Abu Dhabi-based Emirates Steel has started talks with banks about refinancing a $1.1bn loan signed in 2010 to fund the development of its Mussafah steel plant.

The company hopes to replace the existing $1.1bn loan that matures in 2017, which is mostly funded in dirhams by regional banks, with a new facility funded primarily in dollars. Preliminary meetings with banks have included the existing lenders and international banks not currently involved in the deal.

The new loan could be reduced in size to around $900m, with some of the debt repaid from the cashflows of Emirates Steel operation. “Banks have been asked to give an indication how long a tenor they could do, as the preference of Emirates Steel is to put in place a longer-term deal,” says one banker involved in the talks. “The refinancing should allow them to lower their borrowing costs, and expand their relationship banks in preparation for funding their next expansion.”

Emirates Steel financing
Phase 1 budget 820
Phase 2 budget 1,500
Total 2,320
Debt 1,600
Equity 720
Debt financing:
Conventional bank loan 733
Islamic loan 367
GHC Sace-backed loan 500
Total 1,600
Source: MEED

“It makes more sense for them to borrow in dollars as almost their entire business operates in dollars, and now they can probably get a better deal than the one they have in place,” says another banker.

A formal request for funding the deal is expected to be sent to banks in August, and Emirates Steel aims to complete the refinancing before the end of the year.

France’s BNP Paribas is arranging the refinancing, which will be a precursor to Emirates Steel looking to raise around $800m-$1bn to fund its phase three expansion.

The existing $1.1bn financing was arranged by France’s Natixis. It replaced a $700m bridge loan from May 2008 that was put in place to fund the start of construction of the company’s phase two expansion, while it waited for financial markets to recover before trying to raise long-term funding.

Emirates Steel declined to comment.