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1. Workshop on Debt Markets: Importance of Debt Capital for Africa
2. 2 We Have a Strong Debt Markets Panel
3. 3 Objectives To recognize the importance of debt capital for African financings
To explore means to raise debt capital
In domestic debt capital markets
In international debt capital markets
SCIC - A financial advisory firm providing advice to emerging market clients on credit. My focus here:
Credit ratings
Credit enhancement / risk mitigation
Importance of local capital markets
4. 4 Importance of Debt for Africa Commercial debt is considered inappropriate for public sector borrowers in HIPC countries by IMF / World Bank
To do so without any concern for the merits of the project and the financing is a big mistake
Because debt is a fundamental component of corporate finance
Most projects combine 20% 40% equity financing with the remainder in debt
Debt is available for African projects
In international capital markets
In local capital markets
Constraints are credit quality and require credit strategies
5. 5 Key Project Finance Lessons Projects should be economically viable -- provide essential services on an affordable and a profitable basis
Only possible within a framework of sound sector strategies, good policy planning and a long-term commitment to improving country ratings
Requires willingness to uphold legal contracts, even in adversity
But poor project economics enhance pressures to renege on policy protections , e.g., take or pay contracts and commitments to raise rates
Poor project design / poor public policy can hurt (Maylinad)
Even good documentation cannot offset weak demand (Meizhou Wan)
Poor projects may exacerbate direct / indirect public contingent liabilities
Financial engineering / risk mitigation (PCG, PRG, full wrap) can help
Attract foreign investors, extend maturities, reduce costs, etc.
But no substitute for project fundamentals
Local capital markets have a key role to play
6. 6 What Makes a Project Viable? Predictable country risks (with country ratings), transparent legal / business environment
Sound infrastructure sector strategies and policies
Acceptable country risk (could be measured with credit ratings)
Willingness to abide by contracts and enforce arbitral awards
Sound deal economics [other speakers will present projects]
Experienced and reliable sponsors
Secure supplies with agreed or acceptable price expectations
Adequate demand at affordable prices generating attractive ROI
Sensible, transparent, affordable PPAs or other support payments
Exit options via IPOs or sale to strategic investors or a handover to the government after expiration of the concession period
Adequate local / international financing and risk mitigation
No substitute for sound policies and sound project economics
7. 7 Ratings Can Reduce Perceived Risks 12 African countries rated B+ or lower
Unrated African countries could consider getting ratings
6 rated BB- or higher including four rated investment grade
Benefits of ratings
Investment grade ratings are necessary for many investors
Even non-investment grade ratings can help access capital
Ratings can expand universe of potential investors
Ratings are an independent opinion of the creditworthiness of a country
Well accepted by international investors in bond markets
Growing use in loan markets, bank regulation and domestic markets
Impose a market discipline on country leadership
International rating agencies rate both FX and LC obligations
Local market rating agencies are also making progress
8. 8 B+ or Lower Rated African Countries
9. 9 BB or Higher-Rated African Countries
10. 10 Risk Mitigation Can Help Viable Projects In mitigating policy and non-policy risks
With PRI, PRG
With PCG, monoline or multiline guarantees, etc.
In extending maturities for domestic and offshore debt with maturity and partial credit guarantees
In reducing currency and interest rate mismatches
Via better FX indexation, liquidity, currency and rate swaps
In attracting a wider investor base and reducing costs
In distributing lenders’ risks post-construction via pooling
11. 11 Risk Mitigation Sources
12. 12 Risk Mitigation Has Been Used In Africa
13. 13 Private Guarantors Must be Attracted Instruments
Full guarantees of principal and interest are most common
Partial guarantees have been provided, especially for such ABS as those backed by home equity (second mortgage loans)
Maturity guarantees (to provide certainty on maturities)
counterparty guarantees
“Supply guarantee” to cover export performance risk
Requirements vary
Monolines require a investment grade rating before the guarantee (Foreign currency rating for FX transactions; LC for domestic transactions)
Multilines can go to lower rated transactions and prefer high non-investment grade transactions before the guarantee
14. 14 Must Develop Public - Private Partnerships
15. 15 Need to Develop Local Capital Markets Local capital market financings can reduce FX and other risks
Need to develop corporate and municipal bond as well as equity markets
Develop investor base along with better regulatory frameworks
Covering pension funds, insurance companies, mutual funds and non-bank finance companies
Review and improve disclosure standards for issuers
Extend maturities with “take out” financings and maturity guarantees
Fix local rates with domestic currency interest rate swaps
Develop / improve local credit rating agencies
Increase transparency and legal basis for inter-governmental fiscal and service arrangements to promote municipal financings
Improve currency swap markets to better hedge FX risks
16. 16 Mahesh K. Kotecha, C.F.A. Mr. Kotecha is President and founder of Structured Credit International Corp. (SCIC), which provides advice on ratings and structured financings for emerging market clients. Prior to forming SCIC, he was Managing Director of MBIA Insurance Corporation, of CapMAC Asia and CapMAC and an Alternate Director for ASIA Ltd. His previous responsibilities at MBIA included deal origination of all types of transactions and execution or corporate structured financings.
He came to CapMAC in 1989 from Kidder, Peabody, where he was Director of the Market Analysis and Product Development. Mr. Kotecha led Kidder into the UK mortgage backed securities markets, structured the first public Collateralized Bond Obligation (CBO), and advised International Finance Corporation (IFC) and Turkey on capital markets issues. Previously, Mr. Kotecha worked for eight years at Standard & Poor's, where he was responsible for all ratings based on non-US collateral: mortgage and non-mortgage. Earlier, Mr. Kotecha worked for four years at the Federal Reserve Bank of New York and for three years at the United Nations Fund for Population Activities (UNFPA). Mr. Kotecha holds a Master's degree in management from the Sloan School of Management at MIT, and a Bachelor's degree in physics and engineering from Harvey Mudd College in Claremont, California. He is listed in Who's Who in America (1992 -). He is a member of the Council on Foreign Relations, where was an Adjunct Senior Fellow (1999-2002), and of East African Development Bank's International Advisory Panel. He was also a member the Commission on Capital Flows to Africa established by the Corporate Council on Africa from 2002 to 2003. He is currently a member of the CCA’s Task Force on Capital Flows and chairs its Debt Sub-Committee.