Inside a steel deal: a new, state-of-the-art steel mill is starting to rise in Mississippi. A look at the complex financing behind it.

A highly sophisticated steel mill in a relatively rural area in Mississippi, helped by a state grant approved by the governor. A major equity stake from a Russian-owned steel company. A large export credit guarantee from Germany. A very sizable debt financing arranged by GE Commercial Finance.

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There's much about the financing of a new steel mill in Columbus, Miss., that merits a closer look. It offers strong evidence that even in a struggling/recovering/reorganizing (pick your adjective) industry like steel, a combination of impressive expertise, a well-articulated plan and powerful partners can help bring a financing to fruition.

Through the $872 million deal, announced in October, a new entity called SeverCorr is building a 1.2-million-square-foot mill on 1,400 acres in Lowndes County, Miss. Groundwork has begun, and the principals hope to complete it in 21 months and be in the business of making rolled steel in sheets wide enough to be used by auto manufacturers. More than a dozen automakers--including DaimlerChrylser, Toyota and BMW--have plants within several hundred miles of the proposed mill.

The new facility is designed to produce 1.5 million tons a year of high-quality, flat-rolled steel, but in a technologically advanced way that will combine several different processes. SeverCorr expects to produce hot-rolled, cold-rolled and coated steel products by the third quarter of 2007.

The plant is a clear shot in the arm to the local area. Approximately 2,000 construction-related jobs will be created during the next 24 months, and nearly 450 people will be on the payroll when the mill is fully operational.

SeverCorr is a partnership between OAO Severstal, Russia's second-largest steel company, which has made news by acquiring steel plants in places like Detroit and Italy, and a team of former steel executives led by John Correnti, the former CEO of mini-mill steel star Nucor. Severstal has taken an 80 percent stake in the equity put up for the transaction, as well as investing in some of the subordinated debt.

"Severstal became completely integral to whole project," said Eddie Lehner, SeverCorr's CFO, in an interview. The new mill will be the Russian firm's "first foray into mini-mill culture," he says, though it has been successful in "integrated" operations--traditional steel plants that use coke ovens, blast furnaces and massive raw material operations. (Minimills, in contrast, have flourished by using recycled scrap steel and other metals to produce sheet and bar steel and light structural steel.)

Another intriguing cross-border aspect to the deal is export credit insurance from Euler Hermes, a European credit insurance firm that commonly provides such programs for German companies. In this case, $227 million of the financing is coming from Germany and is being backed by Euler Hermes, similar to the way U.S. companies' foreign investments are backed by the U.S. Export-Import Bank. SMS Demag AG, a German steel manufacturer, is among the German investors.

The genesis for the transaction, says Craig Reynolds, senior managing director with GE Commercial & Industrial Finance, a unit of GE Commercial Finance, came from previous transactions GE had done in the steel arena. "We've been investing in the steel industry since 1980, and we've stayed with it through five cycles in terms of pricing," Reynolds says.

GE did a transaction in the early 1990s to finance a mini-mill, and the financial advisor to that deal--Global Principal Partners LLC of Cleveland--was also involved with SeverCorr, Reynolds says. An initial meeting with the advisor and John Correnti took place in May 2003.

"We went through a vetting period, and engaged an engineering firm that helped us evaluate the project," recalls Greg Wicander, senior vice president at GE Commercial Finance. "That took some time; we needed to get comfortable with the industry outlook and financial projections. We had to assimilate all of that into our credit process" and get a "sense for what the investor was looking for."

The transaction was unusual in several ways, Wicander says. There will be no conventional "market off-take," a common arrangement in which finished product is presold to buyers. Also, SeverCorr is acting as its own general contractor, bypassing the normal engagement of an engineering, procurement and construction contractor; that will create significant savings.

"In traditional projects, you will have a contracted party who will purchase the output," says Wicander. "Without it, there's a certain amount of risk because you don't know who the customers are, or at what prices they will buy." But he says that GE is "very comfortable that the market will be there," in that the mill will not be a union facility and that its end products will be significant cheaper that those coming from a traditional integrated mill. "It will be the pinnacle of steel manufacturing," he adds.

GE was the agent for the senior financing, taking the exposure and syndicating out the deal to banks and other institutional investors, both in the U.S. and abroad. The export credit financing from Germany was a key piece, and GE worked hard, its financing team says, to sell the German investors on the merits of the mill proposal. "They were very keen on understanding that this was a viable project," Wicander says.

The senior financing, including the export credit facility, totals $440 million over eight years. There is a $50 million revolving loan, and senior and subordinated debt (unrated by rating agencies) in four different tranches that GE says are very similar in risk profile (see table for the full deal structure.) Neither GE or SeverCorr would divulge the interest rates on the debt, though Lehner says, "we obtained favorable financing."

GE launched the deal to select co-agents in April and completed the syndication at the end of June. At completion, the transaction was oversubscribed.

Says GE's Reynolds, "The passion and experience SteelCorr and Severstal brought to the table, combined with our financing expertise in the steel industry, allowed us to create a financial structure that met both the short- and long-term objectives of the new organization." Says Correnti: "GE's industry knowledge and complex structuring capabilities differentiated their approach and provided SeverCorr a strong financial foundation."

By all accounts, Severstal's role was pivotal. "Severstal is an entrepreneurial, intelligently aggressive company," says SeverCorr's Lehner, noting that it has acquired steel companies in Italy and purchased Rouge Steel, an old-line Detroit steelmaker, from bankruptcy in 2003. "They've been very active around the world. Banks, especially the European lenders, had a strong preference for a strategic partner like Severstal in terms of protecting their investment and providing relatively patient capital when compared to the majority of private equity firms."

Severstal is registered to issue debt securities in the U.S., but currently has no American Depositary Receipt (ADR) listing on U.S. stock exchanges.

Lehner adds that "a significant amount of the capital commitments represents contingency funding, meaning that the total capital raise[d] is in excess of the expected capital cost of the project. The remainder is for unexpected events such as an extended operations ramp-up, sustained inclement weather, force majeure declarations and the like."

According to Mike Wagner, executive vice president of marketing for SeverCorr, the site--105 miles west of Birmingham, Ala., and not far from the Alabama line--was chosen for four reasons: 1) its proximity to automotive plants; 2) low-cost electrical power, provided by the Tennessee Valley Authority; 3) the availability of raw materials, scrap metal and other metallics; and 4) Mississippi's status as "an aggressive economic partner."

The mill, in fact, is a direct beneficiary of a state legislature-backed incentive package to attract "strategic" industries. The state and county provided $35 million in grants and loan guarantees of $70 million for the project--money it hopes will be well spent when the first sheets of rolled steel come off the assembly line in two years.

The Deal for SeverCorr ($ in thousands)

Source of Capital                 Amount Raised

Debt
Senior Term Loan -- ECA           227,000
Senior Term Loan -- Non-ECA       163,000
Government Financing               70,000
Subordinated Debt/Junior Capital  106,000
(including vendor financing)

Equity & Grants
Equity & Grants                   256,000
Total Permanent Financing         822,000
Revolving Facility Available       50,000

Source: SeverCorr