How the Captive Power Market can be Positioned to Incentivise Local Institutional Investors like the Pension Funds. Chinua Azubike CEO, InfraCredit

Transcription

1 How the Captive Power Market can be Positioned to Incentivise Local Institutional Investors like the Pension Funds. by: Chinua Azubike CEO, InfraCredit

2 BILLION The Market Opportunity Nigeria s huge infrastructure deficit requires long term capital WITH a growing supply of capital from pension funds, and limited investment instruments to safely channel these long term funds towards infrastructure, our market demands bankable infrastructure assets that can attract long term capital in a sustainable manner. N8 Trillion Total Par Value Outstanding in Nigerian Debt Capital Markets as at F 2017 N11Trillion FORECAST of the nation s Pension Assets to double over the next three years 0 Limited long dated corporate bonds issued to finance infrastructure assets $25 CORPORATE INFRASTRUCTURE BONDS Annual Funding required to bridge infrastructure deficit ( ) According to Nigeria s National Integrated Infrastructure Master Plan ( NIIMP ) 30years Ave. Contractual Maturity of Pension Fund & Insurance Funds with limited assets of matching duration N3 Trillion % Estimated Potential Pension Funds Investable in Eligible Infrastructure Bonds (35%) and Funds (10%) Based on Current PFA Investment Thresholds and Limits in April 2017 PENCOM Investment Guidelines N6.7 TRILLION Pension Fund Assets has grown from N47 billion in 2004 to its current level 1

3 Infrastructure as an Asset Class Bankable infrastructure assets may default in a stress environment but have demonstrated a materially lower loss severity given the essentiality and long expected life of the underlying assets. 1 Natural 2 Inelastic 3 Monopolies Demand Essentiality of Services 4 Inflation Linked Income 5 High Barriers 6 Stable 7 to Entry Cashflows Economies of Scale 8 Long term 9 Low Operating Assets Costs *A Moody s study concludes that Loss Given Default levels are 3 times higher for Non Financial Corporates versus Infrastructure Issuers rated Ba *Infrastructure Default and Recovery Rates dated 9 March

4 BILLION Domestic Debt Capital Markets Institutional Investors largely participate in investments through the capital markets, Captive Power Assets will compete for capital with other eligible asset classes in accessing the capital markets Infrastructure Assets/Projects Capital Market Regulators $25 Est. Annual Funding required to bridge infrastructure deficit ( ) CAPTIVE POWER GRID POWER TOLL ROADS GAS RAIL Regulatory Oversight INTERMEDIARIES Issuing House Financial Adviser Stockbroker Rating Agency Fund Manager Infrastructure Bonds 1 2 Institutional Investors PFA s, Insurance Cos. Infrastructure projects issue bonds to fund or refinance projects or via a Fund Infrastructure Funds The high credit quality of the bonds will facilitate their placement with institutional investors including pension funds Listing Authorities N3.0 TRILLION Allocable Investments Pension Fund Assets 3

5 Access to Long Term Debt Capital Markets Asset Classes with Strong Credit Quality, Transparency, Governance, and Accountability are attractive to the Debt Capital Markets Full Disclosure Corporate Governance Credit Rating Size/Scale Continuing Obligation Global Best Practices Investment Grade Size/Liquidity of Issue Financial and other Material Information Minimum Standards Annual Review Economies of Scale 4

6 Key Commercial Considerations Subject to satisfactory credit assessment, eligible power projects with the following features should be an attractive asset class to institutional investors =/>NGN 10 Bln (c. 30 MW) Modular Incremental Projects Take or Pay Contract Availability & Energy Charge Scalability of Project Sustainable Cost-Reflective Tariff Strong Counterparty Off-taker Up to or > 10 year contracts Payment Security Secured Long Term Offtake Bankable Supply Agreement Availability, Accessibility Fuel /Gas Supply 5

7 Illustrative Captive Power Transaction GUARANTOR Key Features XYZ Funding Plc (SPV) Bonds Credit Guarantee Bondholders (Institutional Investors) 1. SPV is established to issue debt backed by cashflows of Eligible Captive Power Plants Pass-through net proceeds Issue Proceeds NOTE TRUSTEE Coupon and principal repayments 2. Captive Power Plants aggregated as Co-Obligors to attain required size/scale (=>N10 Bn) Co-Obligors A Power Ltd B Power Ltd C Power Ltd 3. Collective Cashflows of Plants secured to repay Bondholders 4. (Optional) Guarantor provides credit enhancement by guaranteeing timely payment of principal and interest E Power Ltd F Power Ltd 5. Institutional Investors (Bondholders) invest in the Bonds and Trustees monitors timely payment to Bondholders 6

8 Key Project & Market Considerations Key Variables Market/Project Considerations Legal Framework Investment Grade Credit Rating Long Term Predictable Cashflows Creditworthy Counterparty Institutional Capacity Inflation Linked Income Macroeconomic Factors Corporate Governance Size and Capacity Permits & Licences Environmental & Social Standards Project/Market Tools 7

9 About InfraCredit InfraCredit is a specialised financial guarantor established by the Nigeria Sovereign Investment Authority in collaboration with GuarantCo to provide guarantees to enhance the credit quality of local currency debt instruments issued to finance eligible infrastructure related assets in Nigeria. For more information go to: Credit Rating AAA (NG) June 2017 AAA (NG) July 2017 Sponsors Capital Total: Up to $200 Million Initial Core Capital Initial Callable Capital US$ 25 Million US$ 50 Million (NGN EQUIVALENT) (NGN EQUIVALENT) Eligibility Criteria Naira Denominated Debt Issue Eligible Infrastructure Activity Debt Tenor of up to 20 years Brownfield Asset Acceptable Credit Profile Pension (PENCOM) Compliant Minimum BBB- Credit Rating Adequate Security Package Environmental & Social Standards Development Partners 9 8

10 Thank You 9