Africa’s economic growth has remained strong despite a global downturn in commodity prices. However, the continent’s infrastructure and development needs are still some US$50bn a year short of what is currently being spent. Where will this extra funding come from? Will banks and ECAs have sufficient appetite to meet these needs? What are borrowers of large capex seeking in terms of long-term funding? GTR gathered a group of export finance specialists on the sidelines of the GTR Africa Trade Finance Week in Cape Town to discuss these and other questions.
- Gabriel Buck, managing director, GKB Ventures (chair)
- Michael Creighton, head of Africa office, Sace
- Wanda Felton, vice-chair of the board of directors, first vice-president, Export-Import Bank of the United States (US Exim)
- Greg Fyfe, head of mining, energy & infrastructure, Standard Bank
- Ed Harkins, head of export credit financing, Fieldstone
- Faruq Muhammad, managing director, head, Europe, Middle East & Africa, structured export finance, Standard Chartered
- Mandisi Nkuhlu, chief operating officer, Export Credit Insurance Corporation of South Africa (ECIC)
- Siyabonga Nxaba, senior advisor (funding execution), treasury department, Eskom Holdings
- Simon Sayer, head, structured trade & export finance EMEA and global co-ordinator, Deutsche Bank
Buck: What are the viewpoints of the people around this table in regard to ECA funding as a form of financing in comparison with the bank market, debt market through the bond market, and project finance? Will the ECAs become more important going forward? How much capacity will the ECAs be able to provide, and with that capacity, given all the regulation that is going on, will the banks be there to take and hold these types of asset going forward.
What is US Exim’s position in terms of country appetite for Africa? I have always viewed US Exim as having very deep pockets: you are either a friend or a foe in terms of the relationship that the US will have with a particular country. My sense is that once a country is on cover then the appetite that the bank will have will always follow the projects that US companies are able to secure.
Felton: I think that is right. Having said that, we do have some concerns in the current environment. Consider the conversations we have been having the last couple of days about currency reserves, volatility and controls and commodity prices. These issues may be short term, but they have the potential to become longer-term problems. This is particularly true of commodity prices to the extent that they hamper government budgets. We have to be mindful of borrowing capacity and debt sustainability. We will look to be as active as possible. We do not have lending caps and are able to finance very sizeable sums, but each opportunity is reviewed on a case-by-case basis. By statute, US Exim financing rests on the ability to find that there is a reasonable assurance of repayment.
If I may jump ahead a little bit, I would like to talk broadly about particular sectors. We have looked at ports, rail and other transportation infrastructure. These sectors are typically very attractive because of their ability to generate hard currency. However, in an environment characterised by global oversupply and demand uncertainty, the question will be whether some of the mines that are projected to come online will actually be developed as currently envisioned or whether they will be scaled back? Will contracts be renegotiated? Will production be halted? Given the scale of projects that are being developed in other parts of the world, what is the competitive outlook? These questions create some uncertainty for us. We think that sector is attractive, but if you are looking at it today, we have questions. But, again, we have a long-term horizon and conditions may change.
Power is an important sector for us, but currency issues are a concern. Even if countries eliminate subsidies, tariffs are paid in local currency. We are looking at how we can address that. Can we fund in local currencies? We offer a hedging product for about 18 currencies. It is mainly available for hard currencies. We are looking at the possibility of funding power transactions in local currencies. Are these markets deep enough for us to be able to buy them without moving the market? We are looking at these things.
I do not have answers for them, but we are trying to be flexible and creative.
Lastly, I think donor money will be important, but take the World Bank as an example. The World Bank requires subordination. By statute, US Exim cannot be subordinated. We are talking to the World Bank – I do not want to get out in front of my skis here – but they seem to have some appetite for being a little flexible on that.
Buck: Which other local currencies are you able to do in Africa?
Felton: It is just the rand currently. We are looking at the possibilities, but, again, we have to think long and hard about how that would work. We are giving it some thought.
Buck: It is a good time to bring Siyabonga in, from a power generation and issuer’s perspective. Can you give an insight in terms of your own requirements, subject to budgetary approval, what yourcapex spend would be like and where you would see the main funding coming from; keeping in mind hard and local currency?
Nxaba: Our funding is still quite large: looking out over the next five years in the region of about R50bn per annum that we would need to raise. We have various sources that we need to tap; there is no single source or market that would be able to accommodate that appetite.
We have made extensive use of the local bond markets, the local capital markets; we have found them to be pretty deep over the years. We have got a bond programme in place, which we access regularly, and we also own the shorter-term space in commercial paper that we issue on an annual basis.
But we source a lot of our funding internationally. We make extensive use of ECA financing, so that has been a big part of our portfolio, but increasingly DFI funding too. There we have got quite a number of transactions that are in the pipeline, which we are negotiating, and it will also go a long way in terms of fulfilling those funding needs that we have.
Another market that we have made use of, but obviously it is not so conducive at the moment, would be the international bond market. We have got three bonds out in issue currently, and we will always communicate to the market that it is a matter of timing and that we will access the markets opportunistically. Broadly speaking, those are the funding sources that we have; we are always looking and always evaluating alternative sources of funding, from non-traditional sources as well, and we have been able to put one or two of those in place.
Buck: When you issue an international bond, what practicalities are there that you take into consideration when looking at converting that back into rand?
Nxaba: As a company we have a policy of hedging all our foreign currency exposure back into rand: we earn our revenue in rand and all our expenses and expenditure are in rand, so any exposure that we have, we have to hedge it back. We are fortunate in the sense that we have relationships with banks, both local and international or multinational banks, who then assist in that process of converting those funds back into rand. We have not faced any challenges per se in the mechanics of doing that, but the market movements have necessitated that we be a lot smarter in terms of how we approach our risk management. In as far as the availability of credit lines, and as far as having partners where we can execute those transactions, we have not struggled with converting those funds.
Buck: To be clear, if you raise a 10-year bond, do you then hedge on a 10-year basis that dollar to rand?
Nxaba: Yes, it would be on a 10-year basis.
Buck: Presumably the cost of doing that now, in comparison to the last five or six years, has increased significantly given the changes in regulatory capital associated with long-dated FX swaps?
Nxaba: Yes, we have seen that there has been an increase in that funding, but, as I said, foreign currency funding is a big and important part of our funding mix, so it is a cost that we have to factor in when we look at our overall portfolio of funding. We monitor it very closely, which is why, as an example, in the international bond space, we will not just issue at any cost; we factor in the actual cost of converting that hard currency into rand, and it is part of the elements that will go into our decision when we make a call on whether or not we should access those markets.
Fyfe: On a related point to Eskom’s strategy to convert back into rand, it highlights the point again that local currency support from ECAs, multilaterals and DFIs, is very important. As an industry we really need to work together with ECAs, DFIs, etc, to try and develop local currency funding programmes. I understand there is concern and a valid point around the depth of some of those markets, but as an industry we simply have to move towards local currency funding from ECAs; from the commercial bank market we need to do whatever we can to try and facilitate that process. That is what the borrowers want, but also, from a risk point of view, that is what the utility borrowers and PPPs actually need.
Muhammad: That is a good point: local currency has become much more of a topic over the last 12 months. I do not know if the ECAs or the Berne Union have had any specific conversations about how we may want to treat the crystallisation clause? The crystallisation is where the challenge comes through, and local currency also struggles, because a lot of the local currency players, the local banks or the regional banks, do not follow the Basel II internal ratings-based (IRB) approach, so they can never price the ECA cover as an international bank could price it. It is a question for Michael, is that something that is discussed or is that even a topic for conversation about how local currency could be dealt with in some of these markets?
Creighton: ECAs, including Sace, have for many years been talking about doing local currency funding, but I would think that it is not that widespread in actual deals done, with certain exceptions like South Africa. Even in the case of Sace, we have issued letters of interest to support rand funding deals, but in the end they were not accepted, and we went ahead doing euro or dollar facilities.
It has not gone ahead for various reasons, but one of the reasons is typically that the value that we bring is the value of the pricing that the international banks bring. As soon as you convert it to a local currency structure, in a country like South Africa where you have got depth in the local financial markets, suddenly the value does not seem as obvious. In the current environment in Sub-Saharan Africa, when we are talking to companies in South Africa, Angola, Nigeria, few of them want to go into a foreign currency exposure over the medium to long term, because of the fear of what their repayments may become. It is very relevant to try and find an ECA-backed local currency funding structure.
Harkins: Clearly from the point of view of affordability, it makes a lot of sense around a local currency, but, as Michael says, you tend to find there is just not sufficient depth of liquidity and not very well developed, if at all, into the bank markets in most of the local currencies outside of South Africa. There is obviously a lot of depth and liquidity in Egyptian pounds and naira, but sometimes there are also FX constraints around that, so that can be a problem. Interestingly, there is also a lot of appetite and depth of liquidity in a lot of these markets, and in pension funds there are a lot of assets and appetite that are locked up there; if there is a way that some structures can be found to access some of that liquidity, that could be a solution. Clearly from a borrower’s perspective, if your income is in local currency it makes more sense to be borrowing in local currency if it is possible.
Creighton: That is an interesting idea in a country like Nigeria, where there is a lot of local currency liquidity; there are many Nigerians who have returned to the country and who want to invest in their country, and there are pension funds and the like looking for investment opportunities. Nigeria is a large country with a large economy, and a government trying to create an environment that stimulates local industrialisation and the development of the local agricultural industry. Given the large resources of local liquidity, concerns regarding the exchange rate, and the high local bank interest rates, one could envisage seeing an ECA-wrapped bond making use of local funds.
Nkuhlu: From a Berne Union perspective it is a topical issue for discussion and consideration, but some of the challenges have been alluded to: that the depth of those financial markets, and some of the infrastructure projects require long tenors, the ability to extend those facilities on a long-term basis might be a bit of a challenge. Companies like GuarantCo specialising in that area have come up with crystallisation clauses. There are certainly lessons to be learned from that to see how ECAs can adapt and be able to support some of the projects on that basis.
Buck: I am going to say something slightly different to what has been said already and I would be interested in your viewpoints: to get an ECA to do a project in local currency for the first time is unbelievably difficult. Ed and I worked on doing that here in South Africa and I think it took us a couple of years. Once you have done the first deal, then it was easy for the market to be able to replicate it. When we were doing that, everybody was saying: ‘You cannot do it,’ there was not the depth of liquidity.
The reason I raise this now is that it is important and it is relevant to other countries in Africa, because here they issue long-dated local currency bonds. Siyabonga, what is the longest rand bond that you as Eskom have raised?
Nxaba: It is up to 2042.
Buck: There is investor appetite for 2042 rand. Fixed rate?
Buck: The issue then is how many other countries in Africa, at sovereign level, issue long-dated local currency bonds? The issue is that there is already investor appetite willing to take long-dated paper against their sovereign. How do you change the investor appetite away from taking their sovereign to taking an export credit facility, which is outside of their country, for a project that is inside their country? That takes an enormous amount of education, both in country, because you need to be sitting with those investors, and with the ECAs about getting them comfortable that the mechanism is there, and you need the mechanism to pay the exporter in the hard currency.
I have to admit, I personally do not buy the argument that there is no long-dated liquidity, or long-dated investor appetite for a lot of these local currencies. I believe that there is not enough energy being put in to find a solution.
Sayer: I agree there is probably more long-dated liquidity in local currencies than banks want to either admit or recognise, but – to be fair to local economies across Sub-Saharan Africa – this is an issue that stumps not just Africa, but the export finance market as a whole. One of the last remaining unresolved issues in export finance is how to design structures that allow institutional investors to fund infrastructure projects on a note, bond or capital markets basis.
The fact is infrastructure projects are not easy to fund on a capital market basis, whether in dollars, euros, yen or in rand, naira or kwanza – it is tricky. You have very
extended drawing periods and you have uncertainty around funding risks, which exporters and borrowers are often reluctant to take on. This issue is not unique to local currencies, but rather a sector-wide challenge that becomes still more complex if you try to do it in a local currency.
The issue is ‘where does the funding come from?’, and this relates to the previous question of whether Africa is short of funding or short of bankable projects. I would argue that funding is available, actually – not just from China, but from other sources as well. That is one side of the equation. The other side depends on the capacity of Sub-Saharan Africa to absorb debt of that magnitude. As things stand today, Sub-Saharan Africa cannot absorb the size of debt required to fill the infrastructure gap – either in hard currency or potentially even in local currency – unless you look at diversifying all the available balance sheets to make that possible. The sovereigns cannot do it alone because there are not enough bankable true project financings, although there are certainly some private company balance sheets. The reality is that the capacity to carry the debt is not sufficient to build the infrastructure quickly enough.
Muhammad: We have seen a change in Chinese funding going into a lot of these sovereign projects: it is moving away from direct funding, which used to come from China Exim at concessional rates, to Sinosure-wrapped financing, which has been funded by commercial Chinese banks. Sinosure itself is opening up; they have upped their limit from US$30mn to US$300mn, where any bank can fund it irrespective of whether it is Chinese or not. Again, that is a move for them to try and shore up more liquidity for Sinosure.
On the sovereign borrowing side, ECA appetite is helping sovereign borrowers, because there is always ECA appetite for all sovereign projects. The challenge in the current scenario is that there is very little appetite for the commercial clean piece on an unstructured basis. Some sovereign borrowers are having a challenge raising a seven-year clean commercial tranche at competitive levels. Even the private insurance market is now looking for more structured transactions.
Certainly in many countries, Sinosure dominates the amount of business that is done in that country. I wouldn’t be surprised if it was as much as 80% of the ECA business in certain countries.
Harkins: I would be surprised if that was the case in South Africa, because they have got a lot less exposure here. One could read into those statistics that because they have got huge appetite in a lot of these markets that if you were a borrower without that much choice, if the only source of funding is China, you are going to take that. When you put it into a market like South Africa where there is a lot of choice from capital markets to one ECA versus another, interestingly Sinosure does not seem to have been quite as successful.
Fyfe: I think that is right; if you look at South Africa specifically I anticipate that Sinosure-backed lending in rand will become very relevant going forward, but your point is a good one Ed. There is a huge amount of funding in the market, a huge amount of liquidity from the capital markets through the syndicated loan bank market, and even the DFIs. There is a lot of capacity from the South African banks and even institutional investors, so there is a lot of rand liquidity. Sinosure-backed rand lending is just one of the potential sources of funding. But I agree that Sinosure-backed funding has become very relevant in the rest of Sub-Saharan Africa. We are seeing Sinosure being much more active, whereas in the past, Chinese funding has been provided on a bilateral government-to-government basis.
Nkuhlu: Sinosure is a leading ECA, but if you group the other ECAs together, they are probably collectively doing the same or slightly more. There are many other ECAs that are quite active: the Japanese ECAs, even US Exim if you look at some of the latest projects, some of the commitments they have put on the table are quite huge. From a South African ECA point of view there is also appetite from our institutional investors to increase their commitments to the rest of the continent.
Creighton: One has to take into consideration that the ECA is often not the driver of the market; it is the exporters and their clients that are the drivers. Certainly in the case of Sace, we try and be proactive in identifying opportunities, but you still have to have your exporter doing the contract, and the Chinese have been very successful in doing that. Most of the other ECAs, as Mandisi said, have still got a strong appetite to do business in the region. Certainly in our case, despite 2015 being a difficult year, we did €900mn of business in Sub-Saharan Africa, which was four times what we did the preceding year. Our pipeline for this year indicates that we could theoretically match – or grow on – 2015.
There are some difficulties and economic challenges, so possibly there will be more debate at one’s credit committee about how much one can support a project in this kind of environment, but there will be good projects being supported by ECAs. As it has been said, there are a lot of initiatives on the go including the multilaterals and ECAs, who are exploring risk-sharing mechanisms amongst themselves. Rather than trying not to do a transaction, it is better to try and support the transaction and then to see if there is some capacity to risk share in the market. I think that will be a dynamic that will play a bigger role.
Buck: At Eskom, how important is it, when you are looking at a new project or a major contract with an EPC contractor, that financing is available associated with them? Is it part of the decision-making process, or have you seen your procurement being driven by the availability of financing?
Nxaba: It is a factor in terms of availability of financing, but the overriding consideration is the technical requirements and the ability to deliver technically on that actual project. Financing is factored into the decision, but if you look at where it stacks up in the evaluation, it is definitely more towards the technical side and the ability to deliver on the project.
Creighton: What is definitely happening is that financing has become an important part of decision making, so maybe the weighting is still strongly in favour of the technical side, but we are seeing that financing is often part of the procurement process. All over the continent, to support our exporters, we have to prepare letters of interest, which then go to potential funding banks to get a supplementary letter of interest and that forms part of the bid submission. They submit the technical solution, together with at least a preliminary indication that financing is available if they are awarded the contract. That combination is becoming more and more important.
Harkins: I think that is exactly right. Having affordable funding available for a project is absolutely critical to enable that project to proceed, because contractors can get a contract signed, but they need to ensure that the funding is in place so that they are paid. It is important for the borrower to ensure that they can afford to buy whatever piece of infrastructure it is; also that the funding that is attached to it is provided in the most affordable, efficient way for that country, so that you get almost an alignment of interest between a contractor and borrower themselves. They both have an interest in ensuring that the project proceeds with the most affordable funding solution.
In terms of South Africa, against the backdrop of a weakening rand, strengthening dollar, potential credit downgrades, etc, I see export credit as being a much more attractive asset class in the next two or three years than perhaps it has been for the last four or five.
Sayer: With regards to China, in terms of the statistics and size of the Sinosure commitment to Africa, I do not think those figures are always strictly tied to export contracts. Historically, Chinese lending was intended to secure natural resources, through pre-payments for oil, copper and ore, and the Chinese export finance system was the vehicle through which to do so. There may have been some roads, ports, or civil infrastructure built, but these projects were not necessarily directly correlated to the value of finance given, which was more concerned with securing natural resources. As things move into a phase where there is more tied equipment and tied contracts required, then we will see the numbers reflect increased involvement by European and western, and perhaps Japanese and Korean, ECAs. Correct me if I am wrong, Siyabonga, but I don’t think Eskom, for example, has been a big user of Sinosure?
Nxaba: We have not used them.
Fyfe: The cost of long-term debt for African infrastructure is going to become more expensive and more capital-intensive for banks to undertake. If we take a three to five-year view we cannot ignore the fact that in an increasingly regulated world, with Basel requirements, etc, the banks’ ability to fund long-term infrastructure through debt is going to be constrained and it is going to become more expensive.
Buck: I look round to the bankers who are based in London; that has been bread and butter to us now for five, six, seven years. I have to admit that regulatory change has not impacted the South African banks, which, in my opinion, have been very open in terms of providing long-dated balance sheet on a project finance basis in a manner that you never see in the rest of the world.
Fyfe: It is definitely changing; we are certainly seeing the change in pricing driven by regulatory requirements. Also our appetite to provide these long-dated facilities and to hold that risk to term is going to change over time with more of a requirement to distribute that risk and not hold to term.
Buck: We have heard a number of times that there are not enough bankable projects in Africa, why do you think that is? Is it that the projects that are currently being looked at are poor projects, or do you think that the aspirations of the issuers and the sponsors are out of sync with requirements, or is it that there are no banks willing to spend time and energy in putting these projects together?
Sayer: All of the above.
Fyfe: There is an element of affordability. If you look at the power sector in particular, our experience in some of our target markets is that a number of the utilities are under significant pressure, so debt facilities directly to those utilities are difficult. Any PPP that has one of those utilities as the principle offtaker also becomes difficult to get your mind around from a risk point of view. The opportunity is there; if you go and speak to clients they have always got a number of ideas; particularly on the public sector side. There are always a number of wishlist projects, but it is an affordability issue more than anything.
Sayer: I want to introduce another factor that hasn’t been particularly prevalent in African financing infrastructures over previous years, and that is credit. Credit has largely been a relatively benign environment for the last four or five years, but that is clearly changing due to the effect of oil commodity prices on the market. I can say, without surprising anyone, that across all the African countries in which we currently operate – across the spectrum of trade products and short, medium and long-term debt – we have delays in every single country.
Sometimes, that is par for the course, and in the past there have been situations that have been remedied very quickly, but now the remedies are not occurring so quickly, the frequencies are increasing, and we have credit departments that are under intense pressure not to increase exposure to markets with delays, or worse, defaults.
Buck: Is that generally due to the unavailability of FX, or the delay in getting FX, or is it a deterioration in the fundamentals of the underlying credit?
Sayer: Yes, it is FX in part; in the past it has been administrative, by which I mean countries that have been in a fortunate position of having money to spend on infrastructure have undertaken a lot, quite quickly, without necessarily having the administrative processes in place to run those loans. That is a very technical one to get around, but it has been a cause of delay in the past. Now, however, it is not just FX; it is a problem of fundamentals with governments and some companies having to prioritise which projects are getting paid.
Nkuhlu: The other element, which affects affordability, is how much of that cost is shared between the consumer and the government, because some of the tariff increases are directed at consumers, and in a struggling economy the bearing capacity of the consumer for that increase becomes a challenge. It becomes embedded into the credit discussion.
Creighton: We have spoken about the big infrastructure projects, the big government-supported projects, but we have not touched on the increasing need within Africa to try and diversify economies away from the one or two large natural resources that the country has relied on. There has been talk of industrialisation of the economies, maybe initially light industrialisation, and the agricultural sector. Typically these areas involve the private sector and SME players and are therefore smaller value transactions which are often more difficult. For example, they can involve small-scale private sector players who want to import machinery in order to convert from being a pure importer to a manufacturer.
Certainly in support of the Italian economy, where the Italian economy is dominated by machinery manufacturers, it is a perfect fit: export of machinery to go into agro processing, agricultural on the land, and also light industry. We see this as a very critical area and a very important area for us to play in. I think we have got a lot more work to do, but we have had some success with about 40 transactions last year in Sub-Saharan Africa purely supporting SME exporters to SME importers. In value terms it is not as impressive, but in volume terms it is, and maybe with the end objective of trying to uplift the local manufacturing sector it requires more support from banks and ECAs.
Harkins: When you look at the big question about where the money is coming from – back to where we started – you have got to look across the spectrum, the huge numbers that are being talked about. You have got to look at bank, bond, ECA, local currency, DFI and multilateral funding, because for these sorts of numbers all of those players, the whole spectrum of investors, are going to be involved to provide the solutions. ECAs are going to be a big part of that, and you need well-structured solutions to make the projects affordable.