Presentation on - Aluminium Bahrain (ALBA): The Pot Line 5 Expansion Project Authors: Benjamin C. Esty, Aldo Sesia Jr. Harvard Business Review Case no. 9-205-027 Contents: • Introduction to Case. • Comparison of Single source and Multi source financing. • Advantages and Disadvantages of Multi source financing. • Cost of Financing of both approaches. Done by- 111 Rakshit Jhunjunwala 115 Ankitesh Mathur 211 Manu Shrivastava 301 Balagopal Padmakumar 402 Rishi Bajaj

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PIF Case Presentation - ALBA
Group 1
111 Rakshit Jhunjunwala
115 Ankitesh Mathur
211 Manu Shrivastava
301 Balagopal Padmakumar
402 Rishi Bajaj

2. +
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.

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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.

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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).

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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.

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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.

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Rejection of Sources
Option Reason for Rejection
International 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 expensive
Loans 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.

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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.

9. + 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

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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

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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

12. +
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

13. +
Comparisons

14. + Amount
Single source Multiple source
 Limited  Very huge
 Preferred when relatively less  Used when huge amount is
amount is needed and in short needed.
time.
Time
Single source Multiple source
• Less time consuming • Much time consuming
• Preferred when need • Preferred when quantum
is urgent. and cost of funds are
more important.

15. + Loan spread
Single source Multiple source
 Rises sharply with loan  Don’t increase much with
amount amount.
 Increases more in case of
projects.
Complexity (for borrower)
Single source Multiple source
• Less complex • More complex
• Can be used when fast • Should be used when cost
and hassle free but is of more important and
small amount of finance when expertise is
needed. available

16. Expertise (in case of raising or borrowing
+ company)
Single source Multiple source
 Less expertise needed  More expertise needed
 Costs of expertise also to be
beared.
Negotiating power (for borrowers)
Single source Multiple source
• Very less • More
• Number of sources tends
• Can be used when to create a competition
project have a low among them benefiting
risk rating . the borrower

17. Negotiating power on price and terms (in case of
+ lenders)
Single source Multiple source
 High  Low
 Tends to increase the interest
rates
Decisions of quantum
Single source Multiple source
• Only one source so • Capacity- pricing
only it should tradeoffs for each source
finance . is to be determined and
then the final decisions
have to be taken.

18. + Financing costs
Single source Multiple source
 Usually the lender is in the  Overall usually lower than
dominating position. single source
 Usually higher than multiple
source.
Conflicts of interests and constraints
Single source Multiple source
• Low • High

19. + Additional costs
Single source Multiple source
• Low • High
• Example :
Advisory fees
• Only one source is
Execution fees
there.
Legal fees
Structure, manage and restructure (in case needed).
Single source Multiple source
• Decisions in the hands • Many parties thus a bit
of only one source. complex

20. +
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

21. +
Source of financing Motivations
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
Metals-linked facility The hedging component allow to
decrease cost of debt.
Could be viewed as a competing source
of Capital
ECA Availability
Halo effect

22. +
COST of EACH Approach
 See Excel File

23. +
Thank You