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

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

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.

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.

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.

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)

(i) Secured Finance: collateral is assigned

(ii) Structured Finance: collateral is assigned and an automatic reimbursement procedure devised.

2. WHAT IS STRUCTURED FINANCE –A definition

Essential Steps:

1. Understand the envisaged physical transaction (draw boxes)

2. Understand the flow of documents (sketch where possible)

3. Understand the envisaged Funds flow (sketch)

4. Identify the key parties and entities involved (including countries and domicile of parties)

5. Assess the risks

6. Identify the mitigants

7. Develop the term sheet

8. Finalise legal documentation

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)

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)

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.

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

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.

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

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

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

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.

Thank You