System boosts its steel mill investing

Teacher pension goes much bigger

Wednesday, June 18, 2014

The trustees for the Arkansas Teacher Retirement System on Tuesday authorized investing up to $125 million in system funds in the proposed Big River Steel mill near Osceola -- far more than the $60 million originally approved early last year.


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System Executive Director George Hopkins said the increase of up to $65 million authorized for the investment includes $20 million for a contingency fund, $12 million required for a debt service fund, $10 million for secured debt, $5 million for unsecured debt, and $16.91 million for other possible financing.

A German bank required the investors in the project to create a $100 million contingency fund and $60 million debt service fund to provide several hundred million dollars of financing for the $1.1 billion project, he said.

"As things have developed, additional funding requirements and opportunities have occurred," he told the system's board of trustees.

Hopkins noted that the trustees authorized $60 million for the project in February 2013 for the system to get a 20 percent equity stake in Big River Steel LLC. Overall, investors initially committed $300 million for the project.

"Of course, there has been extensive environmental challenges [and] other challenges that have occurred," he said.

Hopkins said the system's staff and system consultant Delta Trust & Bank recommend these additional investments.

He said the additional investments should allow the system to make more money than it could on other investments.

The proposed $1.1 billion steel mill will employ 525 people and the workers will have average annual earnings of more than $75,000, according to steel magnate John Correnti of Blytheville, who heads Big River Steel LLC and is a former chief executive for steel-maker Nucor Corp. of Charlotte, N.C.

Last year, the Republican-controlled Legislature authorized a $125 million bond issue and tax incentives for the project over the opposition of Nucor Corp., which maintains that the presence of a third steel mill in Mississippi County might force it to reduce its work force.

Nucor operates two steel mills near Blytheville in Mississippi County -- Nucor Steel Arkansas and Nucor-Yamato, a joint venture with Japanese company Yamato Kogyo Corp.

After the meeting of the teacher retirement system's trustees, Correnti said he hopes to close financing for the project by the end of this month and probably move dirt July 1 or July 2 "if we close by June 30." He said he expects construction to take 24 months and steel production to begin in July 2016.

The Arkansas Pollution Control and Ecology Commission approved an air permit for the project on April 25 -- upholding a March 20 ruling by Administrative Law Judge Charles Moulton -- after Nucor had challenged the permit.

Last month, Nucor filed an appeal of the commission's ruling in Mississippi County circuit court, and Big River Steel filed a motion requesting the transfer of Nucor's appeal to the Arkansas Court of Appeals. Nucor has filed a federal lawsuit against the U.S. Environmental Protection Agency for failing to object to the Big River Steel permit, and the state Department of Environmental Quality has been notified of Nucor's intent to file a lawsuit under the federal Clean Air Act against Big River Steel, according to department spokesman Katherine Benenati.

Nucor attorney David Taggart of Shreveport could not be reached for comment at his office Tuesday afternoon.

Hopkins told the teacher retirement system's trustees that even though "we have about a 10 percent cushion in the financing" for the project, the German bank KfW is requiring the equity investors to create a $100 million contingency fund in case there are cost overruns and ensure the steel mill is completed "without having to go for some kind of bridge financing, which is also often a lot more expensive."

The system will be required to provide $20 million of the $100 million contingency fund because the system has a 20 percent equity ownership in the project, he said.

The system could have reduced its share of equity ownership by providing only $60 million toward the project, but "we have had the other investors wanting us to give up some of our equity," and that proves this is a good deal, Hopkins said.

He wrote in a report to the trustees that the contingency fund is not expected to be needed as "a large majority of the hard dollar costs of construction have been finalized."

The other investors include a subsidiary of Koch Industries of Wichita, Kan., which has a 40 percent equity ownership in the project and initially committed $120 million toward the project; Correnti and Global Principal Partners, which initially committed $90 million; and Capital Partners, a Greenwich, Conn., investment fund, which committed $30 million, according to officials.

The KfW bank is providing several hundred million dollars for the project and is guaranteeing a large portion of it "so it is not like they don't have an interest in this thing working," Hopkins said.

The bank also wants a $60 million debt service reserve fund to cover about six months of debt payments because it often takes a start-up steel mill a while to make money to pay "all the debt service," he said.

The system's share of the debt service reserve fund will be $12 million, Hopkins said.

These funds will be placed in escrow until used for debt service or returned to the system and the other investors, he wrote in his report to the trustees. The system may be able to substitute a letter of credit or a similar document during this escrow period, so the system's assets are not idle during this period, he wrote. At the end of the escrow period, the $12 million would be needed to honor the system's obligation for debt service at the end of construction.

During negotiations, the system's staff "saw an opportunity to participate in the debt structure of Big River Steel for quality interest returns," and these negotiations led "to cost savings for the project and the opportunity for ATRS to invest in this special project for strong returns instead of bringing in third party mezzanine [or unsecured] debt funds," Hopkins wrote.

The system's staff and consultant Delta Trust are recommending an investment of up to $5 million in the unsecured part of the Big River Steel debt structure, and the investment is expected to yield an investment return in excess of 15 percent a year, he wrote.

They also are recommending an investment up to $10 million in the senior secured debt of Big River Steel, and this investment is projected to yield an investment return in excess of 11 percent a year, Hopkins wrote.

Hopkins said Big River Steel may offer more opportunities for financing equity and debt structure up to $16.91 million from circumstances of cash flow and timing. That $16.91 million probably could go to senior secured debt for the project, he said.

Trustee Danny Knight of Sherwood said this investment is very worthwhile and great for both the teacher retirement system and the state.

But trustee Hazel Coleman of Helena-West Helena abstained from the vote, after lamenting the closure of steel mills in Gary, Ind., and Chicago.

Hopkins said Big River Steel's proposed mini-mill will be an efficient recycling plant that's much different from those old steel mills in the Great Lakes region.

A section on 06/18/2014