+

PIF Case Presentation - ALBAGroup 1

111 Rakshit Jhunjunwala115 Ankitesh Mathur211 Manu Shrivastava301 Balagopal Padmakumar402 Rishi Bajaj

+Introduction

Aluminium Bahrain (Alba), was planning to add a fifth pot line

Boost its aluminium production capacity to over 60% to more than 8,30,000 tons per year.

Proposed $1.7 billion project

External consultant named Taylor-Dejongh (TDJ) to act as the project’s financial advisor.

The consultant offered various financial options which included a structured corporate credit using as many as five options inclusive of both project and corporate finance.

With the past experience of Pot 4, the company had plans to seek financing from multiple sources.

The company initially worried about the economic situation at that time and they feared if the project would get tainted and hence a diminishing public sentiment.

+Bahrain

Bahrain, as a country was not quite up to the standards in the oil and gas market as compared to other Middle Eastern countries

Energy sector remained the largest contributor to the country’s GDP followed by financial services and Manufacturing ( Aluminium) at 25%, 19% and 12% respectively.

One of the main attractions the Bahrain Government posted was that they did not tax corporate income.

+ALBA

Alba was incorporated in 1968 as JV between the Government of Bahrain, with an original ownership interest of 18% and a consortium of aluminium users.

It was the first aluminium smelter in the Middle East and it began production with two pot lines and a production capacity to over 500,000 tons

Alba had a history of strong credit history, having operated for more than 30 years without default.

The company’s pot 4 project was huge success which added 235,000 tons of annual capacity at a cost of $1.5 billion.

Alba over the years became the largest single-site smelters in the world but also one of the low-cost producers.

The pot line 4 projects saw financing which included a combination of commercial bank loans and export credits plus a small amount of Islamic finance.

It paid debt service out of revenue generated through a quota engagement with its shareholders.

Before the pot line 5 projects were to be set up, the company had to analyse the economic feasibility (Phase 1) and assess their financing options (Phase 2).

+ALBA - Phase 1

TDJ carrying out the economic feasibility study review of the project’s economic feasibility a recommendation on the optimal organizational structure an assessment of the market’s overall ability to finance the project.

TDJ concluded cost of $1.7billion but only if the project was combined with Alba’s existing operations.

Project could not be financed on standalone basis without significant structural changes to the company and therefore the project’s debt had to be paid by Alba’s total cash flow without recourse to the sponsors.

Hence it would be classified as a project finance deal.

However Alba rejected the proposal citing the reason that the deal would be very expensive than a structured corporate credit.

Also, it would have to undergo a major restructuring of Alba’s business model and assets as well as a much larger equity commitment from the sponsors of $500 million or more would be required.

+Phase 2

With the Phase 1 completed, the team proceeded toward phase two for identifying the suitable sources of financing.

TDJ came up with eight viable sources of financing namely, Commercial bank loans Project Bonds( Local or International) Islamic financial instruments ECA financing: direct loans or guaranteed/ insured loans Metals-linked facility: bank loan with repayment either in metal or linked

to metal prices Subordinated debt Private Placement debt Loans from multilateral agencies such as development banks.

+Rejection of Sources

Option Reason for RejectionInternational Bond Price quotes coming in from markets

were high. Also Alba would have to have ratings from different agencies which meant more time is required

Private Placement Spreads were too expensiveLoans from Development Banks Alba would not qualify for a

multilateral loan for pot 5 project considering the past experiences with the pot 4 project

Subordinated Debt Sponsors were not interested in putting more capital into the deal.

+Phase 2

Therefore after eliminating the above stated options, TDJ prepared a financing scenario that used up to five sources of debt: Commercial Bank finance a local bond an Islamic tranche a metals linked facility possibly ECA loans or loan guarantees/ insurance.

The company went into paper works with a proposed financing from multisource financing, thus forming a strategy of creating a competitive bidding process that would give Alba the best deal possible.

+Advantage of multi-source financing strategy

Participating several lenders stimulate competition

More power to negotiate for customer

More safety:-Multi-source finance reduce the dependency of customer on any single lenders.

Low cost as compared to single

+Multi-sourced benefits related to Alba

Local Bond Allow investors to participate in and benefit from the

project. Develop the local Capital markets. Consistent with the government policy

Islamic financing Bahrain is an Islamic country and a regional center for

Islamic finance

+Multi-sourced benefits related to Alba

Metals-linked facility The hedging component allow to decrease cost of debt. Could be viewed as a competing source of Capital

ECA Availability: more easy to be obtained Hallo effect: help sponsors attract financing

+Disadvantages of multi-sourced financing

Complexity: the more parties involved the more difficult the transaction

On going management complicated

Difficult to manage a deal in the event default

For Islamic tranche: the problem of asset ownership

+

Comparisons

+ Amount Single source

Limited

Preferred when relatively less amount is needed and in short time.

Multiple source

Very huge

Used when huge amount is needed.

Time Single source

• Less time consuming

• Preferred when need is urgent.

Multiple source

• Much time consuming

• Preferred when quantum and cost of funds are more important.

+ Loan spread Single source

Rises sharply with loan amount

Increases more in case of projects.

Multiple source

Don’t increase much with amount.

Complexity (for borrower)Single source

• Less complex

• Can be used when fast and hassle free but small amount of finance needed.

Multiple source• More complex

• Should be used when cost is of more important and when expertise is available

+Expertise (in case of raising or

borrowing company) Single source

Less expertise needed

Multiple source

More expertise needed

Costs of expertise also to be beared.

Negotiating power (for borrowers)

Single source

• Very less

• Can be used when project have a low risk rating .

Multiple source

• More• Number of sources

tends to create a competition among them benefiting the borrower

+Negotiating power on price and terms (in case

of lenders)Single source

High

Tends to increase the interest rates

Multiple source

Low

Decisions of quantum Single source

• Only one source so only it should finance .

Multiple source

• Capacity- pricing tradeoffs for each source is to be determined and then the final decisions have to be taken.

+ Financing costsSingle source

Usually the lender is in the dominating position.

Usually higher than multiple source.

Multiple source

Overall usually lower than single source

Conflicts of interests and constraints

Single source

• Low

Multiple source

• High

+

Structure, manage and restructure (in case needed).

Single source

• Decisions in the hands of only one source.

Multiple source

• Many parties thus a bit complex

Additional costs Single source

• Low

• Only one source is there.

Multiple source• High • Example :

Advisory fees Execution feesLegal fees

+

Source of financing Type of financing

Commercial banks loans Financing projects (covenants related to the financial and operating performance to control project cash flows)

Local bond Financing corporations (Dividend paid over the firm cash flows)

Islamic loan Financing projects (project assets ownership)

Metals-linked facility Financing corporations (transaction related to the output)

ECA loans Financing projects

+

Source of financing MotivationsLocal Bond Allow investors to participate in and

benefit from the project.Develop the local Capital markets.Consistent with the government policy.

Islamic financing Bahrain is an Islamic country and a regional center for Islamic finance

Metals-linked facility The hedging component allow to decrease cost of debt.

Could be viewed as a competing source of Capital

ECA AvailabilityHalo effect

+COST of EACH Approach

See Excel File

+

Thank You