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Generate exec explains rebar manufacturing investment

Generate Capital’s USD 200m investment in a reinforced steel contractor was two years in the making, with the firm using project finance and contracted offtake to create an infrastructure-like investment, Generate’s president told Infralogic.

Earlier this month, Generate announced that the firm, along with co-investors CalSTRS and HESTA, is providing a USD 200m secured loan to Pacific Steel Group (PSG) to back the construction of an electric arc furnace (EAF) micro-mill in Kern County, California. The Mojave Micro Mill is a USD 600m-project in total and would significantly reduce emissions for rebar production, Generate Capital President Bill Sonneborn said.

“We saw an opportunity to create a market,” Sonneborn told Infralogic. “If we could set the standard for steel production in the United States with lower emissions, everyone else will have to follow.”

King & Spalding acted as legal advisor to Generate on the investment, while Mercer Thompson acted as PSG’s legal counsel, Sonneborn said.

The plant, expected to be operational in 2027, will convert locally sourced steel scrap into high-quality rebar to be used in construction projects, according to the announcement. The plant  uses cleaner production methods and will eliminate the need to haul scrap and finished steel into and out of California, the firm says, producing rebar with 85% fewer emissions than traditional methods.

“We are financing the construction of a subsidiary to vertically integrate Pacific Steel, to bring what has been done in Arizona and Utah historically back into California,” Sonneborn said. “There is no steel production in the State of California.”

‘It looks and feels no different than infrastructure’ 

While a rebar production plant maybe not appear to be a prototypical infrastructure asset, Sonneborn said his firm had little hesitation treating it as one. For one thing, he noted, around half of the end customers are building infrastructure such as roads and bridges.

Structurally, the firm used its project finance skills to make an infrastructure-like investment, Sonneborn explained. The plant has a long-term contract with PSG for 100% of the offtake.

“We have fixed-price, volume-certain offtake to make it no different in CPI linkage than any infrastructure project would for a 25-year period,” he said. “So it looks and feels no different than infrastructure.”

Sonneborn also noted that while the loan is at the parent level, it is also secured by the project subsidiary.

“One of the six key pillars that we focus on is industrial decarbonization,” he said. “Steel generates roughly 7 to 8% of global emissions. We are focused on sustainability and doing so at no green premium.”

For CalSTRS, the investment is coming from the California pension fund’s Sustainable Investment and Stewardship Strategies bucket let by Investment Director Kirsty Jenkinson, though CalSTRS does consider it an infrastructure investment, Sonneborn said. HESTA, an Australian superannuation fund for health and community service workers, is making the investment from its infrastructure allocation, he added.

CalSTRS confirmed that its investment is considered infrastructure even though it was made through the SISS team.

“The SISS Portfolio is an opportunistic and unconstrained allocation designed to source and invest in sustainable investment opportunities across the risk-return spectrum from opportunistic infrastructure to venture capital,” a spokesperson for the firm said in an email. The spokesperson declined to reveal the specific allocation amount.

HESTA did not respond to a request for comment.

Sonneborn declined to disclose the distribution of the USD 200m loan between Generate and its two co-investors.

Generate initially proprietarily sourced the investment roughly two years ago, Sonneborn said.

“There were a lot of challenges,” he noted. “Getting anything built in the manufacturing sector in California has its challenges to get permitting.”