Great hope of the last frontier
South Africa’s trade and export finance community is steadily stretching out its tentacles, writes Kevin Godier. With margins eroded in other regions, Africa is seen by many as the ‘last frontier”.
South Africa’s economy has benefited in 2006 from relatively strong global economic growth, high commodity prices, and an expansion of manufacturing output that has provided a healthy component of new export growth for banks and insurers.
On the export side, the three markets of Zambia, Tanzania and Angola are providing significant new business for Credit Guarantee Insurance Corporation (CGIC), says the short-term insurer’s general manager, export division, Ismail Dadabhay. “Zambia is importing lots of mining equipment huge quantities of product related primarily to the mining sector, while we have just opened cover on Angola, which is growing quickly, albeit from a very small base,” he observes.
The growth and opening up of the South African economy in recent years has been matched by the country’s banking community. “A lot of South African corporates are looking overseas to access capital, and South African banks are responding as part of an overall drive to raise their game,” says Dermot Quinn, responsible for global markets products at ABN AMRO’s Johannesburg office.
Showcasing this trend, Nedbank Capital joined forces with ABN AMRO in late November to offer its corporate clients better access to international capital markets. Other alliances have been formed by Rand Merchant Bank (RMB) and by Standard Bank, while the largest overseas tie-up involved Absa’s sale of a majority stake to Barclays Bank in July 2005.
According to Jeff Midzuk, Absa Capital’s regional head of investment banking, Africa, the Barclays merger has provided a unique fusion whereby “we can combine our local franchise in Sub-Saharan Africa with the global and product expertise at Barclays Capital, enabling African clients to seamlessly tap capital markets transactions”.
This will help with a handful of key Sub-Saharan project financings lining up. Absa Capital holds the mandate for Songas’s debt refinancing in Tanzania, was on the cusp of finalising an unspecified deal in Mozambique as GTR went to press, and is on the shortlist for the long-awaited Kudu gas-to-power scheme.
It is also advisor and debt arranger for the Bermuda-registered CIC Energy Corporation, which is shaping up for an estimated US$5bn 3,600MW coal-fired power plant in Botswana, the Mmamabula Energy project. Scheduled to reach financial close in 2007, the project will require some US$3.5bn-US$4bn in debt, much of this denominated in South African rand, and will reach out to providers in both the export credit agency (ECA) and development finance institution communities.
On the commodities side, international banks such as BNP Paribas, Fortis Bank and Macquarie Bank have moved in to set up structured trade finance units in Johannesburg or are in the process of doing so.
These developments are all part of a pattern whereby South Africa is becoming more of a finance hub for Africa, says Maarten van Alkemade, director of trade finance at Standard Bank. “In the past, there was lots of deal-by-deal suitcase banking out of London and Paris. Now much more is being done from Johannesburg. We have seen that with Barclays, where lots of the bank’s African exposure is now routed via South Africa.”
Integration is a strong theme at Standard Bank, whose London office would once focus mainly on large accounts in Africa. “Now the business is all connected, with deep links between our 17-18 offices in Africa, and Johannesburg more of a financial gateway looking out at the continent,” says van Alkemade. “This is a natural evolution, that makes best use of South Africa’s people and knowledge, and of a national financial authority that has loosened many of the foreign exchange restrictions of 10 years ago.”
Van Alkemade argues that “Africa is now the last frontier” for some banks that have seen their margins eroded in other emerging markets regions around the world. “People had forgotten Africa to some extent, but are now being drawn in by stable margins and a wealth of export-import business. Our business will grow significantly in the coming years,” he predicts.
The advisers for the Mmamabula scheme also include Investec Bank, mirroring the extent to which South African banks have moved out of their home market to support trade and investment flows. “As the South African economy has maintained its traditionally strong focus on commodities and mining, two or three South African banks are now very focused on trade and structured commodity trade finance,” notes Ian Henderson, who runs the southern hemisphere office for Texel Finance near Sandton, Johannesburg.
“New players are undertaking studies and prospecting in the mining region spanning the Democratic Republic of Congo (DRC) and Zambia, some of these springboarding from Zambia, and others setting up in South Africa,” Henderson underlines. “Some of these want to look at finance arranged from South Africa, although others – Canadian companies for example – use their own domestic financing hubs.”
A particularly active player in the structured commodity trade finance market is RMB, whose head of structured trade finance (STF) Dwight Snyman reports several strands to his bank’s strategy. Having begun STF operations four-to-five years ago by financing maize exports from South Africa, RMB has found niches in markets such as Brazil and East Africa, and now has a book of which around 90%-95% of exposure is to commodity deals.
“A key driver here is my unit’s very close proximity to RMB’s fully-fledged commodity trading desk, which deals in base metals, energy and soft commodities,” says Snyman, who describes most of RMB’s STF deals as falling within the US$5mn-US$20mn bracket. .
China’s demand for metals and minerals represents another significant trend for locally-based commodity financiers, points out Deon Coetzee, Absa Capital’s head of global trade and commodity finance: “Africa is in need of capital – and Asia is in need of strategic commodities. There have been some deals, notably in Zambia, where they tied up these different needs.”
According to Luendran Pillay, transactor, project finance at RMB, mining is now the key sector in a booming African project finance market. “There is lots of junior mining activity out of South Africa, and a tremendous exploitation of the commodity boom in terms of equity and project financing. Capital flows for companies that are mining Zambian copper, platinum and other metals have increased by around 10 or 15 times more than five years ago.”
Pillay says that mining finance has come largely from South Africa, but that the market is “now more difficult from a banking perspective than at any time in the last 20 years, with even hedge funds having moved in.”
He notes that some European banks have stretched lending tenors out to 10 years – well past the typical five-to-seven-year mining sector maturities. “European banks can get their money at cheaper rates, but the South African banks have location and history in their favour, as well as the support of the South African government, which is very important when times become tough again.”
Aside from mining and energy, telecommunications and media technology are playing a big part in what Midzuk terms as a “renaissance of African projects, after a period when foreign sponsors left the continent”.
To build out telecoms network expansions, “there is a need for syndicated loans, bond issues and merger and acquisitions financing”, he observes. Aircraft finance – for carriers in Ethiopian, Kenya and South Africa – is another string to Absa Capital’s bow. “More challenging, but no less important, is the demand for infrastructure such as roads and transport, water and sanitation,” Midzuk stresses.
China’s growing influence in Africa is one of the biggest stories. One South African banker says that the trading links between China and South Africa have become so large that concentration risk has become a major concern for banks in South Africa. “Exports to China now account for around 40% of African trade. The demand for cement and steel from South Africa has been enormous as the Beijing Olympics are approaching. We haven’t yet found that the margins on this business are too low – it is more a fear that this will become a permanent stream of business, with larger and larger single payments involved.”
Another banker, Nedbank’s Steve Meintjes, head of correspondent banking, highlights a pattern where multinationals like BMW and Volkswagen that manufacture in South Africa and sell to Asia are moving away from documentary credit payments to open account terms. “In the past, the trend was that open account trade was likely to be Europe-oriented, while trade with the Far East was generally documentary based,” he emphasises.
Standard Bank executives contend that a new paradigm has emerged here. “During the past year, we have seen an increase in open account business that is more than double the increase in letters of credit (LCs) and collections, itself in double figures,” says Sarel Cilliers, director international trade services.
This is directly attributable to the closer relationships between importers and exporters, which obviates the need for LCs or collections, he says, adding that imports into Africa from markets like Nigeria are nevertheless still generating heavy volumes of LC-based trade. “The majority of LCs issued by South African importers are still to China, India and other countries in the Far East,” he says.
“We are at the end of an era of opportunistic trade, with partners that are unknown,” underlines Van Alkemade. “People are cutting back on a variety of partners and looking for one distributor only for their local buyers, which cuts the potential for default right back. The same applies to finance – old open-ended balance sheet-based lending facilities are being replaced with structured, transactional and secured finance, hence the transformation of old-fashioned trade finance departments into STF lenders.”
“Everything is now very dedicated along the supply chain – including the buyers, the producer, the transportation and the collateral manager,” he adds.
Basel II impact
Enhancing these trends in 2007 will be a dry run among most major South African banks of Basel II, under which general banking facilities, and open, clean credit will be less attractive than highly structured deals backed by collateral, note bankers.
“Much less solvency is required, and all the South African banks are more or less on the same train with this,” says van Alkemade.
Meintjes also flags up South Africa’s role as a portal into the African continent, and Nedbank’s “policy of following our clients into different regions”. He says: “Africa isn’t a basket case, there have been no real payment problems since the late 1990s, and risks can usually be covered. If the client is a large company, we will be there as a partner from the outset.”
Nedbank’s strategy is to “try to get the banking route from payment to payee as short as possible”, says Meintjes. In markets where Nedbank has a presence, such as Lesotho, Malawi, Namibia, Swaziland and Zimbabwe, the payments flow remains within the network. Elsewhere it attempts to maintain a relationship with several correspondent counterparties in each country, setting up credit lines that it can operate through.
“In a country like Kenya we can effectively deal through all the branches of our correspondent banks.” By comparison, operating through just one branch can sometimes lead to bureaucratic delays, Meintjes suggests.
Inevitably some African markets remain out of bounds for vanilla trade finance. “We still exclude Zimbabwe, where not much trade finance is being transacted except for where banks like BNP Paribas and RMB are using forms of collateralisation,” points out Cilliers.
Zimbabwe is also one of a handful of markets – including Burundi, DRC, Cote d’Ivoire, Rwanda and Sierra Leone, where CGIC cover is unavailable. “We have recently, also had a couple of large claims in Malawi due to fraudulent activity, and exporters must exercise caution and do their homework properly when providing open account terms,” says Dadabhay.
For South African exporters requiring longer-term financing support, Absa Capital’s Midzuk singles out the ECA-backed finance available from the Export Credit Insurance Corporation of South Africa (ECIC SA). “It has a capability in certain countries – such as DRC or Zambia – that its European peers have less appetite for, in terms of size and tenor.”
He continues: “ECIC SA’s stance is a mixture of supporting the Nepad initiative and asking whether the deal works commercially.”
In terms of ECA-backed financing flows into South Africa, the main user to date has been power parastatal Eskom, to support a component of its five-year capital expenditure programme. Under a Euler Hermes-insured deal signed in August, 2006, Eskom tapped a €114mn financing that was advised, arranged and provided by Deutsche Bank, which will cover turbine contracts placed with Siemens.
“We were awarded the mandate due to Eskom’s need for a bank that could arrange ECA money globally,” says Piers Constable, director of export finance at Deutsche Bank. However Constable acknowledges that Deutsche Bank’s presence in Johannesburg, where it had struck up a relationship with Eskom’s finance and treasury teams, was one key to the mandate award. “Our presence on the ground in South Africa plus our long-term relationship with Eskom proved of considerable value here,” he comments.