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In May 2008, mandated lead arrangers Calyon, HSBC, ING, Standard Chartered and Société Générale closed a US$381mn and €375mn multi-tranched export finance facility for South Korea’s Hyundai Steel Corporation (HSC).

The financing is supporting the development of the borrower’s new steel mill in Dangjin in South Korea. Hyundai Steel is Korea’s second largest steel manufacturer and the world’s second largest electric arc furnace operator.

The financing is a complex multi-sourced export credit agency (ECA)-backed financing involving six export credit agencies, a commercial loan and a bridge loan.

It marks the first multi-sourced ECA transaction for a Korean borrower. The efforts of the arranging banks to coordinate the various different tranches, multiple currencies, multiple execution periods and multiple payment terms also ensured that this deal stood out in the tumultuous markets of 2008.

There are a total of five bank-funded tied export credit facilities backed by ECAs. These are supported by Germany’s Euler Hermes; China’s Sinosure; Luxembourg’s ODL; OEKB in Austria; and Finland’s Finnvera.

There is also one untied bank-funded tranche supported by Italy’s Sace which was signed at an earlier date in January 2008 and enabled the company to cover certain import costs related to the project but not eligible to traditional tied export credits.
This was Sace’s first untied facility in Asia, after the ECA had successfully developed this product, notably in Middle East project finance transactions in the power and petrochemical sectors. The Sace facility was executed in a record five months from initial approach to closing.

The Hyundai financing is provided in US dollars and euros. The buyer credit tranches offer an 11.5-year door-to-door tenor, incorporating three years drawdown period and 8.5 years repayment. The commercial loan has a five-year door-to-door tenor, with bullet repayment.

The lenders also provided a US$150mn bridge facility to cover early project costs during the evaluation period of the ECAs.

According to Arnaud Cachard at HSBC, the challenges faced by the deal were those typical of a complex, multi-sourced ECA package, namely the need to incorporate a large diversity of contracts specifics under the same package and the need to coordinate several ECAs in their due diligence process and document the transaction to the satisfaction of all parties. “The five MLAs achieved this through extended communication among ECA agents and tight management of each ECA,” Cachard explains.

The planned Dangjin steel mill will consist of an integrated steel mill and will include two blast furnaces, one hot rolling mill, one sintering plant and a coking plant. It will be able to produce 8 million tonnes of steel products per year, which is an 80% increase to HSC’s production capacity.

The financing heralds the borrower’s first entry into flat steel production and its move into high-grade automotive quality steel and thick plates for shipbuilding.

HSBC’s Cachard notes that the financing package addresses a highly diversified industrial sourcing, and complex contractual planning, to offer a uniquely integrated solution to cover most imported capex costs of the project over a three-year investment period.

With this new product offering, Hyundai will be able to fulfil growing demand in the domestic market. The company’s diversification of its product line will also help it become less exposed to the cyclical nature of the construction sector and competition from Chinese producers.

The deal further stands out in the market as the transaction is more than double the size of the company’s balance sheet.

Mr Han of Hyundai Steel adds: “I am very pleased and honoured that our ECA financing is selected as one of the GTR Best Deals of 2008 and won recognition in the global financial community.

“Though the work to put it together had been very challenging under the recent environment, I believe the ECA financing arrangement for our Dangjin integrated steel mill project was successful. This deal, which involves six ECAs of Europe and China, is impressive due to its substantial size and its complex structure as well.

“The successful financial closing is the result of the long and hard work of many involved. I’d like to call this deal a historical event for Hyundai Steel’s construction of integrated steel mill and further for the future of the Korean steel industry.”

Deal Information

Borrower: Hyundai Steel
Amount: €381mn & US$375mn (including earlier Sace-backed tranche)
Mandated lead arrangers: Calyon; ING; Société Générale CIB; HSBC; Standard Chartered Bank
ECAs: Euler Hermes; Finnvera; ODL; OeKB; Sace; Sinosure
Law firm: Allen & Overy
Tenor: 11.5 years (buyer credit tranche/untied tranche); 5 years (commercial loan)
Date signed: Sace facility: January 2008; other ECA facilities: May 2008