Group 1.

PIF Report: ALBA REPORT

Subject: Project Infrastructure Finance (PIF) Course: MBA Tech. (Finance) College: Mukesh Patel School of Technology Management and Engineering,NMIMS Mumbai Group 1: 111 Rakshit Jhunjunwala115 Ankitesh Mathur 211 Manu Shrivastava301 Balagopal Padmakumar 402 Rishi Bajaj Case Study: 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.

Group 1. PIF Report: ALBA About the case- an Introduction

Aluminium Bahrain (Alba), was planning to add a fifth pot line to boost itsaluminium production capacity to over 60% to more than 8, 30,000 tons per year. With regards to this, the company was reviewing various financial optionsfor the proposed $1.7 billion project. The company has hired an externalconsultant named Taylor-Dejongh (TDJ) to act as the projects financial advisor. The consultant offered various financial options, which included a structuredcorporate credit using as many as five options inclusive of both project andcorporate finance. With the past experience of Pot 4, the company had plansto seek financing from multiple sources. The company was initially worriedabout the economic situation at that time and they feared if the project wouldget tainted and hence a diminishing public sentiment.Bahrain, as a country was not quite up to the standards in the oil and gasmarket as compared to other Middle Eastern countries, but over the years energy sector remained the largest contributor to the countrys GDP followed by financial services and Manufacturing ( Aluminium) at 25%, 19% and 12%respectively. One of the main attractions the Bahrain Government posted wasthat they did not tax corporate income. Alba was incorporated in 1968 as JV between the Government of Bahrain, withan original ownership interest of 18% and a consortium of aluminium users. Itwas the first aluminium smelter in the Middle East and it began production withtwo pot lines and a production capacity to over 500,000 tons and expandedinto several downstream and related businesses such as the production of calcinated coke, which was required to make anodes for smelting process. Alba had a history of strong credit history, having operated for more than 30years without default. The Government ownership rose to 77% and SABICIndustrial Investment Co and Breton Investments owned 20% and 3% respectively. The companys pot 4 projects was huge success which added 235,000 tons of annual capacity at a cost of $1.5 billion. Alba over the yearsbecame the largest singlesite smelters in the world but also one of the low-cost producers. The pot line 4 projects saw financing which included acombination of commercial bank loans and export credits plus a small amount

Group 1. PIF Report: ALBA of Islamic finance. It paid debt service out of revenue generated through aquota engagement with its shareholders. Before the pot line 5 projects were tobe set up, the company had to analyse the economic feasibility (Phase 1) andassess their financing options (Phase 2).TDJ, the hired external consultant was entrusted with the duty of carrying outthe econom ic feasibility study, which entailed a review of the projects economic feasibility, a recommendation on the optimal organizational structure and an assessment of the markets overall ability to finance the project. TDJ concluded that the project was economically feasible at a cost of $1.7billion but only if the project was combined with Albas existing operations. They

commented that the project could not be financed on standalone basis withoutsignificant structural changes to the company and therefore t he projects debthad to be paid by Albas total cash flow without recourse to the sponsors. Hence it would be classified as a project finance deal. Since the project wouldbe supported by multiple assets, namely the cash flows from the Pot Lines 1 to5, the financing may resemble a corporate finance. However Alba rejected theproposal citing the reason that the deal would be very expensive than astructured corporate credit. Also, it would have to undergo a major restructuring of Albas business model an d assets as well as a much larger equity commitment from the sponsors of $500 million or more would berequired.With the Phase 1 completed, the team proceeded toward phase two for identifying the suitable sources of financing. TDJ came up with eight viablesources of financing namely,1. Commercial bank loans2. Project Bonds( Local or International)3. Islamic financial instruments4. ECA financing: direct loans or guaranteed/ insured loans5. Metals-linked facility: bank loan with repayment either in metal or linkedto metal prices6. Subordinated debt7. Private Placement debt