.87 billion on a 16-year term loan
• Emirates Bank International providing a US$270 million letter of credit
• US$2 billion bond financing to be arranged by National Bank of Abu Dhabi, Goldman Sachs and Citigroup

As to the US$2.8 billion equity, this was provided by 10 MLAs in the shape of an equity bridge loan and the sponsor plans to take it out on completion.

The US$2 billion bond will be issued within three years. The bond is not being issued immediately because of the current state of the bond market following the US sub prime crash. The money will not be needed for a couple of years and the sponsors are willing to take this funding risk.

Citigroup acted as financial advisor to the sponsor while Sullivan & Cromwell provided legal advice. White & Case acted as legal advisor to the lenders.

The EPC was awarded to a joint venture of SNC-Lavalin Group and WorleyParsons Engineering.

Innovative Features

The Emal smelter project reached financial close with surprising speed - it was first launched to banks at the beginning of October and was signed and funded on 12 December.

To find and secure commitment to a three-tranche, US$5 billion debt facilities in less than two-and-a-half months is no mean feat.

Furthermore the US$2 billion bond component of the financing structure complicated matters and while it relies on the bond market recovering from the current sub prime crash, the sponsors are comfortable to wait.

Stewart Robertson, who co-heads Sullivan & Cromwell's EMEA projects group in London, said: "From a legal perspective, creating a financing structure that permits Emal to do a subsequent bond deal without the benefit of completion guarantees after already closing US$4.8 billion of term loans, equity bridge loans and a letter of credit facility provided an interesting challenge that we successfully overcame."

Emal also differs from other recent smelter projects as it has no committed long-term off-taker for the aluminium and no single long-term supplier of alumina - instead relying on three different suppliers.

Conclusion

The speed with which this deal was closed and the sheer scale of the project - the largest smelter in the world - shows how confidence in investments of this kind in the Middle East continues to grow, even when no long-term suppliers or off-takers have been secured.

Furthermore the unusual structuring of the bond in this deal shows that those working in this sector now have the self-assurance and imagination to experiment with more unusual ways to finance such projects.

The project at a glance