Strictly Private and Confidential An Authorised Financial Services Provider
Raising capital and local partner equity funding options for
Mozambican coal projects
Henk de Hoop – Rand Merchant Bank
July 2013
Henk de Hoop
Business Development Director: Resources
Tel: +27 11 282 4970
Email: [email protected]
010
Series 1
Introduction
Where do banks play
Why and how have funding options changed
Sources of funding, focus on ECA
Financing local partner participation
Conclusion
Strictly Private and Confidential
Introduction
3
FirstRand Limited (“FirstRand”) is the 2nd largest financial institution in
Africa with a market capitalisation of c.US$16.5bn and one of the largest
companies listed on the Johannesburg Stock Exchange
FirstRand operates through 3 divisions:
Rand Merchant Bank (“RMB”) (investment banking)
First National Bank (“FNB”) (retail and commercial banking)
Wesbank (asset financing)
FNB operates throughout Africa, including Mozambique
RMB is the entity that would lend into mining projects and infrastructural
development
Strictly Private and Confidential
FirstRand in Africa
4
On the ground presence
Gaborone
Lagos
Mbabane
Maputo
Maseru
Windhoek
Luanda Lusaka
Accra
South Africa
Representative
offices
Full banking
operations
Target
jurisdiction
Deal footprint
Strictly Private and Confidential
FirstRand’s international footprint
5
Strictly Private and Confidential
# Bookrunner Deals Value ($ m) Market share
1 RMB Morgan Stanley 30 7 181 44.4%
2 UBS 6 1 193 7.4%
3 Standard Bank 11 951 5.9%
4 Java Capital 17 828 5.1%
5 Deutsche Bank 8 715 4.4%
6 BofA Merrill Lynch 3 545 3.4%
7 Goldman Sachs 2 523 3.2%
8 Macquarie Group 4 468 2.9%
RMB is the leading adviser in South Africa
(2007 - 2013YTD) PwC Peer Ranking of Banks
# Adviser No of deals Value (R’m)
Mergers & Acquisitions
1 Rand Merchant Bank 151 370,376 2 Goldman Sachs 18 266,535
3 Standard Bank 78 246,274
4 JP Morgan 25 220,288
5 Deutsche Bank 51 219,920
General Corporate Finance
1 Rand Merchant Bank 175 720,322 2 JP Morgan 30 260,421
3 Goldman Sachs 9 244,206
4 Investec 179 155,590
5 Deutsche Bank 34 140,471
6
M&A deal value (2005 – 2012)
432
284
258
230 210
200
250
300
350
400
450
500
RandMerchant
Bank
StandardBank
JP Morgan DeutscheBank
GoldmanSachs
R'b
n
Listings M&A Equities Underwriting
2013 1st 1st 1st 1st
2011 1st 2nd 1st 1st
2009 1st 1st 2nd 1st
2007 3rd 1st n/a 1st
South African ECM (2010 - 2013YTD)
Introduction
Where do banks play
Why and how have funding options changed
Sources of funding, focus on ECA
Financing local partner participation
Conclusion
Strictly Private and Confidential 8
The funding cycle
Structured
Equity
Time/Project Stage
Steady state
mining
Early
exploration
Resource
definition
Pre-feasibility
to bankable
feasibility
Project
development
Equity
Project
Finance
Senior debt
Valu
e
Bank funding
Streaming, royalties, offtakes
Introduction
Where do banks play
Why and how have funding options changed
Sources of funding, focus on ECA
Financing local partner participation
Conclusion
Strictly Private and Confidential
What has changed since last year
10
Lagged supply response to period of high margins exacerbating
oversupplied market
Estimated 16% of seaborne met coal market uneconomic – finally
forcing (some) producer discipline
Cost competitiveness / capital efficient capacity addition again key in
assessing project quality for both equity and debt providers
…but easing contractor/capital equipment market constraints, offering
better deals and likely less project delays
Strictly Private and Confidential
Project funding impact
11
Increased equity cheque constraints for both big and small players
Fewer banks, smaller cheques, but more competition for high quality assets
Revenue line outlook more uncertain
Likely increased hedging requirements from funders
Offtake contracts becoming more important (volume, and/or price)
Longer tenors likely required, and longer project reserve tails
Projects likely to require a more phased approach
More palatable capital cheques
Market timing risk reduced
Increased stress testing of project risk, forecast ramp-up, costs, etc
Introduction
Where do banks play
Why and how have funding options changed
Sources of funding, focus on ECA
Financing local partner participation
Conclusion
Strictly Private and Confidential
Debt funding market for Mozambique projects
13
Universe of the debt funding market generally available for projects include:
Regional DFIs (ZAR+USD)
International DFIs
(US$ + MZM guarantees)
Local commercial banks (MZM&US$)
Regional commercial banks
(US$ + ZAR)
International commercial banks
(US$, EUR, other)
ECA-backed funding
Regional DFIs (ZAR+USD)
International DFIs
(US$ + MZM guarantees)
Local commercial banks (MZM&US$)
Regional commercial banks
(US$ + ZAR)
International commercial banks
(US$, EUR, other)
ECA-backed funding
DBSA, IDC, AfDB, PIC
EIB, Proparco, DEG
(KfW), FMO, IFC,
EBRD, CDB, BNDS
Africa Exim, ECIC,
Coface, Sace, China
Exim, US Exim, JBIC,
EKN
Broad range of
international banks
Regional banks, among
which FirstRand (RMB/FNB)
Range of 15-20, single
project limit <50m$ max
Strictly Private and Confidential
ECA: South Africa’s ECIC scheme
14
The Export Credit Insurance Corporation of South Africa (“ECIC”) is an
independent, limited liability company in which the Government of South
Africa is the sole shareholder
Principal objective is to facilitate and encourage South African export trade
by underwriting bank loans, supplier credits and investments outside the
country
Very attractive funding rates can be achieved
The project must be commercially robust and include, as applicable:
Bankable feasibility studies, completion guarantees, structured payment
mechanisms (non-recourse, limited recourse or full recourse), off-take
agreements, environmental / social impact assessment studies, security over the
assets, Independent Technical Engineer’s review
Strictly Private and Confidential
ECA: South Africa’s ECIC scheme
15
15
Premium
SA
Bank
Interest+
capital
The ECIC issues a
policy covering:
100% political risk
85% commercial risk
Moz
Borrower
The Borrower:
Pays a premium to the ECIC for the policy
Obtains a loan from a commercial bank
South Africa
i.e. Mozambique
The Bank:
Advances a
loan to the
borrower
85% Loan
SA Contractor
Supply
contract
15% down payment
Insurance
cover
Payment on behalf of
Moz Borrower
Introduction
Where do banks play
Why and how have funding options changed
Sources of funding, focus on ECA
Financing local partner participation
Conclusion
Strictly Private and Confidential
RMB - leading local partner adviser in SA
17
45.3%
58.8%
37.9%
71.8%
47.9% 51.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2004 / 2005 2006 / 2007 2008 / 2009 2010/2011 2012 2004 - 2012
RMB % of deal value
RMB has helped craft the vision of some
of South Africa’s foremost BEE
transactions
Strictly Private and Confidential
The evolution of BEE in SA
18
• Focus on strategic partners
• Small group of politically well-connected individuals involved in most of the landmark transactions
• Growing discontent with ‘enrichment of a few’
• More broad-based empowerment partners
• Encouragement of the involvement of employees, communities and social-upliftment organisations
• Significant increase in the number of Employee Share schemes
• Realisation that selecting individuals may not be the most ‘productive’ method of empowerment
• More balanced and inclusive ownership
• Importance of strategic partners in driving localisation within the organisation
• Increased emphasis on ‘new entrant’ strategic partners
• Inclusion of broad-based groups continues to be incentivised
• Local public offers increase in popularity
2012 +
Emphasis on:
-broad based
ownership
(employees,
communities)
-skills
development
-enterprise
and supplier
development
1994 2000 2006 2009 2012
Strictly Private and Confidential
Local partner funding solutions
19
RMB has developed a number of bespoke solutions to structure and fund
transactions where local partners are not able to finance their participation
These solutions utilise a facilitation mechanism by a company and its
shareholders and can be provided in a variety of forms
If structured correctly value loss from the facilitation is recovered through value
created in the project by the introduction of local shareholders
Nature of facilitation is ultimately a function of the transaction structure
Subordination
of shareholder
loans
SOFT FACILITATION HARD FACILITATION
Restricted
dividend
policy
Access to
underlying
cash flows
Put option Guarantee
Subsidised
vendor
funding
Free
options
Discounted
purchase
price
Donation of
shares
Soft facilitation is likely to affect credit lines
Hard facilitation is more expensive for shareholders F
ac
ilit
ati
on
co
nti
nu
um
Strictly Private and Confidential
Typical facilitation solutions
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A transaction with employees and communities is likely to be vendor financed or a
combination of vendor financed and “unfunded”
• Dilution • Disposal price and funding
rates
• Dilution
• Disposal price
• Recourse for financiers
• Entire “sale proceeds” used
for financing
• Shareholders dilute over
time on an agreed basis
• Sale proceeds accrue to
company
• Agreed hurdles need to
be achieved
• Share and/or financial
outperformance is essential
• Share and/or financial
outperformance is essential
• Dividend flow required
• Financial covenants
“Unfunded” structure Vendor financed Third-party financed
• Earn-out structures that
overcome many traditional
tax and financial
assistance obstacles are
used
• Value to local partners is
dependent on growth of the
business
• Robust and flexible
structure
• In a private environment,
regular valuations required
• The optimal mix of equity,
mezzanine and/or senior
debt within a tax efficient
framework is required
• Difficult and expensive to
raise in volatile markets
Subsidy
Effect
Requirement
Comments
Strictly Private and Confidential
Notional vendor financing example
21
21
• Shares issued to local partner at nominal value, Mine A has the right to repurchase a
certain number of the shares at maturity at nominal value:
• Number of shares based on a formula: N = [ ($100m x (1 + r) ^ t ] / share price at maturity
• r is the notional interest rate Mine A requires on its notional vendor finance, which is a
function of the level of facilitation that Mine A is willing to provide
• Dividends paid on the shares can either be remitted to local partner, used to re-invest in
Mine A shares or used to repay the notional vendor financing
• Re-investment of dividends allows local partner to acquire additional Mine A shares at
varying share prices - reduces exposure to a single entry price
Mine A
Issue of shares (or a new class of shares)
to local SPV at nominal value
Call option to acquire a variable number of
shares at nominal value at maturity
Local partner
SPV
Strictly Private and Confidential
Third party funding example
22
Developer
Mine A
Equity by
Developer
(100%-X)
Equity by
Local Partners (X%)
Project
funding
Non-recourse funding
(DFI’s, FI’s, Developer)
Recourse funding by Fin
Institutions (backed by
Developer)
100%-X
<49%
X%
Local Partner SPV
Equity by
Developer
(<49%)
Equity by
Local Partners
(>51%)
Acquisition
funding
Non-recourse funding
(DFI’s, FI’s, Developer)
Recourse funding by Fin
Institutions (backed by
Developer)
Local partner(s)
>51%
Introduction
Where do banks play
Why and how have funding options changed
Sources of funding, focus on ECA
Financing local partner participation
Conclusion
Strictly Private and Confidential
Conclusion
24
• A more subdued bulk commodity environment is forcing a changed
approach to project funding, both from an equity and debt
perspective
• Regional banks have built up significant experience in integrating
project funding and local partner equity funding requirements
• It will be beneficial for Mozambique to make use of the lessons
learned on how NOT to structure local partner participation
• RMB is keen to assist in advising and funding the required solutions
for the inclusive development of Mozambique’s exciting growth
opportunities
Strictly Private and Confidential
Contacts
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Henk Deist
Head: Resources Finance
Tel: +27 11 282 4345
Email: [email protected]
Jan Cronje
Corporate Finance
Tel: +27 11 282 8597
Email: [email protected]
Werner van Oudenhove
Head: Infrastructure Finance
Tel: +27 11 282 8121
Email: [email protected]
Greg Mckenzie
Head: Asset Based Finance
Tel: +27 11 282 8143
Email: [email protected]
Henk de Hoop
Business Development Director: Resources
Tel: +27 11 282 4970
Email: [email protected]
Strictly Private and Confidential
Strictly Private & Confidential
This presentation has been prepared by FirstRand Bank Limited, acting through Rand Merchant Bank (“RMB”).
The information contained in this presentation is confidential and intended solely for the use of the intended recipient. This presentation may contain
information proprietary to RMB and accordingly may not be reproduced, acted upon or disseminated in whole or in part without RMB’s prior written
consent. By attending this presentation, the intended recipient undertakes to keep the information contained in the presentation confidential and not to do
any act or allow same to be done on his behalf which is in breach of the above mentioned prohibition.
This presentation contains information which has not been independently verified by RMB. RMB and its directors, officers, employees and agents make no
representation and give no warranty with respect to, and assume no responsibility for:
the correctness, accuracy and completeness or otherwise of the information contained in this presentation; or
the correctness or otherwise of the Advisers’ conclusions based on such information.
Any liability of whatsoever nature and howsoever arising on the part of RMB, their directors, officers, employees and agents relating to the contents of this
presentation is hereby expressly disclaimed.
This presentation is intended for discussion purposes only and does not represent a commitment, proposal, recommendation, offer open for acceptance or
agreement to enter into a transaction. Any transaction is subject to the agreement of final terms to be set out in a separate written agreement. The decision
to enter into any transaction and to assume the risks associated with the transaction rests solely with the intended recipient.
July 2012
Disclaimer
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