Equity Bank Funding Options_Konza Investment 2012

7/30/2019 Equity Bank Funding Options_Konza Investment 2012

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EQUITY BANK LIMITED

Funding Options

Konza Techno City

Konza Techno City Investor’s Conference – 8th August 2012



Africa’s Infrastructure Funding

Requirements• Infrastructure funding requirements for MIC African

nations estimated at about 10% of GDP p.a. until 2020

• For LIC, their investment needs are even higher

estimated at 15% of GDP annually • ou o enya governmen u ge s a oca e o

infrastructure

• In 2008, the United Nations had estimated the need of

investing 52 billion dollars annually; about 75% of whichis to go to MICs for infrastructure developments

• Traditional sources insufficient, alternative sources of funding required



Proportion of Foreign Aid that

goes to Infrastructure

3000

3500

4000

4500

54.9%

48.6%

22.0%

37.8%

12.5%

0

500

1000

1500

2000 1.2% 20.2%

0.2%

15.3%

7.6%

Infrastructure Aid($ mn)

Total Aid ($ mn)



Funding Options for African

Infrastructure Development• Project Finance includes various funding sources:

Commercial Banks

Export Credit Agencies (ECAs)

• Development Financial Institutions (DFIs)

ADB

World Bank & Other DFIs

• Project/Infrastructure Bonds

• Private Equity Funds



Funding Options for African

Infrastructure Development• Delivery Mechanisms:

Public Private Partnerships

Concessions

Build, Operate-Transfer



Commercial Banks

Key Features

• Proven fundingsolution

• Structuringcapabilities

International Banks

• Reduced liquidityand players

• Are constrained byhigh liquidity costs

Local Banks

• Usually followinternational banks

but some of themcould accept more

• Solutions oriented• Work with more

flexible guidelineswith respect to ratiosand economic

analysis• Offer fast execution

process

• Shorter tenor expected in light of implementation of Basel III

• Remain constrained

by host country riskappetite and mayrequire political riskcover /

• Limited appetite for local currency risk

aggress vestructures providedthey can obtain ahigher return

• Limited pool of

liquidity• Limited international

track record



Export Credit Agencies (ECAs)

Key Features

• Provide political and / or commercial risk cover to lenders

• Can finance part of localcosts, ECA premium and financing

To Consider

• Amount linked to eligibleprocurement (tied schemes)

Usually offer attractive fixed rateCIRR option i.e. “free swap” costs

• Also act as catalyst to bankspresence: enhance liquidityReduce banks’ exposure to country/ industry concentration

risk• Enable longer tenors• Improving flexibility: ECAs tend to

limit their requirement and workmore closely with the samerequirements as banks

• e nanc ng mtat ons prem umpaid upfront)

• Require an adaptation of theprocurement strategy, as their involvement is constrained by

eligibility requirements



Development Financial

Institutions (DFIs)

Key Features

• Promote sustainable privatesector investment through

financing in the form of loans, guarantees or equity

To Consider

• The involvement of DFIs could beconsidered provided that the

project is strategic for the countryand is significantly positive for its

• yp ca y prov e ong- erm

financing• Maintain a high level of due

diligence, with a focus onenvironmental and social aspects

• Provide confidence tocommercial banks

• Two main categories:• National or Regional

Development Banks• Multilateral or International DFIs

• DFIs usually take political risk• Can offer embedded fixed rates• Some of them offer A/B Loan

structure: A loan perceived by

commercial banks as an umbrellafor B Loan

• Can also contribute throughvarious forms of junior funding



Project/Infrastructure Bonds

Key Features

• Project bonds have been overshadowedb the bank market to date, but

To Consider

• Require ratings• Minimum size

increasing interest from both sponsorsand bond investors

• Project bonds can be incorporated intothe majority of well structure projectfinancings across a range of infrastructure and energy sectors

(transportation, power, PPP, renewableand oil & gas)

• Large size project bonds are achievable;full range of tenors available

• No commitment prior to execution• Negative carry/ make-whole provisions



Private Equity/Venture Capital

Funds

Financial investors - Players

• Infrastructure funds / Directinvestment by institutional

To Consider

• Investors interested inattractive class of investors

• Sovereign wealth funds• Specialized private equity

funds

asset, diversification, stablereturns and long term yieldsHighly liquid

• Lower appetite for

construction risk or demandrisk• Some will require

involvement of strategicplayer



Challenges to finance

infrastructure projects

Traditional bank lendingcannot meet financing needs

• Certain banks have either materially reduced lending

or refocused activitiestoward their domestic

Project bonds to bridge thefinancing gap

• Important additional sourceof liquidity

• Fixed income investors havemoney to invest and are mar e s

• Elevated funding costsespecially in non-domesticcurrencies

• Constraints for long term

financing• Uncertainties around the

impact of future bankregulation and BaselIII, with associated higher capital constraints

diversifying away from purecorporate and sovereignrisks

• Diversification of thesources of funding as it

does not use banking lines• Long dated maturities and

bullet structures areavailable (less constrainedthan on-balance sheetlending for banks)



Funding Solution –

Project/Infrastructure Bonds

For Issuers

• Opportunity to lock in fixed ratefunding without the use of swaps

• Underlying yield environment

For Investors

• Secured against real assets

• Solid and comprehensive securitypackages

rema ns avoura e

• Flexibility to adjust the repaymentprofile

• Can sit alongside other financings

(bank and ECA financing)

• Recent credit spread tightening hasresulted in materially better marginson offer, particularly in growthmarkets

• Portfolio diversification

• Solid secondary tradingperformances

• Pre-vetted by lending banks

• Attractive yields



Challenges and considerations

of Project Bonds

For Issuers

• Information -Up-front and ongoingdisclosure

• Structure• Potential negative carry issues

For Investors

• Project information need

• Government support; strategic

importance

• Can be more expensive to refinancebefore maturity

• Limited currency choices

• Bond features

• Assignment of credit ratings• Exchange listing

• Profit sharing, geopolitical &sovereign risks concerns

• Construction risk and mitigationmeasures

• Relative complexity of the structure

• Amortizing structures difficult tovalue

• Liquidity



Equity Bank and Infrastructure

Funding• Equity Bank is active in infrastructure projects in

Kenya for example:

Under-writing of KPLC rights issue to fund

infrastructure projects

Funding of Rift Valley Railways (RVR) upgrading$20m

Funding of oil terminal construction in Mombasa

Proposed funding of a hydro power project inRwanda



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Web site: www.equitybank.co.ke

Documents

Equity Bank Funding Options_Konza Investment 2012