On the surface of it, West African trade finance is flourishing. In late September, Ghana’s Cocobod, the state-owned cocoa exporter, issued its annual pre-harvest loan, and managed to raise US$1.2bn, which is a record amount for the borrower, and possibly a record for any soft commodity deal from the continent.

Other stand-out deals include a US$1.5bn loan for Angola’s Sonangol in late September, and a US$750mn loan in July for Kosmos, one of the partners developing the Jubilee oil field in Ghana, which follows a US$2bn loan raised by another partner in the project, Tullow Oil, at the beginning of the year.

But look closer, and it’s clear the West African market is still struggling. Bankers say it still hasn’t fully recovered from the credit crunch, and many bankers say they only expect it to come to life in 2010.
In large part, this is due to global factors, such as western banks’ higher risk aversion, the decline in global trade flows and the fall in commodity prices. Stephen Capon, head of country and credit risk at ACE Insurance, says: “There has been a huge collapse in global trade flows, which are down around 12% year-on-year. It has never fallen by that much in the post-war era. Banks are trying to conserve capital, so there’s less supply of financing, while demand for imports is also down. And this has hit West Africa, where both exports and imports are down steeply across the region.”

The West African region is, in general, dependent on imports for many commodities, such as rice, pork and oil and petrol, as well as for infrastructure equipment. But the cost of imports has risen this year, as local currencies depreciate and foreign exchange reserves dwindle.

Lack of hard currency

Anne-Marie Woolley, director and head of trade finance, Africa, at Standard Bank in London, says: “We’ve seen a drop off in demand for trade finance due to a lack of availability of hard currency in some markets, and a concern among importers about FX risk. The Central Bank of Nigeria’s system of holding FX auctions has changed a number of times this year, and this has made it difficult for importers to predict how much hard currency they could access, plus the naira has depreciated by over 20% this year.”

Ghana’s trade finance market has also been troubled by a depreciating local currency and a lack of FX reserves. This shortage of hard currency liquidity led to the state-owned Tema oil refinery, the biggest refinery in Ghana, being unable to service around US$300mn in debt, and the refinery has been closed for most of the year.

Most of the debt is owed to Ghana Commercial Bank, although foreign lenders like Standard Chartered have also been affected. One banker, a lender to Tema, says off-the-record: “I think the new government was surprised to get elected in January, and came in unprepared. Tema simply ran out of working capital.”

In September, the government finally appointed Ecobank Development Corporation, the investment banking arm of Ecobank, to advise on the restructuring of US$300mn in existing debt, as well as arranging US$300mn in new debt for Tema, and eventually listing the refinery on the Ghana Stock Exchange. Ecobank is, in turn, in discussions with western banks to build a syndicate.

Arjuna Balasingham, head of structured trade finance, Africa, at Standard Chartered, says: “Tema needs financing urgently. Ecobank is in talks with a range of banks, though financing like this can’t be put together in a few weeks. But I’m optimistic it will be out in place this year.”

Pricing surges
Along with depreciating local currencies and a shortage of hard currency, West African markets are having to cope with a decline in supply of foreign bank capital, and rising risk aversion. The best-known African names can still find debt financing, but they are paying as much as 10 times what they paid just two years ago.

Cocobod is a good example. It’s one of the best-known names in West African markets, and has borrowed using the same structure for 13 years. Its annual deal this year has been labelled a “phenomenal success” by all the banks who took part in it, particularly the lead arrangers of Natixis, Standard Chartered, Ghana International Bank and Société Générale.

“The record amount Cocobod raised, and the fact that 29 banks took part in the deal, shows the widespread appetite there is for the region,” says Andrew Kairu, chief operating officer of Ghana International Bank.

At the same time, Cocobod ended up paying 250 basis points over Libor, compared to 16 basis points over Libor in 2007. Few other deals have had price rises that extreme, but bankers say margins over Libor have typically at least doubled on deals.

Angolan state oil company Sonangol, for example, which is one of the biggest borrowers in Africa, managed to raise US$1.5bn from the market in late September, including US$1bn that was solely underwritten by Calyon. But it had to pay 3% over Libor, compared to 1.6% over Libor last year.

Ian Stern, director for structured commodity finance, Africa, at Calyon, says: “Because Libor is at historical lows, borrowers aren’t necessarily paying more than what they have in absolute terms.
“However, in relative terms, margins have clearly gone up, and tenors have come down.”

Some borrowers have not yet adjusted to the new reality of pricing, says Ian Henderson, director at brokerage Texel Finance: “We’re working with a Nigerian client looking for international funding.
“Their perception of the pricing they can get is very different from what foreign banks are prepared to give right now.”

Pulling out of Africa
Banks are also becoming more demanding on deal structures. Arjuna Balasingham of Standard Chartered says: “Banks are looking for structures that are efficient from a Basel II perspective, which means deals secured on existing receivables.”

Complex structures, such as those involving derivatives, are less popular now, says James Willcock, solicitor at DLA Piper: “There’s been a real focus on structured lending secured on actual assets rather than via derivatives. Many banks have dramatically reduced the size of their derivatives desks. Some have gone completely.”

Instead, secured pre-export and pre-payment structures are back in fashion. One example, which both DLA Piper and Calyon worked on, was a US$125mn two-year pre-payment facility for Sonara, the Cameroon mining company, which Calyon sole-arranged in August.

But even with the use of tighter structures like these, some western banks have simply lost their appetite for African risk. Christian Karam, head of the Africa desk at SMBC Europe, says: “A large number of lenders have pulled out of the market, some of which were opportunistic players looking for high yields during the ‘good’ years.

“Other international banks that have been historically active in Africa have had their own liquidity problems and sought government support, forcing them to significantly retrench and limit their lending to emerging markets. This fact has had a tremendous impact on the number of deals being done.”

For example, Royal Bank of Scotland and ABN Amro have historically been active in emerging markets, as has KBC, Fortis, ING, Citigroup and others, all of whom have taken on their respective governments as shareholders in the last 12 months.

Bankers say these banks are less evident in African trade finance at the moment.

However, other banks are taking advantage of this retreat to increase their own market share. The French banks, for example – BNP Paribas, Natixis, and particularly Calyon – have remained active.
Nonetheless, Stern of Calyon says: “Our capacity to lend has continued, but we’ve become more selective of the names with whom we work.”

Standard Chartered is also increasingly visible and active, partly thanks to its strong capital adequacy levels, and also perhaps thanks to the support of a US$1.25bn global trade liquidity programme which it signed with the IFC in April 2009.

Arjuna Balasingham says: “We’ve been in Africa for over 150 years. The total African trade finance market may be smaller this year, but we are taking a bigger proportion of it.”

Chinese banks also appear to be maintaining their commitment to, and appetite for, African commodity deals. Both ICBC and Bank of China signed up to the Cocobod deal, for example, while the China International Fund signed a controversial US$7bn deal in October with Sonangol and the new military junta in Guinea to export bauxite from Guinea to China. China is also rumoured to be interested in buying Kosmos’ stake in the Jubilee oil field in Ghana, although Kosmos says it is close to selling its stake to ExxonMobil.

Meanwhile, some local banks are also increasing their market share. Ghana International Bank, a London bank that is majority-owned by the central bank of Ghana, has increased its trade finance portfolio by 10-15%, according to CFO Andrew Kairu. “Some of the big western players have cut back their credit lines to Ghana. There’s been a bit of a panic following the credit crunch. We remain very liquid, so have been able to increase our presence in the market.” he says.

Some Nigerian banks’ foreign subsidiaries are also upping their activities. First Bank Nigeria’s London subsidiary, FBN Bank (UK), for example, recently hired a structured commodity team, headed up by John Vowell, formerly head of structured trade and commodity finance in London at Nedbank.

He says: “We’re rushed off our feet with deals. It hasn’t quite got to the stage of sleeping in the office, but we’re swamped with business. The departure of some of the biggest western banks from the market has created room for us at the top table.

“Where, two years ago, we would have struggled to sell FBN to borrowers, now we are in a strong position, with excellent liquidity and a good comfort level with African risk.”

Nigerian banks crisis
However, not all Nigerian banks are as bullish as FBN. While the West African market has struggled with exogenous shocks, it is also slowed due to internal factors.
Nowhere is this more obvious than Nigeria, the biggest trade finance market in West Africa.

David Colgan, director of business development at Zenith Bank (UK), says: “The global economic downturn created a scenario where western banks were withdrawing credit lines to Nigerian banks, and for a short period, demand for trade finance exceeded supply. That was short-lived, because soon the overall demand for import and credit shrank. But then the banking crisis happened in Nigeria.”
In August, the newly-appointed governor of the Central Bank of Nigeria (CBN), Lamido Sanusi, dramatically fired the heads of five banks, and pumped in US$2.6bn in emergency capital into those banks, claiming they were far less capitalised than they claimed.

The CBN then undertook an audit, or stress test, of the other main banks in the system, which has only just concluded, with five more banks being named-and-shamed, re-capitalised with state money.
In addition, the CBN has revealed several of the country’s top corporates have defaulted on their loans to local banks, including Dangote Industries and Transcorp.

Most damagingly, governor Sanusi has lifted the lid on the incredibly lax risk management cultures at some of the country’s top banks. As Senator Ayogu Eze told journalists after a Senate briefing by governor Sanusi: “What we used to have in the past was a situation where some people would just walk into a bank and take as much as N18bn (US$110mn) without any security. Some bank executives have used depositors’ funds to procure private jets and even ordered for more.”

The revelations have clearly impacted western banks’ appetite to lend to Nigerian banks.

Karam of SMBC Europe says: “The CBN is moving in the right direction; the big picture is becoming clearer, however, we have yet to ascertain the true financial health of some banks after the rigorous audit they recently had to undertake.”

Sanusi has also demanded all banks report their year-end results at the same time, in mid-December, whereas previously banks’ had much greater flexibility about when they reported.
This is introducing a new level of conservatism for Nigerian banks’ lending, says Colgan of Zenith Bank.

So it’s been a difficult year for West African trade finance, with imports down, debt financing less available, and defaults by some of the biggest names in the market.

However, there is still cautious optimism among bankers that next year will bring a renewal of the market. Balasingham of Standard Chartered says: “While much of the world is likely to experience small GDP growth, I’d expect to see significantly higher growth in West Africa, and higher spending on areas like power and infrastructure.”

“The recent rise in oil prices is only part of it. I also expect a general firming up in commodity prices.”

Nigeria is likely to see a revitalisation of the market once the CBN concludes its audit of the system, assuming governor Sanusi is not assassinated.

Ghana, meanwhile, is set to receive precious hard currency inflows from the Jubilee oil field, once production begins there in 2010. “It will have a very positive impact,” says Kairu of Ghana International Bank.

“Ghana will probably be energy self-sufficient by 2012, so imagine the savings on hard currency and the strengthening of the local currency.”

The region also still has major infrastructure financing needs. “The Nigerian government alone has spent US$15bn trying to upgrade the power sector,” says Zenith’s David Colgan, “and it’s still spending.”
As the market picks up again next year, new players will probably once again look to West Africa for opportunistic deals. But local banks and corporates will no doubt remember which banks stayed committed during the tough months of 2009, and reward them accordingly.