When an SME making widgets in the UK can’t get a credit line, then what hope for a farmer in Malawi? Finbarr Bermingham speaks with three alternative financiers about the vital work being done by non-bank lenders in Africa.
In 2012, Africa became the world’s fastest-growing continent, with GDP rising at an average of 4.5% across its 54 countries. The continent’s collective GDP is now similar to that of Russia or Brazil and is expected to hit US$2.6tn by 2020, about twice as high as India’s volume was in 2012. Bilateral trade with China grew 1,409% to US$160mn in the first 11 years of this millennium. In August of this year, H&M began sourcing garments from Ethiopia, moving some to question whether it was the beginning of the African manufacturing boom.
Sub-Saharan Africa, in particular, is ripe with untapped opportunities for trade financiers, and banks are always keen to discuss the deals they close on the continent. At a recent event in London, a Deutsche Bank representative spoke proudly of the bank’s debut participation on the annual Cocobod transaction in Ghana, saying it was a stable way to advance its Africa lending book. Equally, international banks were more than happy to join the syndicate for Sonangol’s US$2.5bn loan in September. With lenders as secure as these, the transactions are no-brainers. Local banks operate at a rung below, enjoying higher margins in return for the perceived risk they’re taking.
But between them, local and international banks provide a mere drop of the ocean of financing that’s required to support Africa’s growing economies. For the majority of banks, the underlying trade infrastructure and political systems are too underdeveloped to fund anything but large commodities deals (in Kenya, for instance, only 32% of people live within 2km of an all-weather road).
The African Development Bank (AfDB) calculates that there’s a US$140bn gap in the African trade finance market, into which a plethora of non-bank lenders have stepped. Africa’s alternative trade financiers differ in structure, size and sectors covered, but they’re all aiming for the hefty slices of pie the big boys won’t touch because of their low appetites for risk, the groundwork required to close deals, or due to a lack of the local resources needed to source and vet them.
“At the moment, a lot of investors are sitting on the edge, looking into Africa and wanting to invest,” says Gary Isbister, COO at Barak Fund Management, an African investment house specialising in agri-finance. It’s a sentiment reiterated across conversations with numerous non-bank financial institutions (NBFIs).
The role of the NBFI is to bring deals that strike a balance between high return and acceptable risk to its investors (often pension funds, insurance companies, family funds or funds of funds). For Isbister, that means realising that while the potential returns in Africa are attractive, many investors are still anxious about having their funds tied up in the continent on long-tenor transactions. “We offer a return that’s relatively close to the five-year return you’d get on a private equity deal,” he explains to GTR. “But we give investors the ability to withdraw their funds if they feel nervous about the climate. We have a three-month lockdown period for the fund. If they need to withdraw, they can do it quickly.”
Barak’s specialism is in the agribusiness space across Sub-Saharan Africa and while much of its trade involves South Africa, its trade finance fund has disbursed funds into countries such as Zimbabwe, the Central African Republic, Malawi and Botswana – countries which aren’t devoid of a banking sector, but which aren’t mainstream investment hubs either. The risk perception is high.
In the run-up to the recent elections, Barak reduced its exposure to Zimbabwe and carefully selects the counterparties it works with. “From a Zimbabwean perspective, you have to make sure you tick all the boxes,” Isbister says. “If you can find an entity that’s gone through the indigenisation process it reduces the risk. There are still strong, reputable banks you can utilise to get certain forms of guarantees from Zimbabwean counterparties. To get the returns that the fund gets we have to look at different forms of risk. But we’ve had a very low default rate over all our areas. If you manage the risk correctly, we can still invest.”
The return Isbister speaks of averaged out at 14.49% up to September 2012 compared with the 0.7% over Libor participants in this year’s Cocobod transaction were reported to have earned.
Scratching beneath the surface
It’s not just willingness to accept risk that has helped alternative financiers establish a footprint in Africa. Being less cumbersome and encumbered to long-standing relationships than banks, they’re often better-positioned to sniff out opportunities lying below the surface, says Irfan Afzal, who manages structured trade finance at Triple A Frontier Investments, and estimates that 90% of African growth over the next few years will be driven by SMEs.
“If Exxon Mobil is drilling off the coast of Ghana, you can bet your life banks like JP Morgan or Citi will be on those deals. They’ll invest US$100mn without blinking an eye,” he tells GTR. “But if you tell them there’s an indigenous Nigerian company that wants US$10mn for storage finance, they’re not geared to look at those transactions.”
Triple A is in the process of arranging its first trade facilities for a group of South African companies. South African law states that 25% of its energy sectors import requirements must be channelled through Black Economic Empowerment (BEE) companies – those that are majority-owned by ‘previously disadvantaged groups’. Afzal says that local banks have maxed-out credit availability with existing energy clients – “global companies such as BP, Shell and Statoil”. The fact that South Africa imports all its energy creates what he calls a “credit challenge for banks”.
He continues: “It’s especially an issue in the oil sector because one shipment of oil is worth US$125mn. The biggest challenge the BEE companies are facing is a lack of finance. The banks aren’t geared towards providing 25% of South Africa’s import needs to be financed by BEE companies. We’re using it as an opportunity. We spoke with the South African Petroleum Industry Association which says nobody has approached them with a solution to the financing requirement. They’ve opened their arms to us.”
Whereas Barak often finances an entire transaction alone, Afzal will be hoping to syndicate as much debt as possible to the banking sector. He envisages originating oil deals of up to US$500mn and structuring them in a way that mitigates commercial risk and makes it attractive enough that banks will take a ticket of US$30mn to US$40mn each, alongside funds from Triple A’s investors.
In a sense, Triple A will be doing the leg work banks might have done in the past (or, indeed, still do in different circumstances and jurisdictions). Organisations like Barak provide direct funds into Africa’s agribusiness, but by doing the laborious research and admin banks are, for whatever reason, unwilling to do, Triple A will be acting not so much as an alternative financiers, but as a broker and conduit to trade – unlocking untapped funds from the mainstream banking sector.
Not in isolation
When the issue of alternative finance is raised at among a group of bankers at an industry event, the response is typically muted. It’s pointed out that while it certainly garners headlines, it is a tiny cog in the overall trade finance machine. But Nicolas Clavel, chief investment officer at Africa-focused commodities lender Scipion Capital, says that for banks looking to deleverage their balance sheets, businesses such as his have become vital.
Often, he tells GTR, banks will direct their clients to Scipion for funding that falls outside of what they’re able to provide themselves. In the Basel era, this may mean transactions that are below the volumes banks wish to entertain, bridge financing to fund a commodity, say, before it boards the ship, or deals in countries with a risk profile the bank isn’t comfortable absorbing.
This isn’t the be all and end all of Scipion’s business (Clavel is confident of taking the fund’s lending portfolio past the billion-pound mark), but it highlights the bilateralism that can exist between the mainstream and alternative lending markets. You’ll struggle to find an alternative lender that won’t accept a credit line from a bank, or that doesn’t need to use their services to issue an LC. But equally, there’s generally more acceptance among bankers now that a lender that’s helping to plug the giant gap in Africa’s trade economy is welcome and is healthy for the wider industry.