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Private Bank & Financing in Africa
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  1. Private Bank & Financing in Africa 24 June 2008 24 June 2008 Henry K. Hall, CFA Managing Director GEM Equity Derivative Sales, Structuring and Financing

  2. Equity Linked Financing

  3. Basic Concept Equity Linked Financing Collateral Value • Liquid Shares: possible to use market trading value • Illiquid shares: need to rely on a new valuation based on trading levels of comparable companies. Market price used as reference only. This method has been recently applied by Merrill Lynch share financings in the CIS1 region Margining • If the value of the portfolio decreases below a pre-determined value, the borrower would be expected to post margin payments (cash and/or acceptable securities). • In special circumstances the bank may allow for the first call to be made in shares, and then switch to cash • The deadline for posting cash of share collateral in most cases shall be 1 or 2 days • If the secured shares are not a reliable margining benchmark, a proxy index or basket of shares can be used • Alternatively - margining is based on audited accounts as a function of EBITDA, Sales or other financial indication multiple • If the share value drops substantially, then the bank has the right to accelerate the loan Legal Structure • The most simple version is the pledge of the local shares by the owner to the lender, but this works if the legal system in the jurisdiction if robust enough to allow easy and immediate enforcement of the pledge • To ease the legal issues of the pledge, investors prefer an outright sale and repurchase of shares by the pledgor to the lender (assurances can be given for dividend pass through and proxy voting) in a Repo (Sale and Repurchase) transaction. • Alternatively, if the holding company is in an offshore jurisdiction with English or similar law (e.g. Cyprus, BVI), a combination of local law pledge onshore and English law pledge of the shares in holding company can be used. • The due diligence process shall specifically focus on the shareholder agreements and any side agreements that might contain pre-emptive shareholders rights. Note: 1 CIS region means Commonwealth of Independent States and include former USSR countries

  4. Financing Structure Potential Share Pledge $ Loan $ Project or Acquisition Hold Co Interest, Principal & Equity Upside []% Ownership Op. Co. []% Share Pledge Sub 1 Sub 2 Sub 3 Equity Linked Financing • Financing is provided to the holding company (or SPV), which owns or intends to own (in the case of acquisition financing) a portfolio of shares in an operating company(ies) • In general such structures centre around the shareholder’s aim to obtain financing for developing new parts of the portfolio by unlocking value of the more developed parts of the portfolio • Furthermore this type of loan does not interfere with the business of the operating asset itself • We assume that the financing is provided at the holding company (HoldCo) level without recourse to the operating company (OpCo). • This means that there is usually no operating company guarantee and the shares are the only security available to the lenders • These structures generally require share collateral and participation in equity upside in addition to usual credit terms

  5. Repayment of Loan Deal Parameters Equity Linked Financing • If the shares are not liquid • The loan needs higher collateral coverage: ([3]x-[4]x of the loan amount) • A specific exit strategy is evaluated • Dividends commitment • Expected liquidity event, such as the sale of the investment project or an acquired asset • Expected IPO of the operating company / assets • Sale for a strategic buyer • Block sale of some assets if there’s a strategic buyer available • Put option from a strategic buyer or an investor • If the shares are liquid, the sale and repurchase of shares in the open market may be possible • Loan size equivalent to approximately [10] business days of average trading volume. • The trading volume would normally include the aggregate volume of the local currency markets and the Global and/or American Depositary Receipts if applicable. • Leverage Restrictions • Financing amount may be influenced by the amount of debt at the operating company level • The leverage of the operating company also has effect on the valuation of the shares • After the financing is in place, certain covenants will be put on the loan • The Bank will also look at the total leverage (at the holding and operating company) • Upside • If the borrower is not prepared to pay a higher spread, one way to achieve an equitable return for investors would be to give them some equity upside, for example, a call option on a portion of the shares in the secured portfolio • This component becomes essential if the financing is extended for more than 1-1.5 year

  6. KES Senior Unsecured Loan

  7. Transaction Description Salient Features KES Senior Unsecured Loan Structure and Benefits • Client receives a loan of KES [6.7] billion for [3] years from Merrill Lynch • Client pays [16.00]% per annum, calculated on the KES Loan Amount paid in USD using the then spot FX rate • Client redeems the loan at the then equivalent USD Loan Amount [16.00]% x KES Loan Amount paid in USD at the then KES/USD rate Client Merrill Lynch [6.7] billion KES Loan • Client borrows in local currency (KES) • Long Term Funding – 3 to 5 year maturities available from Merrill Lynch • Attractive rate and size • Financing from an International Institution

  8. Summary of Terms KES Senior Unsecured Loan

  9. Dual Currency KES/USD Senior Unsecured Loan

  10. Transaction Description Dual Currency (KES/USD) Senior Unsecured Loan Structure and Benefits • Client receives a loan of KES [6.7] billion for 3 years • Client pays • [14.00]% per annum, calculated on the KES Loan Amount paid in USD using the then FX rate; or • USD Libor +[2.00%] on the USD Loan Amount, at Merrill Lynch’s option • Client redeems the loan at • the then equivalent USD Loan Amount in KES; or • the USD Loan Amount; at Merrill Lynch’s option [14.00]% x KES Loan Amount paid in USD OR (LIBOR +[2.00%] x USD Notional Amount Client Merrill Lynch [6.7] billion KES Loan Redemption KES [6.7] billion OR USD 100 million

  11. Salient Features Dual Currency (KES /USD) Senior Unsecured Loan Structure and Benefits • Client borrows in local currency (KES) • Lower cost of financing due to dual currency optionality given to Merrill Lynch • ML can choose one of the two coupon options on the Interest Payment Date, therefore making the whole loan cheaper for the borrower • This loan has a tighter margin than either borrowing in just USD or borrowing in just KES • If the KES devalues strongly, loan repayments nominated by Merrill Lynch are likely to be in USD. If this is the case, it is more cost efficient than a straight USD Loan as the interest payments under the proposed structure are lower than interest payments that would be due under a straight USD Loan • No risk of mismatch between Client’s assets and liabilities, as Client likely has revenues both in USD and in KES. Client is therefore monetising the optionality to use KES or USD balances that are prevalent on their balance sheet by lowering their cost of funding • Financing from an International Institution

  12. Summary of Terms KES Dual Currency Senior Unsecured Loan

  13. Convertible Loan Financings

  14. Basic Structure Convertible Financing Convertible loans, which convert to a fixed number of shares at maturity, at the option of the lender A typical maturity would be for 3-5 years By providing a call option on the shares of the company to the Lender through a convertible structure, the funding cost is more attractive than senior unsecured funding levels At maturity the borrower will have the obligation to either repay the Loan to the Lenders in Cash or Shares The strike price of the convertible is generally set above current market level which allows the Borrower to sell his stock in the future at higher prices, should the convertibility option at maturity be exercised by the Lender Lenders generally require that the Borrower facilitates the borrowing of the shares from the Company to the Lenders The structure also generally provides for protection to the Lenders against any change in dividend policies and anti-dilution and takeover protection In come structures investors may put the convertible bond back to the Issuer prior to maturity at a predefined Put Price

  15. Convertible Financing Key Indicative Deal Terms Issuer A Kenyan registered commercial banking company, or a Corporate Issue Size US$ [100],000,000 preferred stock/convertible loan (the “Loan") Maturity 2012 (5 year tenor) Security Shares pledged of the issued share capital of Issuer Selling Restrictions None. Private transaction between Kenyan bank or a Corporate and Merrill Lynch [●]% paid semi annually Coupon Lenders can choose to be repaid by receiving shares at a conversion price equal to [110]% of current share price Conversion Rights Early Redemption None Put Option Puttable at year [3] at the Put Price (to be determined) by the Lenders US Dollars Currency English Governing Law

  16. Benefits Cheaper cost of financing, than senior unsecured loan Sale of company stock at higher prices that the current stock price Treatment as senior unsecured debt Additional leverage for existing shareholders Compared to an equity issuance, the dilution effect is deferred until maturity of the Financing

  17. Typical Deal Timeline

  18. Indicative Timetable: 6 – 8 weeks Typical Deal Timeline

  19. Trade Ideas and Equity SecuredFinancing Case Studies

  20. Financing Trade Ideas and Equity SecuredFinancing Case Studies Case Study • Majority owner of a private metal sector company seeks 1 year bridge financing to purchase shares in a listed company • Other commitments require funding solution using only his private equity stake in company • 1 year financing is arranged using control stake of private equity worth 4 times the value of the loan • Legal structure and multiple layers of pledge – onshore and offshore ensure full creditor access to collateral Interest + Principal Loan Blocking Share of OpCo Pledged &Portion of HoldCo Pledged Use of Proceeds Target Company Clean SPV Offshore Holding Company Payback Offshore Onshore Onshore Operating Company Ownership

  21. Financing Trade Ideas and Equity SecuredFinancing Case Studies Iron Ore Mining Rights Financing ML’s structuring expertise and openness to non-standard risks can lead to attractive deals for investors Example: • Majority owner of speculative natural resource company sought financing to buyout minority shareholders • Company’s sole assets are iron ore mining rights premium • Exit from the loan through international auction of mining rights by Merrill Lynch • Merrill Lynch receives interest payment + equity upside determined at the time of the auction Selling Shareholder 1 Cash paid directly by ML to shareholder SPV purchases 30% stake 30% Shareholding Before Funding: 50% shareholding After Funding: 100% shareholding Loan Loan Company (Limited Company) Borrower (Panamian SPV) Pledge of 100% of Company shares 20% Shareholding SPV purchases 20% stake Selling Shareholder 2 Cash paid directly by ML to shareholder

  22. Financing Trade Ideas and Equity SecuredFinancing Case Studies Private Equity / Mezzanine Finance -Iron Ore Mining Rights Financing • Financing for LBO in attractive agro-business sector • The exit is in three years via an IPO or trade sale • Merrill Lynch arranging: • USD30m Private Equity; and USD70m Mezzanine Debt financing in partnership with the management team • 2-3 year trade with high risk/high reward characteristics • Equity target ROE is >30% $70 MM Mezzanine Financing + Principal repayment + Asset security • Debt Management to augment or replace existing team with experienced individuals Merrill Lynch - Agent And/or Partial investor Agribusiness Company Equity $30m Equity investment

  23. Case Study: Oceanic Bank Bilateral Loan

  24. Summary Terms & Conditions Transaction Overview Geographical Distribution of Allocations Investor Type Distribution of Allocations Oceanic Bank – US$175m Bilateral Loan Transaction Summary In May 2007, Merrill Lynch closed a US$175m bi-lateral financing with Oceanic Bank International Plc Financing in both Nigerian Naira (NGN) and US dollars First ever multi currency loan in Sub Saharan Africa Longest maturity bank financing to date from Nigeria The orderbook encompassed hedge funds, banks and asset managers from 6 countries Orders were received from the United States, UK, Asia, and Scandinavia

  25. Oceanic Bank – US$175m Bilateral Loan Transaction Structure Counterparties Nigeria Offshore Interest & Principal Payments Oceanic Bank Hedge Funds / Asset Managers Merrill Lynch International Risk Syndication Loan Agreement Dual Currency Loan

  26. May 2007 Oceanic Bank – US$175mn Bilateral Dual Currency Loan Press Coverage

  27. Merrill Lynch Africa Credentials, 2000-2007 March 2007 March 2007 $175,000,000 $480,000,000 2005 2004 2004 2003 2003 US$1,553 million €450 million €400 million €330 million Federal Republicof Nigeria First Bank of Nigeria Final London Club Debt Repayment EGPC Republic of Tunisia National Bank of Egypt Kingdom of Morocco Republic of Tunisia 9.750% LT2 10NC5 Multi-Tranche Oil Receivables Securitisation Due April 2011 Joint Lead Manger Advisor on Securitisation of Future Flows Due July 2008 Joint Lead Manager Due Feb 2013 Joint Lead Manger 2004 2002 2001 2001 2001 2000 ¥15 billion US$650 million US$1.5 billion ¥35 billion ¥20 billion ¥35 billion 2001 €500 million Central Bank of Tunisia Central Bank of Tunisia Government of Egypt Central Bank of Tunisia Central Bank of Tunisia Central Bank of Tunisia First Ever 4.3% Global Samurai Bond Due 2030Sole Bookrunner 7.325% Global BondDue 2012Lead Manager Inaugural BondJoint Lead Manager 2.27% Global Samurai Bond Due 2006Sole Bookrunner 4.2% Global Samurai Bond Due 2031Sole Bookrunner 3.3% Global Samurai Bond Due 2010Sole Bookrunner Republic of South Africa 7.000% due April 2008 Joint Lead Manager Merrill Lynch - Africa Credentials

  28. Discussion Parameters • The preceding information is intended to you with general market views and information, and is not based on the individualized characteristics of any particular plan(s). It is not intended for further dissemination in its present form and may not be disseminated to other parties. It is for your private information and is for discussion purposes only. The preceding information is intended solely to provide you with a general overview on risk management products. • The information was prepared by Merrill Lynch Sales personnel (ML Sales) and is not a publication of Merrill Lynch Research (ML Research) although a ML Research report may be referenced as a link or as an attachment hereto. Actual ML Research Reports can be found at www.mlx.ml.com. • Bid and/or ask prices are estimated values only. The values given for "reference" reflect closing prices of the underlying security as indicated in the presentation. There can be no assurance that actual trades in the securities, or their underlying reference securities, could be completed at such values. The information was obtained from various sources and is not guaranteed for accuracy or completeness. • The estimated values may vary significantly from actual trade prices as a result of various factors, may not be representative of any internal valuations employed by Merrill for its own purposes, may vary during the course of any particular day and may vary significantly from the estimates or quotations that would be given by another dealer. You should consult with your own accounting or other advisors as to the adequacy of this information for your purposes. Merrill Lynch makes no representation and shall have no liability in any way to you or any other entity for any loss or damage, direct or indirect, arising from the use of this information. • Neither the information nor any views expressed constitutes a solicitation for the purchase or sale of any securities or other financial instruments. Merrill Lynch and any affiliate may trade for their own accounts in any of the products mentioned herein or in related investments, and also from time to time perform or solicit investment banking or other services for, or from, any entity mentioned herein. • In preparing these materials, we were cognizant of potential conflicts between the interests of certain parties such as plan sponsors and plan participants. Corporate employees who are also plan fiduciaries must become adept at managing that conflict, seeking independent fiduciary advice where the conflict is too severe. However, at least in respect of the matters considered in these materials, it is our perspective that the interests of sponsors and participants often converge. Each individual must evaluate the factors considered in reaching any decision with respect to trade execution or risk management techniques in view of his or her unique role(s) in making the decision. • We understand that certain parties may have a fiduciary role regarding retirement plans or counsel those who have such a role. Where we provide investment advice to plans and their fiduciaries, we have strong controls, as required by ERISA, to make sure that we do not trade with the plans in effectuating our advice. The material in this presentation should not be taken in any way as fiduciary advice for plans and the information presented should not serve as a primary basis for investment decisions with respect to plan assets. You should seek independent advice for any decisions that you make

  29. Disclaimer This information is for your private use and is for discussion purposes only. A variety of market factors and assumptions may affect this presentation, and this presentation does not reflect all possible loss scenarios. There is no certainty that the parameters and assumptions used in this presentation can be duplicated with actual trades. This document does not constitute an offer or invitation to acquire any security or to enter into any agreement and Merrill Lynch is not soliciting any action based on this information. In connection with any swap or over-the-counter (“OTC”) derivative transaction Merrill Lynch acts solely as a broker, or solely in the capacity of an arm’s length counterparty. Merrill Lynch is not acting as a fiduciary in respect of the investor and has no responsibility under the standards governing the conduct of fiduciaries, investment advisers or investment managers. Any information conveyed by Merrill Lynch in connection with this presentation or any transaction is and will be merely incidental to the provision of Merrill Lynch’s services as a broker or role as counterparty and does not and will not serve as a primary basis of any investment decision by the investor. Generally, all OTC derivative transactions involve the risk of adverse or unanticipated market developments, risk of illiquidity and other risks. Any transaction terms are indicative only and are subject to change and any prices mentioned here are not bids or offers of Merrill Lynch to purchase or sell any securities or other financial instruments. Swaps, options and other derivative transactions are not suitable for all investors. Option buyers may lose their entire investment. Option sellers may have an unlimited loss. This brief statement does not disclose all of the risks and other significant aspects of entering into any particular transaction. Prior to undertaking any trade, you should discuss with your professional tax, ERISA or other adviser how such particular trade(s) may affect you.