Increasing Capital Flows to Africa

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Increasing Capital Flows to Africa The Corporate
Council on Africa Debt Capital Markets Working
Group 29 September 2004
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Overview

• Imperial Bank in the African debt markets
• New products and local capital market development
• Case Study Eagle Bonds

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Imperial Bank in the African debt markets
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Imperial Bank

• Corporate profile
• Owned 50.1 by Nedbank, 49.9 by Imperial
  Holdings
• Specialist South African asset-based finance bank
• Key markets
• Motor Finance
• Aviation finance
• Corporate equipment asset finance
• Property finance
• Medical finance

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Imperial Bank

• Specialised Finance Treasury
• Integrated approach to traditional merchant
  banking products
• Transportation finance niche
• Southern Africa focus
• Products
• Debt Capital Markets
• Specialised Finance
• Corporate Finance Investment Banking
• Transport Infrastructure finance
• Treasury

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Imperial Bank

• Typical roles
• Arranger of the Guarantee and underlying
  transaction
• 7th internationally for Exim Bank large aircraft
  deals in 2003
• Originator and administrator of the Eagle Bonds
  programme
• Advisor to the purchaser
• Post implementation administration

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Imperial Bank
Asset finance
Capital markets
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New products and local capital market development
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New products

• Corporate bonds, securitisation and commercial
  paper being augmented by
• Wrapped notes (incl. ECA-wrapped notes)
• Secured notes
• High yield
• Project bonds
• Multi-jurisdictional listings

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Eagle Bonds Case Study
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Features of the Programme
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Features of the Programme

• Eagle Bonds is a South African commercial paper
  conduit
• All Notes must directly or indirectly carry an
  Exim Bank guarantee
• Set up to raise Exim Bank guaranteed finance in
  Rand directly from the debt markets
• R1.4 bn has been raised via Eagle Bonds (for some
  R2 bn of imports)
• Originated and administered, by Imperial Bank

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Features of the Programme

• Credit profile
• Notes carry the full faith and credit of the US
  Government
• Issuance is subject to compliance with the Exim
  Bank-approved implementation process
• Capital and accrued interest (including
  post-default interest) is guaranteed
• Guarantee is unconditional, subject to timely
  claim

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Features of the Programme

• Currency
• The Guarantee may relate USD or ZAR-denominated
  funding
• Possibilities for other currencies in the Exim
  Bank local currency guarantee programme
• Allows importers to match the currency risk
  between assets and liabilities
• Obviates the need for expensive, volatile long
  dated currency hedges
• Presents currency risk for Exim Bank (movements
  between delivery and financing date)
• Loan to value risk where USD assets are financed
  in ZAR

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Features of the Programme

• Rating Agency
• Initial transactions Notes are rated Aaa (global
  scale) and Aaa.zaf (SA scale) by Moodys
• Highest rated paper in the SA debt capital
  markets (higher than the Sovereign)
• Required Rating Agency satisfaction with
• Procedures to ensure timely claim under the
  Guarantee
• Payment and administration procedures
• Structural controls

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Features of the Programme

• Legal jurisdiction
• All programme transaction documentation except
  the Guarantee are subject to SA law
• Documentation framed in a legal context with
  which the importer was familiar
• Required detailed scrutiny of inter alia South
  African insolvency and capital markets law
• Should translate into a cost saving for future
  transactions (use of local legal counsel)

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Features of the Programme

• Calculation of the exposure fee
• Influenced by
• Country risk (foreign exchange cover, stability
  etc.)
• Credit risk (e.g. importer creditworthiness,
  security structure)
• Asset risk (e.g. new vs second hand,
  resaleability, independent appraisal)
• Structure risk (e.g. local currency, Exim Bank
  product used, contractual framework)
• Transaction risk (e.g. term etc.)
• Determined either by policy (e.g. large aircraft)
  or the exposure fee calculator
• May be financed under some circumstances

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Features of the Programme

• Pro forma calculation of the net-net financeable
  amount
• Gross purchase price
• Less non-qualifying components (local content,
  distributor mark ups etc)
• Less cash rebates credit memos
• Less non-cash rebates credit memos (training
  etc.)
• Less look back reduction ( 3 months since
  delivery)
• Net purchase price
• Financeable portion _at_ 85 (subject to Exim Bank)
• Exim Bank exposure fee (subject to Exim Bank)
• Net-net financeable amount

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Eagle Bonds One
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Eagle Bonds One

• Abridged structure

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Eagle Bonds One

• Features of the Notes
• Amortising principal (to match the underlying
  lease cashflows)
• 8-10 years (to match the underlying lease terms)
• Fixed rate (to match the fixed rental cashflows)
• Guaranteed, unsecured
• Guarantee itself is housed in a Debenture Trust,
  with Noteholders as the beneficiaries
• Rated, listed on BESA

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Eagle Bonds One

• Benefits to the Importer
• A greenfields enterprise leveraging the
  lessees balance sheet and good asset quality
• Efficient cost of funds
• Ability to raise substantial gearing without
  tying up banking lines
• Competitiveness and a neutral currency position
  able to offer a Rand-based solution

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Eagle Bonds One

• Pricing inefficiencies
• Complexity of pricing an amortising Note
• Limited scope for secondary market activity
• Coverage of the Guarantee capped at par (100
  of issue price)
• Risk of early settlement (insurance event,
  default event)
• Pricing relative to the swap curve, not the bond
  curve (credit benchmarks)
• Hedgeability

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Key Benefits of the Programme
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Key Benefits of the Programme

• Low effective financing cost
• Credit margin is priced off Exim Bank (US
  Government) credit risk, not the importer
• Benefit is based on cashflow yield, not
  accounting yield
• Capital markets offer the importer a wholesale
  cost of funds
• Eagle Bonds passes its own cost of funds on to
  the importer
• Excludes bank regulatory costs and margins
• Includes placing commissions
• Price set in an auction environment
• Capital relief for bank investors in the paper

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Key Benefits of the Programme

• Preservation of traditional funding lines
• Funders view Exim Bank as their
  credit-counterparty, not the importer
• Exim Bank becomes a new source of facilities
• Allows for traditional funding lines to be
  available for general corporate funding purposes
• Alignment of debt covenants between Exim Bank
  other lenders (banks, capital markets)

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Key Benefits of the Programme

• High gearing levels
• OECD guidelines allow for 85 of export cost
  fees (subject to Exim Bank credit decision)
• Traditional aircraft finance banks have tightened
  up lending criteria (term, rate, equity)
• Exim Bank may (subject to terms) offer a higher
  gearing level (e.g. TSEP equipment)

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Principal Disadvantages
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Principal Disadvantages

• Operational inflexibility
• Operational covenants (maintenance of the
  security asset)
• Mandate restrictions (geographic restrictions
  etc.)
• Credit covenants (gearing levels etc.)
• Cross collateralisation/cross default of Exim
  Bank exposures

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Principal Disadvantages

• Cashflow
• Full principal to be repaid over the term
• Only partially offset by the lower interest
  charge
• May be coupled with a mismatch facility, to
  provide for a capital balloon/residual
• In a lease discounting arrangement, leaves little
  surplus cashflow for shareholders

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Principal Disadvantages

• Onerous regulatory requirements and approvals
• Capital Markets - Bond Exchange of SA and
  Financial Services Board
• Cross border cashflows Exchange Controls
  (Guarantee, realisation of security, payments)
• Rulings - SARS, Competitions Authority, Financial
  Services Board (Short Term Insurance Act)
• US approvals (Exim Bank, Congressional
  ratification)

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Challenges
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Challenges

• Alternative applications for the product
• Different asset classes
• Smaller aircraft and other transport assets
• Non-transport assets
• Smaller transactions
• Implementation costs
• Accommodating smaller issuances
• Financing non-Rand (e.g. USD) transactions
• Multi-jurisdictional ECA arrangements

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Challenges

• Growing the Investor base
• Styling the Notes to achieve capital relief for
  bank investors
• Accessing international investors
• Concentration of investors in top grade paper in
  South Africa
• Investor education on probability of call,
  pricing

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Challenges

• Overcoming pricing inefficiencies
• Floating rate notes
• Reduce breakage costs, remove premium interest,
  remove hedging costs
• May necessitate swap counterparty thus not pure
  Exim Bank risk
• Short term commercial paper coupled with
  liquidity support
• Rremove breakage costs, premium interest, early
  termination price effects, remove hedging cost
• Not pure Exim Bank risk liquidity risk
  management, exposure to market disruptions, swaps
• Absolute pricing off the yield curve
• Market consensus pricing
• Difficult to benchmark

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Challenges

• Speedy, efficient implementation
• Execute the financing on or soon after delivery
  in order to
• Remove currency risk for Exim Bank
• Remove the cost of expensive bridging finance
• Avoid commitment fees (from 60 days after term
  sheet/delivery)
• Strengthening currency post delivery may reduce
  effective Rand gearing level
• The switch from bridging to permanent, Exim Bank
  guaranteed funding may be notifiable
• Organised implementation process (arranger team
  selection)

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Challenges

• Optimisation of terms
• Term of the Guarantee
• Asset-type (New vs used , ability to retain
  value)
• Spread the costs and fees over the longest
  allowable term
• Maximisation of the net net financeable amount
• US content
• Terms of the purchase contract
• Terms relating to security requirements, credit
  covenants cant be relaxed
• Management of costs

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Transportation Security Equipment Programme
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Transportation Security Equipment Programme

• Financing for U.S. exports that improve the
  security of global transportation systems
• Relates to security-related machinery, equipment,
  goods services, including 
• Screening and identification of cargo, baggage
  and passengers
• Data collection and analysis
• Communications
• Provides for
• 85 of US content (maximum allowed under the OECD
  guidelines)
• Support for local costs up to 15 percent of the
  U.S. net contract value

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Transportation Security Equipment Programme

• Amount of the Guarantee
• 85 of net net price 100 of contracted local
  costs (up to 15 of US contract price)
• US contract price - net net after all rebates,
  based on US content
• For a lease discounting, may be limited to the
  NPV of the lease rentals
• Local costs
• Installation other local services which the
  manufacturer is obliged to undertake
• Transport incl. air freight/inland freight
  specified in the export contract
• Sea freight on US vessels or a MARAD waiver
  required

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Transportation Security Equipment Programme

• Amount (indicative values for illustrative
  purposes only)
• US contract price 100 x 85 85
• Contracted local content 10 x
  100 10 (Check
• Installation 5
• Local training 2
• Transportation 3
• Sub-total 95
• Financing of the Exim Bank exposure fee
  5 (assumes a 5 exposure fee)
• Total coverage of the guarantee (plus
  interest) 100

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Questions