Andrew Millard, Head of Specialized Finance
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Andrew Millard, Head of Specialized Finance

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    Andrew Millard, Head of Specialized Finance Andrew Millard, Head of Specialized Finance Presentation Transcript

    • Increasing Capital Flows to Africa The Corporate Council on Africa Debt Capital Markets Working Group 29 September 2004
    • Overview
      • Imperial Bank in the African debt markets
      • New products and local capital market development
      • Case Study – Eagle Bonds
    • Imperial Bank in the African debt markets
    • 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
    • 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
    • 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
    • Imperial Bank Asset finance Capital markets R725 000 000 Ai rcraft financ ing Sole Arranger 2000 R 450 000 000 Aircraft financ ing Sole Arranger 200 1 R 1 500 000 000 A ircraft financ ing Sole Arranger 200 2 R 300 000 000 Ship financ ing Sole Arranger 200 2 R 930 000 000 US Ex-Im Bank guaranteed aircraft finance Sole Arranger 200 3 R 431 000 000 US Ex-Im Bank guaranteed aircraft finance Sole Arranger 200 4 R 2 300 000 000 Commercial paper programme Sole Arranger & Manager 2000 R 3 500 000 000 DMTN Programme Originator & arranger 200 1 R 2 600 000 000 IPL1, IPL2 & IPL3 bonds Originator & arranger 200 1/3 R 515 000 000 IBP1 tier 2 capital bond Arranger & Manager 200 2 R 930 000 000 EGL01 ECA guaranteed bond Manager & arranger 200 3 R431 000 000 EGL02 ECA guaranteed bond Manager & arranger 200 4
    • New products and local capital market development
    • 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
    • Eagle Bonds Case Study Increasing Capital Flows to Africa
    • Features of the Programme Increasing Capital Flows to Africa
      • 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
      Features of the Programme Increasing Capital Flows to Africa
      • 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
      Features of the Programme Increasing Capital Flows to Africa
      • 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
      Features of the Programme Increasing Capital Flows to Africa
      • Rating Agency
        • Initial transaction’s 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
      Features of the Programme Increasing Capital Flows to Africa
      • 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)
      Features of the Programme Increasing Capital Flows to Africa
      • 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
      Increasing Capital Flows to Africa 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 memo’s
        • Less non-cash rebates & credit memo’s (training etc.)
        • Less “look back” reduction (> 3 months since delivery)
        • Net purchase price
        • Financeable portion @ 85% (subject to Exim Bank)
        • Exim Bank exposure fee (subject to Exim Bank)
        • Net-net financeable amount
      Increasing Capital Flows to Africa Features of the Programme
    • Eagle Bonds One Increasing Capital Flows to Africa
      • Abridged structure
      Eagle Bonds One Increasing Capital Flows to Africa Exim Bank Debenture Trust Capital Markets Eagle Bonds Eagle Assetco Safair (Lessor) SAA (Lessee) Security Company Boeing Corp. Guarantee Beneficial interest Commercial paper Loan Security Security Security Operating lease Installment sale Aircraft purchase USA South Africa
      • 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
      Eagle Bonds One Increasing Capital Flows to Africa
      • Benefits to the Importer
        • A “greenfields enterprise” leveraging the lessee’s 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
      Eagle Bonds One Increasing Capital Flows to Africa
      • 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
      Eagle Bonds One Increasing Capital Flows to Africa
    • Key Benefits of the Programme Increasing Capital Flows to Africa
      • 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
      Key Benefits of the Programme Increasing Capital Flows to Africa
      • 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)
      Key Benefits of the Programme Increasing Capital Flows to Africa
      • 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)
      Key Benefits of the Programme Increasing Capital Flows to Africa
    • Principal Disadvantages Increasing Capital Flows to Africa
      • 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
      Principal Disadvantages Increasing Capital Flows to Africa
      • 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
      Principal Disadvantages Increasing Capital Flows to Africa
      • 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)
      Principal Disadvantages Increasing Capital Flows to Africa
    • Challenges Increasing Capital Flows to Africa
    • Challenges Increasing Capital Flows to Africa
      • 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
      • 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
      Challenges Increasing Capital Flows to Africa
      • 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
      Challenges Increasing Capital Flows to Africa
      • 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)
      Challenges Increasing Capital Flows to Africa
    • Challenges Increasing Capital Flows to Africa
      • Optimisation of terms
        • Term of the Guarantee
          • Asset-type ( N ew 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 can’t be relaxed
        • Management of costs
    • Transportation Security Equipment Programme Increasing Capital Flows to Africa
      • 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
      Transportation Security Equipment Programme Increasing Capital Flows to Africa
      • 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
      Transportation Security Equipment Programme Increasing Capital Flows to Africa
      • Amount (indicative values for illustrative purposes only)
        • US contract price $100 x 85% = $85
        • Contracted local content $10 x 100% = $10 (Check <15% of $100)
        • 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
      Transportation Security Equipment Programme Increasing Capital Flows to Africa
    • Questions