Emirates Steel Cuts Banks, Pricing As Loan Oversubscribed

Abu Dhabi’s Emirates Steel has cut around half the banks who applied to fund its $1.3 billion loan and dropped the margin by around a fifth after the facility was heavily oversubscribed, banking sources said on Tuesday.

The loan, which refinances an existing $1.1 billion facility and raises cash to purchase assets from parent Abu Dhabi’s General Holding Corp (Senaat), attracted commitments from lenders worth more than $5 billion, three of the sources said.

This level of demand has allowed the borrower to reduce the margin it will pay on the loan from around 200 basis points over the London interbank offered rate (Libor) to around 160 basis points over the benchmark, the sources said, speaking on condition of anonymity as the information isn’t public.

Emirates Steel declined to comment.

While the interest rate earned on the loan by banks will be topped up by fees, the fact Emirates Steel could drop the margin so significantly is a sign of both the quality of the borrower and the substantial liquidity in the Gulf loan market.

“The response was overwhelmingly good, especially from international banks,” said one local banking source. A second banking source added the lower cost of their funding allowed the foreign banks to drive the price down.

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 to reduce its funding costs – a step it will achieve as the existing deal pays 250 basis points.

Around 30 lenders were invited in January to participate in the loan but only around half that number will end up in the final deal, according to two of the sources. Banks in the final deal come from the Gulf, as well as Europe, the United States and Japan, one of them said.

While scaling back lenders is common practice when a deal is oversubscribed, the fact Emirates Steel asked for bids that had already been approved by banks’ credit committees will leave a lot of frustrated bankers at cut institutions.

Often in loan deals, banks will reply to an invitation from a borrower indicating whether they would like to participate and how much money they will offer, only getting sign-off internally for the transaction at the end of the process.

On the Emirates Steel transaction, banks were asked to have this internal approval already secured when replying. At this initial stage, $5.4 billion was pledged, with $3.7 billion of commitments still on the table once the margin was cut, the third source said.

“If you go to committee and get the approval, and do all the hard work, then it is going to be embarrassing for a lot of bankers to not be in the final deal,” said the second banking source.

The loan has an eight-year lifespan and an amortising structure. This requires both interest and principal to be repaid during the lifetime of the loan, as opposed to a bullet facility where only interest is paid during the tenure.