Increasing Capital Flows to Africa Corporate Council on Africa

1
Increasing Capital Flows to Africa Corporate
Council on Africa

• Dele Babade
• Sub Sahara Africa Division, Corporate Finance
• 26 February 2004

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Table of Contents

• Perspectives From the Front Line
• Challenges in Structuring Financings for Africa
• Possible Solutions to the Challenges Issues
• Realised Opportunities

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Perspectives From the Front Line
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Perspectives from the Front Line

• Broad Issues In Sourcing Financing For
  Transactions In Africa.
• Access to Financing
• Domestic availability of financing limited due to
  lack of depth in these markets as well as limited
  availability of foreign currency financing  
• Few domestic financial markets match the cost or
  tenor of financing provided by international
  markets
• Commercial and business risks need to be spread
  amongst key partners which includes the financial
  markets. Involvement of financiers adds level of
  risk mitigation/insurance to the FDI sponsor or
  investor

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Perspectives from the Front Line

• Investor Perceptions Of Africa
• One of the riskiest regions in the world to
  invest and trade with
• High level of political uncertainty
• Vulnerable to swings in commodity prices
• Low consumer demand, High local interest rates
• Adverse weather conditions
• Weak and unstable currencies
• Little economic growth
• Questionable commitment to sound economic/
  management policies
• Uncertainty of securing and enforcement of
  contracts

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Perspectives from the Front Line

• Lack of Investor Exposure Track Record
• Foreign investors and lenders lack a track record
  of doing deals or having exposure to Africa
• Challenge is to introduce the countries and
  credits of Africa to international investors by
  bringing understandable and well-structured deals
• Building a consistent and good track record

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Perspectives from the Front Line

• Country Ratings
• Investors are ratings driven
• Ratings provide comfort
• Absence of rating increases provisioning levels 
• Ratings could enable the sovereign ceiling to be
  pierced

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Challenges In Structuring Financings for Africa
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Challenges In Structuring Financings for Africa

• Challenges to Structuring Export Structured
  Trade Finance deals in Africa
• Political Risk
• Governmental influence on private enterprise
• Political immaturity
• Government default on international debt
  repayments
• Leads to
• Un-certainty Over Policy Direction

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Challenges In Structuring Financings for Africa

• Market Risk
• Economic volatility
• Devaluation
• Leads to
• Difficulty In Forecasting Macro Economic
  Variables
• Legal And Regulatory System
• Early stage of development
• Independence of Judiciary
• Issues in creating security
• Leads to
• Significant Contract Risk

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Challenges In Structuring Financings for Africa

• Sophistication Of Local Financiers
• Market can be liquid, but not used to longer
  tenors 
• Leads to
• Inability To Source Long Term Local Funding

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Possible Solutions to the Challenges Issues
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Possible Solutions to the Challenges Issues

• Maximize Local Currency Financing
• Provides natural hedge against exchange rate risk
• Greater appetite for shorter tenors
• Seek to cap local interest rates wherever
  possible
• Local financiers have greater risk appetite

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Possible Solutions to the Challenges Issues

• Direct Funding from DFIs and MLAs
• Development Finance Institutions (DFIs)
  Multilateral Agencies (MLAs) provide medium
  term international funding to infrastructure
  projects without requiring Political Risk
  Insurance (PRI) e.g
• Deutsche Investitions- und Entwicklungsgesellschaf
  t mbH (DEG)
• Netherlands Development Finance Company (FMO)
• African Development Bank (ADB)
• International Finance Corporation (IFC)

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Possible Solutions to the Challenges Issues

• Export Credit Agencies (ECAs)
• Provide commercial and political risk insurance
  to international lenders
• Lending linked to equipment orders
• Working With Local Regulators and Governments
• Communication
• Education
• Transparency
• Careful Targeting and Educating of Investors

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Realised Opportunities
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Realised Opportunities
Citigroup has advised on over US2.5 billion of
financing on African infrastructure projects over
last 36 months
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MTN CAMEROON

• Key Features
• Highly structured and innovative deal in
  Cameroon.
• Local currency facility maximised to provide a
  natural currency hedge given MTNs predominantly
  local currency revenues.

• Market Reaction
• Domestic facility syndicated to Cameroonian and
  Gabonese banks with significant oversubscription.
• Highly structured solution, which gained wide
  market acceptance.

• Firsts
• First Project Finance Deal in the Cameroonian
  market.
• First time ADB and FMO guaranteed a local
  currency facility.

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MTN NIGERIA

• Key Features
• NgN31.1 billion (US250 million), 3 year CP
  facility.
• Fully underwritten facility.
• Short availability period, reduced funding risk
  on banks.

• Key Structuring Benefits
• Structure significantly mitigated refinancing
  risk.
• Backstop in hard currency commitment.
• Liquidity risk only. Not a guarantee.

• Innovations
• Largest ever Non-natural Resources financing in
  Sub-Saharan Africa
• First time ECICSA has provided PRI only on a debt
  facility

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NIGERIA LNG

• Key Features
• US 1 billion Syndicated Senior Secured Project
  Financing Facility.
• Multi-Agency involvement USExim, SACE, SCGD,
  Gerling NCM, AFDB.

• Market Reaction
• The transaction was very well received in the
  underwriting phase.
• The international facilities were successfully
  sub-underwritten after a targeted first phase of
  syndication.

• Innovations
• Largest ever Non-recourse Financing in Nigeria
  in Sub-Saharan Africa in recent years.
• The Largest Financing for a Nigerian Borrower.
• First Major onshore Project Financing in Nigeria.

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SAFARICOM KENYA

• Key Features
• Term Loan OND backed Euro 25 million, 6-year bank
  loan.
• MTN OND-backed KSh 4 billion, 5-year medium
  term note.
• 5 major investors committed over 85 of the issue
  prior to retail distribution launch.

• The Result
• Transaction very well received in the market.
• Financing available within 6 months.
• Maximised local currency availability as a
  natural hedge.

• Innovations
• Largest Longest Tenor ever for a
  Non-Governmental Bond in Kenya.
• One of the First Examples of ECA cover for a Lcy
  Capital markets issue.

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CELL C

• Key Features
• 252 million (equivalent) 9-year multi-currency
  financing Senior Secured Loan.
• Largest Telecom Financing in sub-Saharan Africa
  in 2003.

• Market Reaction
• Successful syndication reflected support for the
  country (South Africa), the exporter (Siemens)
  and the sponsor.
• High levels of credit enhancement from Hermes and
  SACE.

• Innovations
• 100 million Debt Facility for local black
  empowerment shareholder.
• First Hermes/SACE covered Project Finance Deal in
  South Africa.
• First time two South African Governmental
  organisations have supported a Telecom
  Transaction in Sub-Saharan Africa.

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CELL SAF

• Key Features
• South Africa ZAR 900 million Bullet Loan
  Facility.
• Cell Saf equity financing was a precursor to the
  Cell C ECA DFI backed 9 year project financing
  of US 252 million.

• Key Structuring Benefits
• The transaction was very well received in the
  market.
• A limited general syndication phase of the
  international facilities.
• Unique security structure.

• Innovations
• Financing of 40 Equity Stake in the largest
  Telecom Financing in Sub-Saharan Africa in 2003.
• Flagship Black Economic Environment (BEE) deal.