Abu Dhabi's Emirates Steel is in talks with banks for a $1.3 billion loan to help refinance an existing facility and raise cash to purchase assets from its parent firm, three banking and industry sources aware of the matter said on Wednesday.
As well as securing the assets from parent Abu Dhabi's General Holding Corp (Senaat), thereby consolidating all steel assets into one entity, the deal will cut the costs of a loan which was signed in 2010 and funded an expansion of Emirates Steel's operations.
While the original deal still has more than three years to run, the company is hoping to take advantage of a lower interest rate environment, a tactic deployed by other UAE-based firms who have sought to replace expensive financing taken out during the global financial crisis.
Refinancing of a $2.2 billion debt package used to fund construction of the Shuweihat 2 water and power plant in Abu Dhabi, which was completed last year, having initially put funding in place in October 2009, is one such example.
Projects can also secure lower funding costs once they are operational as they are generating revenue, thereby making them less of a risk to lenders.
"The company (Emirates Steel) has strong cash flows and it can now switch from the high project-finance interest rate it secured earlier," said one source aware of the transaction, who declined to be named because the information isn't public.
The 2010 deal was worth $1.1 billion in total, split between a $733 million conventional loan and a $367 million sharia-compliant loan, and was funded in UAE dirhams. The new transaction will be denominated in dollars, the sources said.
While the initial debt was provided by local and regional banks, international lenders have been invited to participate in the refinancing. In total around 30 lenders have been sent an invitation, according to one of the sources.
This should help to reduce the interest rate which Emirates Steel will be charged, as while regional banks are extremely liquid and have plenty of cash to lend, the lower funding costs of big international banks mean they can lend out at a lower rate and still make a profit.
"The international banks are acting very aggressively on the deal but, from our point of view, this drives down the margin and makes it less rewarding for us to take part," said a banking source at a local lender.
Emirates Steel hopes to complete the transaction in three to four months, the first source said, while the third source said the group was looking for the new loan to have a lifespan of between seven and eight years.
The original loan helped expand production at the group's complex to 3.5 million tonnes per annum and it has plans to increase output to 5.5 million tonnes by 2015.