House Approves Govt. Guarantee for Cap Loan

The House of Representatives, yesterday (November 7), approved a Government guarantee for a US$200 million loan, to be raised by Clarendon Alumina Production (CAP) on the international capital market.
“The proceeds will allow CAP to meet its financial obligations and put it in a position to contribute in terms of the expansion programme, which is envisaged for the Halse Hall Plant,” Finance Minister, Dr. Omar Davies explained to the House.
“CAP has retained the services of Bear, Stearns & Company through a competitive process, to assist in securing funding on the international capital market,” he said, adding that Bear, Stearns & Company had arranged a long-term fixed rate facility for US$200 million, which they would fully underwrite.
Minister Davies said the bauxite company had suffered drops in production and profit levels, due to cyclical market conditions in the late 1980s and early 1990s and the 1991 collapse of the Soviet Union, which resulted in significant reductions in world aluminum prices.
“This resulted in losses in the immediate years following the collapse. Since then, the company (CAP) has had to face a number of challenges, which have impacted negatively on its financial performance,” Dr. Davies said.
The Minister further informed the House that the company now faced significant debt obligations after securing two major loans in 2001, both amounting to US$125 million, and that the guarantee approved would go a far way in returning the company to profitability.
According to Dr. Davies, CAP remained an important asset to the Government and the company had developed an action plan to this end.
The tenets of this action plan, Minister Davies said, included strategies “to refinance the debts with the objective of extending the average life of the liabilities, reducing debt servicing payments and releasing currently encumbered reserved funds”.Dr. Davies said there were also plans to “hedge future alumina sales to the maximum extent possible, to provide downside protection”.
Hedging is a financial strategy taken by a firm to protect cash flow by establishing a line of credit that can offset possible cost overruns or failure of a client to pay for goods received.
For example, he said, “compared to a projected price of US$206 per tonne for 2006, the average price for the next two years will be US$235 per tonne, translating, all other things being equal, into increased cash flows of US$40 million for the company over the period”.
Outlining how CAP would use the net proceeds from the US$200 million facility, the Finance Minister informed that, “first, there will be a redemption of the existing bonds which are at a high interest rate and this will account for approximately $70 million. Then there is the repayment of an advance, which has been made by the Accountant General for $20 million.
There is a repayment to Alcoa, which is for $18.6 million, a repayment to The Bauxite and Alumina Trading Company of Jamaica Limited (BATCo) of $14 million and there will be working capital of $72.5 million for 2006 and 2007”.
The terms of the loan, Minister Davies said, included “a five-year moratorium, amortized with 21 equal payments and consecutive semi-annual payments beginning in year five. The interest will be payable semi-annually”, and added that the interest rate would be less than nine per cent per annum.
CAP was created as a strategic response to the closure of JAMALCo refinery in 1985 by its owner Alcoa Minerals of Jamaica (Alcoa), saving hundreds of jobs in the bauxite aluminum trade and ensured continued foreign exchange earnings when the bauxite was scarce in Jamaica.
“After the period when CAP operated the facility.there was an upturn in the international alumina market, and Alcoa indicated that it wished to return as part owner,” Minister Davies informed the House, adding that new ownership arrangements were negotiated between the Government and Alcoa, which resulted in Alcoa’s equity being reduced to 50 per cent in a joint venture agreement, while the Government’s equity increased to an equal 50 per cent.