Workshop on Debt Markets: Importance of Debt Capital for Africa

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Workshop on Debt Markets Importance of Debt
Capital for Africa
Moderator / Speaker Mahesh Kotecha,
President Structured Credit International Corp.
(SCIC) Mahesh.kotecha_at_4scic.com 212-605-0123 CCA
Conference on Increasing Capital Flows to Africa
September 29-30 2004, Johannesburg
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We Have a Strong Debt Markets Panel
Have money, will travel Can guarantee, will
travel Know where the money is and please send
a ticket if you want me to travel!
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Objectives

• To recognize the importance of debt capital for
  African financings
• To explore means to raise debt capital
• In domestic debt capital markets
• In international debt capital markets
• SCIC - A financial advisory firm providing advice
  to emerging market clients on credit. My focus
  here
• Credit ratings
• Credit enhancement / risk mitigation
• Importance of local capital markets

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Importance of Debt for Africa

• Commercial debt is considered inappropriate for
  public sector borrowers in HIPC countries by IMF
  / World Bank
• To do so without any concern for the merits of
  the project and the financing is a big mistake
• Because debt is a fundamental component of
  corporate finance
• Most projects combine 20 40 equity financing
  with the remainder in debt
• Debt is available for African projects
• In international capital markets
• In local capital markets
• Constraints are credit quality and require credit
  strategies

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Key Project Finance Lessons

• Projects should be economically viable -- provide
  essential services on an affordable and a
  profitable basis
• Only possible within a framework of sound sector
  strategies, good policy planning and a long-term
  commitment to improving country ratings
• Requires willingness to uphold legal contracts,
  even in adversity
• But poor project economics enhance pressures to
  renege on policy protections , e.g., take or pay
  contracts and commitments to raise rates
• Poor project design / poor public policy can hurt
  (Maylinad)
• Even good documentation cannot offset weak demand
  (Meizhou Wan)
• Poor projects may exacerbate direct / indirect
  public contingent liabilities
• Financial engineering / risk mitigation (PCG,
  PRG, full wrap) can help
• Attract foreign investors, extend maturities,
  reduce costs, etc.
• But no substitute for project fundamentals
• Local capital markets have a key role to play

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What Makes a Project Viable?

• Predictable country risks (with country ratings),
  transparent legal / business environment
• Sound infrastructure sector strategies and
  policies
• Acceptable country risk (could be measured with
  credit ratings)
• Willingness to abide by contracts and enforce
  arbitral awards
• Sound deal economics other speakers will present
  projects
• Experienced and reliable sponsors
• Secure supplies with agreed or acceptable price
  expectations
• Adequate demand at affordable prices generating
  attractive ROI
• Sensible, transparent, affordable PPAs or other
  support payments
• Exit options via IPOs or sale to strategic
  investors or a handover to the government after
  expiration of the concession period
• Adequate local / international financing and risk
  mitigation
• No substitute for sound policies and sound
  project economics

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Ratings Can Reduce Perceived Risks

• 12 African countries rated B or lower
• Unrated African countries could consider getting
  ratings
• 6 rated BB- or higher including four rated
  investment grade
• Benefits of ratings
• Investment grade ratings are necessary for many
  investors
• Even non-investment grade ratings can help access
  capital
• Ratings can expand universe of potential
  investors
• Ratings are an independent opinion of the
  creditworthiness of a country
• Well accepted by international investors in bond
  markets
• Growing use in loan markets, bank regulation and
  domestic markets
• Impose a market discipline on country leadership
• International rating agencies rate both FX and LC
  obligations
• Local market rating agencies are also making
  progress

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B or Lower Rated African Countries
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BB or Higher-Rated African Countries
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Risk Mitigation Can Help Viable Projects

• In mitigating policy and non-policy risks
• With PRI, PRG
• With PCG, monoline or multiline guarantees, etc.
• In extending maturities for domestic and offshore
  debt with maturity and partial credit guarantees
• In reducing currency and interest rate mismatches
  
• Via better FX indexation, liquidity, currency and
  rate swaps
• In attracting a wider investor base and reducing
  costs
• In distributing lenders risks post-construction
  via pooling

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Risk Mitigation Sources
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Risk Mitigation Has Been Used In Africa
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Private Guarantors Must be Attracted

• Instruments
• Full guarantees of principal and interest are
  most common
• Partial guarantees have been provided, especially
  for such ABS as those backed by home equity
  (second mortgage loans)
• Maturity guarantees (to provide certainty on
  maturities)
• counterparty guarantees
• Supply guarantee to cover export performance
  risk
• Requirements vary
• Monolines require a investment grade rating
  before the guarantee (Foreign currency rating for
  FX transactions LC for domestic transactions)
• Multilines can go to lower rated transactions and
  prefer high non-investment grade transactions
  before the guarantee

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Must Develop Public - Private Partnerships
Second loss Protection
Private Financial Guarantee
Bank LOCs, puts, etc.
Recourse to originator
Public Sector Guarantee
Senior/Subordination
Cash Collateral
First Loss Protection
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Need to Develop Local Capital Markets

• Local capital market financings can reduce FX and
  other risks
• Need to develop corporate and municipal bond as
  well as equity markets
• Develop investor base along with better
  regulatory frameworks
• Covering pension funds, insurance companies,
  mutual funds and non-bank finance companies
• Review and improve disclosure standards for
  issuers
• Extend maturities with take out financings and
  maturity guarantees
• Fix local rates with domestic currency interest
  rate swaps
• Develop / improve local credit rating agencies
• Increase transparency and legal basis for
  inter-governmental fiscal and service
  arrangements to promote municipal financings
• Improve currency swap markets to better hedge FX
  risks

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Mahesh K. Kotecha, C.F.A.

• Mr. Kotecha is President and founder of
  Structured Credit International Corp. (SCIC),
  which provides advice on ratings and structured
  financings for emerging market clients. Prior to
  forming SCIC, he was Managing Director of MBIA
  Insurance Corporation, of CapMAC Asia and CapMAC
  and an Alternate Director for ASIA Ltd. His
  previous responsibilities at MBIA included deal
  origination of all types of transactions and
  execution or corporate structured financings.
• He came to CapMAC in 1989 from Kidder, Peabody,
  where he was Director of the Market Analysis and
  Product Development. Mr. Kotecha led Kidder into
  the UK mortgage backed securities markets,
  structured the first public Collateralized Bond
  Obligation (CBO), and advised International
  Finance Corporation (IFC) and Turkey on capital
  markets issues. Previously, Mr. Kotecha worked
  for eight years at Standard Poor's, where he
  was responsible for all ratings based on non-US
  collateral mortgage and non-mortgage. Earlier,
  Mr. Kotecha worked for four years at the Federal
  Reserve Bank of New York and for three years at
  the United Nations Fund for Population Activities
  (UNFPA). Mr. Kotecha holds a Master's degree in
  management from the Sloan School of Management at
  MIT, and a Bachelor's degree in physics and
  engineering from Harvey Mudd College in
  Claremont, California. He is listed in Who's Who
  in America (1992 -). He is a member of the
  Council on Foreign Relations, where was an
  Adjunct Senior Fellow (1999-2002), and of East
  African Development Bank's International Advisory
  Panel. He was also a member the Commission on
  Capital Flows to Africa established by the
  Corporate Council on Africa from 2002 to 2003. He
  is currently a member of the CCAs Task Force on
  Capital Flows and chairs its Debt Sub-Committee.