Presentation to Southern Africa Roundtable Discussion on Making Finance work for Africa

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• Presentation to Southern Africa Roundtable
  Discussion on Making Finance work for Africa
• INNOVATIONS IN FINANCING SOLUTIONS
• The role of Structured Finance techniques in
  providing incremental access to capital in the
  Southern African region
• May 7-9 2007 Zambezi Sun Livingstone Zambia
• N. Justin Chinyanta
• CEO LOITA Group

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Contents

• The role of Structured Finance techniques in
  providing incremental access to capital in the
  Southern African region
• 1. INTRODUCTION BACKGROUND AND CREDENTIALS
• 2. WHAT IS STRUCTURED FINANCE A DEFINITION
• 3. ACCESS TO CAPITAL IN SOUTHERN AFRICA- SOME
  ISSUES
• 4. ROLE OF STRUCTURED FINANCE IN OVERCOMING
  ISSUES
• 5. SELECTED EXAMPLES OF STRUCTURED FINANCE
  TRANSACTIONS
• 6. CONCLUSION

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1. INTRODUCTION- Background and Credentials

• Loita Group
• A Pan -African merchant and investment banking
  services group
• Regulated by the Financial Services Commission of
  Mauritius
• 300 employees in 14 African locations
• Work with Borrowers (Issuers) Banks and other
  specialized bodies in advising on structuring
  arranging and managing debt and equity issues in
  particularly difficult environments.

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2. WHAT IS STRUCTURED FINANCE A definition

• Features
• 1. What
• The art of transferring risk in financing
  transactions from Parties less able to bear
  those risks to those more equipped to bear them
• 2. How
• In a manner that ensures automatic reimbursement
  of advances from the underlying transaction
  assets
• 3. Critical
• It encompasses a structure whereby certain assets
  (inventory contract export
• receivables projects) with a predictable cash
  flow can be
• -isolated
• -pledged
• -used to support the financing being raised as
  collateral and
• or source of reimbursement.

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2. WHAT IS STRUCTURED FINANCE A definition

• Features
• 4. Structured Finance converts uncertainty to
  some certainty via predictable cash flow thereby
  mitigating risk
• -un-bankable deals become bankable
• -risks are mitigated
• 5. There is always an asset involved
• 6. The asset may be
• -tangible (cash treasury bills/bonds
  commodities marketable securities)
• -intangible (accounts receivable contracts
  rights)
• Both of which may be conditional or
  unconditional.
• 7. The asset must be capable of being isolated
  and pledged (i.e. collateralized )
• 8. Balance sheet of the Borrower is not the key
  factor.

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2. WHAT IS STRUCTURED FINANCE A definition

• Features
• 9. Commodities may serve as collateral via
• -indirect use (e.g. through a SPV issuing bonds
  which are collateralized by commodity assets)
• -direct use
• (i) where commodities are ready and produced
  either via warehouse receipts (which may be
  negotiable-can be traded or non-negotiable-used
  only for the deal) or trust receipts (used to
  enable commodity processing)
• (ii) where commodities not yet ready and
  produced commodities which are in the
  ground/being grown can be used as collateral.
• 10. Differentiation between secured and
  structured finance (per UNCTAD)
• Secured Finance collateral is assigned
• Structured Finance collateral is assigned and an
  automatic reimbursement procedure devised.

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2. WHAT IS STRUCTURED FINANCE A definition

• Essential Steps
• Understand the envisaged physical transaction
  (draw boxes)
• Understand the flow of documents (sketch where
  possible)
• Understand the envisaged Funds flow (sketch)
• Identify the key parties and entities involved
  (including countries and domicile of parties)
• Assess the risks
• Identify the mitigants
• Develop the term sheet
• Finalise legal documentation

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3. Access to Capital in Southern Africa Some
Issues

• SOURCES OF CAPITAL
• OFFICIAL
• -Bilateral
• -Multilateral
• -Other soft sources
• PRIVATE
• -FDI
• - DDI
• -Domestic regional and International Banks
• -Locals savings (pre-eminence of micro lending)
• -International private transfers (diaspora)

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3. Access to Capital in Southern Africa Some
Issues

• SOURCES OF CAPITAL
• Can be grouped into domestic and international
• Risk appetite and issues differ depending on the
  class of investor
• Local sources are primarily
• pension fund institutions (primarily government
  owned or driven)
• insurance companies
• Banks (commercial development and some merchant)
• co-operative societies
• Micro-lenders and investors (including so-called
  sack money-ichilimba)
• Local sources tend to emphasise
• capital guarantees (hence appetite for government
  instruments)
• credit enhancement or guarantees
• Liquidity (ability to exit when they want)
• short tenors
• hedge vs return (foreign currency vs local
  currency returns)
• Quality of issuers or collateral (known names
  where instruments are non-government)

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3. Access to Capital in Southern Africa Some
Issues

• SOURCES OF CAPITAL
• Foreign sources comprise
• - Direct sectorial investors (particularly
  energy telecommunications mining)
• - Portfolio investors via capital markets (the
  usual international institutional players
  primarily fund managers and investment banks)
• - Multilateral DFIs
• Foreign (non DFI) investors tend to emphasise
• a short-term view / exit mechanism (hot money)
• higher risk profile dictated by higher return
  sought
• gain-gain ( high margin rates in a stable or
  appreciating exchange rate regime)
• Convertibility and or lack of exchange controls
• Transparency both in the regulatory environment
  and accounting standards and practices.
• Credit Ratings are key.

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3. Access to Capital in Southern Africa Some
Issues

• THE RESULTING PRESENT DAY REALITY
• tight or narrowly held liquidity (to those who
  have)
• Few market makers (investment banks
  underwriters discount houses)
• Regulatory constraints imposed on banks (capital
  adequacy credit concentration general exposure
  limits)
• a short term investor view seeking abnormally
  high returns
• Little or no financial engineering with high
  collateralisation demands
• crowding out effect of government instruments
  and borrowing
• Government owned development banks and mortgage
  institutions as the principal source of long term
  domestic capital

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3. Access to Capital in Southern Africa- Some
Issues

• THE RESULTING PRESENT DAY REALITY
• In summary
• Demand for credit by micros SMEs first- time
  entrepreneurs potential joint venture
  (empowerment) partners and project developers
  remains unfulfilled
• The same players who are able to provide
  collateral or name or balance sheet have
  access to financing
• On the other hand there is unsatisfied
  liquidity seeking quality assets.

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4. Role of Structured Finance in overcoming Issues

• Structured Finance techniques can help
• 1. IN TRADE FINANCE
• -Control over underlying financed commodities
  can take risk away from first time Borrower
• -Even in high risk political environments where
  there are long term off-take contracts with prime
  off-shore buyers the risks can be structured
  transferred and managed (via SPVs).
• -the nature of proceeds that can be assigned
  make it highly possible for any obligor or entity
  to obtain financing in almost any environment
  (.eg. known transactions include assigned
  proceeds from diamonds sales agents (Guinea)
  fishing royalties (Namibia) flower auction
  receivables (Kenya)net-call receivables in USD
  (Ghana/Nigeria) proceeds of power purchase
  contracts with mining companies (Zimbabwe)
  over-flight receivables (DR Congo Ghana).
• -SMEs entreprenuers with contracts and invoices
  from major institutional buyers can be financed
  via invoice discounting and reverse factoring

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4. Role of Structured Finance in overcoming Issues

• Structured Finance techniques can help
• 2. IN PROJECT FINANCE
• - Project specific risks can be shifted to the
  Sponsor
• - Market risk (e.g. demand and competition) can
  be managed through market access agreements and
  long term off-take contracts
• -Currency / Interest risk can be hedged through
  a financing mix of local and foreign currency
  instruments and the use of of sponsor guarantees
• - Inflation risk can be managed or enhanced
  through linking project tariffs to inflation
• -Non-commercial and non-project specific risk
  such as country risk (exchange controls force
  majeur) can be enhanced by usual tools such as
  -Project revenues being paid directly into an
  off-shore escrow account
• - Political risk insurance (with buy-out
  clauses)
• - Donor backed guarantees on financial
  instruments

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5. SELECTED EXAMPLES of Structured Finance
Transactions

• Loita Group Credentials in Structured
  Finance-recent examples
• Zimbabwe Advisor and Lead Arranger USD 100
  million Structured Export Finance for Oil imports
  to the Reserve Bank of Zimbabwe
• Swaziland- Advisor and Lead Arranger for the
  first ever E 50 million Structured Commercial
  Paper Facility for Inyatsi Corporation in joint
  venture with SIDC
• Nigeria Lead Advisor for USD 50 million
  Structured Bond Issue (against securitized
  receivables) for top hotel group guaranteed by
  three top banks
• Zambia Exports Fund of Zambia Limited USD 100
  million structured debt and equity fund for SME
  exporters Sponsor with Exports Board and Fund
  Manager
• Tanzania East African Development Bank Tsh 15
  Billion 7 year Capital Market Bond Issue

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6. CONCLUSION

• Structured financing techniques can assist the
  Southern Africa region in increasing the
  availability of and access to capital
• The changing dynamics of the market dictated by
  demand requires that banks and other providers of
  capital examine more carefully how they can
  participate
• The donor community DFIs and other co-operating
  partners should consider ways in which they can
  provide credit enhancement particularly to the
  banks and to capital market instruments which are
  issued independent of the banks
• Financial intermediaries can play a key role in
  disseminating best practices pertaining to
  structured finance and thus stimulating demand
  and supply.

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Thank You