Bank of China contributes to a $40 billion USD syndicated loan to Rio Tinto for the acquisition of Alcan

Project narrative

On July 12, 2007, a syndicate of four banks — mandated lead arrangers and underwriters Credit Suisse, Deutsche Bank AG, The Royal Bank of Scotland plc (RBS), and Société Générale (SocGen) — entered into a $40 billion USD syndicated facility agreement with Rio Tinto plc (the England and Wales-incorporated branch of Anglo-Australian mining group Rio Tinto Group) and its subsidiaries Rio Tinto Finance plc and Rio Tinto Canada Holding Inc. — a Canadian-incorporated special purpose vehicle (SPV) and indirectly wholly-owned subsidiary of Rio Tinto plc — to finance the acquisition of a 100% stake in Canadian mining company and aluminum manufacturer Alcan Inc.. This loan consisted of four tranches: a $15 billion USD term loan tranche known as 'Facility A' with a maturity period of 364 days with a one-year extension option and an interest rate of LIBOR plus an initial margin of 22.5 basis points (bps), a $10 billion USD revolving credit facility (RCF) tranche known as 'Facility B' with a maturity period of three years and an interest rate of LIBOR plus an initial margin of 27.5 bps, a $5 billion USD RCF swingline tranche known as 'Facility C' with a maturity period of five years and an interest rate of LIBOR plus a margin of 32.5 bps, and a $10 billion USD term loan tranche known as 'Facility D' with a maturity period of five years plus one day and an interest rate of LIBOR plus a margin of 32.5 bps. The margins were dependent on a ratings grid of the borrower as determined by Moody’s and S&P, with the margins increasing 5 bps for every worse rating. Facility A and D were to be repaid on the termination of their respective 364-day and five-year and one business day maturities and were not eligible for reborrowing. Facility B and C would cease to be available one month prior to their respective 3-year and 5-year termination dates. All loans under Facility B and C were to be repaid on their respective termination date, the termination dates to be determined by reference to the date of first utilization In July 2007, Mizuho Bank joined the loan syndicate with an underwriting amount of $2.5 billion USD. Bank of China joined as a co-arranger (Lead Arranger) and underwriter. Sub-underwriting was completed on August 30, 2007. General syndication was launched on or around November 26, 2007, with banks offered tickets of either $350 million USD as arrangers or $200 million USD as co-arrangers. Approximately 25 lenders (including Bank of China and Mizuho Bank) joined the deal in syndication. This was the largest loan facility ever raised by a UK corporate and the fourth largest worldwide.. The proceeds were to be used to finance or refinance, directly or indirectly, the consideration used the purchase of all of the issued and outstanding common shares of Alcan for $101 USD per common share in an all-cash transaction made by Rio Tinto Canada Holding Inc. for a total consideration for Alcan common shares of approximately $38.1 billion USD (£26.18 billion GBP). Facility B and C were also made available for general corporate purposes of the merged group. Alcan had interests in six bauxite mines and deposits, five alumina refineries, and 21 smelters around the world. In Australia, these included a bauxite mine and alumina refinery at Gove in the Northern Territory, a bauxite mining lease on the Cape York Peninsula in Queensland, a 41.4% interest in the Queensland Alumina Limited refinery in Gladstone, Queensland, and a 51.5% interest in the Tomago aluminum smelter in New South Wales. Rio Tinto agreed to buy Alcan in early July 2007. The merger was planned to create a new Montreal-based company called Rio Tinto Alcan. The deal was expected to close in the fourth quarter of 2007. On November 8, 2007, it was announced that Rio Tinto had acquired about 98.1% of the common shares of Alcan, allowing it acquire the rest through compulsory acquisition. On November 14, 2007, Rio Tinto Canada Holding Inc. acquired all common shares of Alcan not already owned, marking the completion of the acquisition. The debt used to finance the acquisition caused Rio Tinto financial distress. While it turned Rio Tinto into one of the world's biggest aluminum producers, by early 2009 the price of aluminum had fallen to $0.70 USD per pound, well short of the estimated $1.10 USD per pound needed to make Alcan minimally accretive. Furthermore, the debt was taken during the commodities bubble, which popped in 2008. With lower prices and a halt to Rio's selling of its non-core assets, its means of repayment became constrained, with the burden of the sheer volume of debt especially problematic. To reduce its net debt by $10 billion USD in 2009, with refinancing unattractive due to the low interest rate (refinancing would lead to a higher one), Rio Tinto began to laid off workers, lower its capital expenditure, attempting cost savings, and selling attractive core assets. In November 2010, a syndicate of banks entered into a $6 billion USD loan agreement with Rio Tinto that refinanced remaining debt from the $40 billion USD loan. To keep itself afloat, in March 2009 Rio attempted a deal with Chinese state-owned Aluminum Corporation of China (Chinalco) for a $20 billion USD (£12 billion GBP) injection, financed by Agricultural Bank of China (ABC), BOC, the Export-Import Bank of China, and China Development Bank (CDB) (Record ID#50022, #96191, #96192, and #96193), but it was cancelled. Rio shareholder's recapitalized the company with a $15 billion USD rights issue. By February 2011, debt had fallen dramatically and revenue had increased thanks in part to rising iron ore prices, even if the Alcan deal still weighed negatively on teh company. Rio's debt stems mainly from the $40bn facility it secured in 2007 for the takeover of Alcan, a Canadian peer. Of that, about $34bn is outstanding. As well as the tranche due in October, a further $10bn matures in October 2010 and $15bn in 2012. The loan was underwritten by Credit Suisse, Deutsche Bank, Royal Bank of Scotland and Societe Generale. About 25 other lenders joined the deal in syndication.