Despite the complexity of its intercreditor agreements ? and the Iraq war raging one-hour's flight away ? the bulk of the $1.55 billion financing backing Aluminium Bahrain's (Alba) expansion for its fifth potline was wrapped up without a glitch on 7 April.

Alba proffers both the lender the comfort of a spotless track record and the financing structure allows for an efficient, if involved, pooling of multiple sources of debt.

Two of the five tranches of the $1.55 billion debt package are still pending, but are set to be finalised within the next few weeks, notwithstanding controversy over the fifth portion of debt ? the ECA-backed tranche.

The multi-sourcing is as much about price as debt availability. According to Terry Newendorp, chairman and CEO of Taylor DeJongh, financial adviser to Alba, ?we were convinced early on that if we went to the bank market to place $1.5 billion, we'd get clobbered on the terms. So right from the beginning we thought we'd break it up into distinct pieces.?

The result is five separate tranches of senior debt: an international uncovered commercial bank tranche of $500 million; a $250 million regional Islamic tranche; a metal-linked commercial bank tranche at $300 million; a $200 million local bond issue; and a $300 million ECA-backed facility.

The real intricacy of the deal's engineering lay in harmonising the Islamic loan (one of the Gulf's largest to date) with the other tranches, all on an unsecured pari passu basis, a challenge not lost on the lawyers. Says Nasim Khan, senior associate at Norton Rose, ?the whole premise of the financings was that it was multisourced but without preferential treatment for any lender, in the event of default. It took some effort to work out the agreements.? This allowed international commercial banks to participate alongside Islamic banks without any tension.

But an equally interesting feature of the deal lies in its initial assumptions. At the outset, the argument put to Bahrain's Ministry of Finance and Economy (Alba's principal shareholder) by many regional lenders called not only for ECA cover but also direct sovereign support, as supposedly the only way to win favourable terms.

Not everyone shared this view. It turns out that Alba that already had in place an implicit backstop from its shareholders, the Ministry of Finance and the Saudi Government (through Sabic, Alba's minority shareholder) to buy aluminium to service debt, if necessary. Says Newendorp, ?we argued very strenuously that that was sufficient and that there shouldn't be any additional sovereign guarantees.? Most international banks agreed, and the corporate opted for the unsecured financing on better terms.

The commercial facility is $500 million for ten years. The lead arrangers on this tranche are the Bank of Bahrain & Kuwait, Bank of Tokyo-Mitsubishi, HSBC, Saudi British Bank, National Bank of Bahrain (NBB), Qatar National Bank, Gulf International Bank (GIB), Mizuho Financial Group, National Bank of Abu Dhabi and Sumitomo Mitsui Banking Corporation. There is a step up pricing mechanism in place which starts at 80bp for the first three years, rising to 90bp for the next three years, and to 105 bp for the remaining four. The base ticket offered at the beginning of syndication was $20 million and carried fees of 85bp.

A $300 million metals facility is also in place ? lead arranged by Goldman Sachs and Gulf International Bank ? and was well received in syndication because of its attractive pricing. A hedge mechanism supports the deal based on Alba making financial settlement on its performance on the hedge. This ensures that the facility is parri passu with all other tranches.

The $250 million Islamic tranche is joint lead arranged by ABC Islamic Bank, Dubai Islamic Bank, HSBC Amanah Finance, Riyad Bank, Islamic International Bank, BBK and GIB. Islamic Finance consultants (IFC) of Bahrain advised on this portion of the deal.

The fourth tranche is a local bond issue for $200 million, something pushed by the Ministry of Finance as part of its goal to stimulate local capital markets. It is in the process of being placed by Securities & Investment Company, NBB, NBK BBK and Gulf Investment Corporation, and is expected to be completed soon.

Controversy surrounds the $300 million fifth tranche. The original plan was to use the ECA financing to back the power plant, also a part of the expansion. But since no procurement decision had been made on EPC contractors at the outset of the deal, it was impossible to get a firm ECA commitment by the time the sponsor had hoped to finalise ? at the beginning of this year.

One solution was to use a JBIC import-financing scheme. This option was pursued, but met opposition from European banks ? notably BNP Paribas ? whose credit committee prevented its participation without ECA cover. Given BNP's strong relationship with the Ministry of Finance, BNP's solution was ultimately favoured despite it being ?$5 million more expensive to Alba on an NPV basis than the JBIC option,? claims a banker close to the deal.

The new solution sees BNP Paribas teaming up with HSBC to lead arrange the $300 million ECA element, with French and German export credit support (given the involvement of Alstom and ABB). The debt has a tenor of 15 years ? 12 years plus a 3-year grace period. It is expected to close very soon.

Some point to the relative dearth of international banks on this deal as being a consequence of low pricing and a fair amount of liquidity in the regional market. But it may also reflect a limited international bank appetite for Gulf assets. With more deals in the pipeline, this theory no doubt will be checked soon enough.

Aluminium Bahrain:

Fifth Potline Expansion

Closed: 7 April 2003

Location: Bahrain

Description: Multi-source debt financing backing the expansion of a world class aluminium smelter

Cost: $1.55 billion

Debt: five tranches, including Islamic facility, commercial tranche, local bond issue, metal-linked facility and ECA cover.

Lead Arrangers: BBK, BTM, HSBC, Saudi British Bank, NBB, QNB, GIB, Mizuho, NBAD, Sumitomo; Goldman Sachs; BNP Paribas

Financial Advisers: Taylor DeJongh, Islamic Finance Consultants

Lawyers to Lenders: Baker & Mackenzie

Lawyers to Sponsors: Norton Rose