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Euro bank retreat raises costs for Abu Dhabi’s EMAL

UAE's Emal

Emal bond invite to be sent to banks late-Sept – sources; Loan to pay 225-300 bps over 15.5-yr life; Margin more than double first phase, shows impact of Euro bank pull-back; All part of $4 bln funding package for smelter expansion

September 5, 2012 5:36 by



Emirates Aluminium (Emal) will have to pay much higher rates to borrow money from banks to help finance a $4 billion smelter expansion due to the impact of the euro zone crisis on infrastructure lending in the Middle East.

 

Emal, a joint venture between Abu Dhabi’s Mubadala and Dubai Aluminium, aims to raise about $2.8 billion via the loan. The company will also invite banks to pitch for a bond mandate at the end of September, banking sources said on Wednesday, a sign that companies are having to turn to bond investors for cash as the euro crisis makes bank loans more difficult to access.

The loan portion of the finance package, currently being studied by banks, will cost Emal more than double what it paid for financing on the first phase of the smelter.

Pricing on the 15.5-year loan, earmarked to raise around $2.8 billion, starts at 225 basis points and increases to 300 bps over the life of the loan, two bankers said, speaking on condition of anonymity as the information is private.

This is up from the 70 bps – 130 bps margin Emal paid on the $4.9 billion loan that backed the first phase of its Abu Dhabi-based aluminium smelter in 2008.

The price hike reflects the shift in the Gulf’s project finance market, where cheap, abundant liquidity from European banks is no longer available because these lenders are grappling with a host of problems related to the euro crisis, including the high cost of access to US dollars.

“It is fairly realistic pricing and banks are reasonably confident that they can get it for that sort of level,” one Middle Eastern banker said.

Non-European banks are expected to provide a large chunk of the loan funding, with Japanese banks in particular lining up to back the deal.

One European banker said two firms with an existing relationship to Emal, Bank of Tokyo-Mitsubishi and Sumitomo Mitsui Banking Corporation, could put down $500 million between them.

Local banks, including National Bank of Abu Dhabi, First Gulf Bank and Union National Bank, are also likely to join the deal, with the possibility of others which have not ventured into the project finance market since the economic crisis, such as Emirates NBD, joining, the banker added.

 

RARE PROJECT BOND

Responses to the loan proposal are expected at the end of September, with the invite to pitch for the bond expected around the same time, three bankers said.

The bond amount is still to be determined but could raise up to $1 billion, depending on market conditions and investor demand, two bankers said. If the bond reaches that amount, the final loan figure will be scaled back slightly.

Project finance bonds are a rarity from the Gulf Arab region because of their complexity and also because projects have traditionally had strong backing from banks as lenders. But as lending sources have dried up, other fundraising methods are being explored.

The bond’s structure will be a so-called 144a issue, according to one project finance banker, which means it will be open to institutional investors in the United States who are familiar with the long-term, complex nature of infrastructure bonds.

Abu Dhabi’s Shuweihat 2 independent water and power plant (IWPP) project may launch a bond by the end of September as part of a $2.2 billion refinancing plan, sources told Reuters this week.

Emal’s expansion finance will also include around $500 million from four export credit agencies – Export-Import Bank of the United States, France’s Coface, Germany’s Hermes and the Export-Import Bank of Korea – Project Finance International, a Thomson Reuters publication, said last month.

The second phase will boost Emal’s production by approximately 1.3 million metric tonnes by 2014. The metals producer announced in March that it was aiming to double its exports to the United States by the end of this year in response to a growing automotive industry, targeting 250,000 metric tonnes from 100,000 metric tonnes in 2011.

(Additional Reporting by Rachna Uppal; Editing by Dinesh Nair and Jane Merriman)



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