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EQUITY BANK LIMITED
Funding Options
Konza Techno City
Konza Techno City Investor’s Conference – 8th August 2012
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Africa’s Infrastructure Funding
Requirements• Infrastructure funding requirements for MIC African
nations estimated at about 10% of GDP p.a. until 2020
• For LIC, their investment needs are even higher
estimated at 15% of GDP annually • ou o enya governmen u ge s a oca e o
infrastructure
• In 2008, the United Nations had estimated the need of
investing 52 billion dollars annually; about 75% of whichis to go to MICs for infrastructure developments
• Traditional sources insufficient, alternative sources of funding required
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Proportion of Foreign Aid that
goes to Infrastructure
3000
3500
4000
4500
54.9%
48.6%
22.0%
37.8%
12.5%
0
500
1000
1500
2000 1.2% 20.2%
0.2%
15.3%
7.6%
Infrastructure Aid($ mn)
Total Aid ($ mn)
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Funding Options for African
Infrastructure Development• Project Finance includes various funding sources:
Commercial Banks
Export Credit Agencies (ECAs)
• Development Financial Institutions (DFIs)
ADB
World Bank & Other DFIs
• Project/Infrastructure Bonds
• Private Equity Funds
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Funding Options for African
Infrastructure Development• Delivery Mechanisms:
Public Private Partnerships
Concessions
Build, Operate-Transfer
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Commercial Banks
Key Features
• Proven fundingsolution
• Structuringcapabilities
International Banks
• Reduced liquidityand players
• Are constrained byhigh liquidity costs
Local Banks
• Usually followinternational banks
but some of themcould accept more
• Solutions oriented• Work with more
flexible guidelineswith respect to ratiosand economic
analysis• Offer fast execution
process
• Shorter tenor expected in light of implementation of Basel III
• Remain constrained
by host country riskappetite and mayrequire political riskcover /
• Limited appetite for local currency risk
aggress vestructures providedthey can obtain ahigher return
• Limited pool of
liquidity• Limited international
track record
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Export Credit Agencies (ECAs)
Key Features
• Provide political and / or commercial risk cover to lenders
• Can finance part of localcosts, ECA premium and financing
To Consider
• Amount linked to eligibleprocurement (tied schemes)
Usually offer attractive fixed rateCIRR option i.e. “free swap” costs
• Also act as catalyst to bankspresence: enhance liquidityReduce banks’ exposure to country/ industry concentration
risk• Enable longer tenors• Improving flexibility: ECAs tend to
limit their requirement and workmore closely with the samerequirements as banks
• e nanc ng mtat ons prem umpaid upfront)
• Require an adaptation of theprocurement strategy, as their involvement is constrained by
eligibility requirements
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Development Financial
Institutions (DFIs)
Key Features
• Promote sustainable privatesector investment through
financing in the form of loans, guarantees or equity
To Consider
• The involvement of DFIs could beconsidered provided that the
project is strategic for the countryand is significantly positive for its
• yp ca y prov e ong- erm
financing• Maintain a high level of due
diligence, with a focus onenvironmental and social aspects
• Provide confidence tocommercial banks
• Two main categories:• National or Regional
Development Banks• Multilateral or International DFIs
• DFIs usually take political risk• Can offer embedded fixed rates• Some of them offer A/B Loan
structure: A loan perceived by
commercial banks as an umbrellafor B Loan
• Can also contribute throughvarious forms of junior funding
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Project/Infrastructure Bonds
Key Features
• Project bonds have been overshadowedb the bank market to date, but
To Consider
• Require ratings• Minimum size
increasing interest from both sponsorsand bond investors
• Project bonds can be incorporated intothe majority of well structure projectfinancings across a range of infrastructure and energy sectors
(transportation, power, PPP, renewableand oil & gas)
• Large size project bonds are achievable;full range of tenors available
• No commitment prior to execution• Negative carry/ make-whole provisions
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Private Equity/Venture Capital
Funds
Financial investors - Players
• Infrastructure funds / Directinvestment by institutional
To Consider
• Investors interested inattractive class of investors
• Sovereign wealth funds• Specialized private equity
funds
asset, diversification, stablereturns and long term yieldsHighly liquid
• Lower appetite for
construction risk or demandrisk• Some will require
involvement of strategicplayer
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Challenges to finance
infrastructure projects
Traditional bank lendingcannot meet financing needs
• Certain banks have either materially reduced lending
or refocused activitiestoward their domestic
Project bonds to bridge thefinancing gap
• Important additional sourceof liquidity
• Fixed income investors havemoney to invest and are mar e s
• Elevated funding costsespecially in non-domesticcurrencies
• Constraints for long term
financing• Uncertainties around the
impact of future bankregulation and BaselIII, with associated higher capital constraints
diversifying away from purecorporate and sovereignrisks
• Diversification of thesources of funding as it
does not use banking lines• Long dated maturities and
bullet structures areavailable (less constrainedthan on-balance sheetlending for banks)
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Funding Solution –
Project/Infrastructure Bonds
For Issuers
• Opportunity to lock in fixed ratefunding without the use of swaps
• Underlying yield environment
For Investors
• Secured against real assets
• Solid and comprehensive securitypackages
rema ns avoura e
• Flexibility to adjust the repaymentprofile
• Can sit alongside other financings
(bank and ECA financing)
• Recent credit spread tightening hasresulted in materially better marginson offer, particularly in growthmarkets
• Portfolio diversification
• Solid secondary tradingperformances
• Pre-vetted by lending banks
• Attractive yields
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Challenges and considerations
of Project Bonds
For Issuers
• Information -Up-front and ongoingdisclosure
• Structure• Potential negative carry issues
For Investors
• Project information need
• Government support; strategic
importance
• Can be more expensive to refinancebefore maturity
• Limited currency choices
• Bond features
• Assignment of credit ratings• Exchange listing
• Profit sharing, geopolitical &sovereign risks concerns
• Construction risk and mitigationmeasures
• Relative complexity of the structure
• Amortizing structures difficult tovalue
• Liquidity
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Equity Bank and Infrastructure
Funding• Equity Bank is active in infrastructure projects in
Kenya for example:
Under-writing of KPLC rights issue to fund
infrastructure projects
Funding of Rift Valley Railways (RVR) upgrading$20m
Funding of oil terminal construction in Mombasa
Proposed funding of a hydro power project inRwanda
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Web site: www.equitybank.co.ke