Agenda. /// Welcome and introduction Eveline Jansen (Solarplaza)

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2 Agenda /// Welcome and introduction Eveline Jansen (Solarplaza) /// Persistent Energy Capital Dirk Münch /// Managing Director /// TCX Per van Swaay /// Sr. Vice President /// GuarantCo Douglas Bennet /// COO /// MFX Brian Cox /// President & CEO /// Q&A /// End of the webinar

3 Unlocking Solar Capital Africa 1-2 November 2016 /// Nairobi, Kenya 2-day conference Unlocking capital for new solar project development in Africa 300+ international key players: development banks, developers, IPPs, EPCs & more 3 leading solar electrification segments: On-grid solar Micro-grids Off-grid Lighting & Household electrification

4 Speakers

5 Participating Companies (confirmed so far)

6 About Solarplaza "Empowering professionals in solar business development by building the most valuable solar PV network" Established in events organized In 25+ countries worldwide Network of solar PV professionals

7 Practical notes Questions? Please use the chatbox on the right side of your screen Technical issues? Use chatbox The slides & recording will be available afterwards

8 How to Manage Currency Risks for Renewable Energy Projects in Africa

9 How to Manage Currency Risks for Renewable Energy Projects in Africa Tuesday 20 September 2016, 5:00 PM - 6:00 PM CEST Organized and hosted by

10 Currency Risk And Mitigation For The Off-grid Sector 20 September 2016

11 PEC practitioner experience and lessons learned PEC has been focused on the distributed off-grid energy services- or PAYG-sector since PEC made 10 investments in the sector and its value chain investing its own and 3 rd party capital. PEC is an advisor to companies and investors in the sector. PEC structured and arranged the first solar asset receivable backed note for BBOXX in PEC provides FX advisory services. PEC consulted for Worldbank, Rockefeller Foundation, DFID, etc. A distributed energy services company (or DESCO) is company which provides private households or small businesses with an energy asset and enables the customer to pay over time. Customers are households and not institutions; there is no PPA. DESCOs connect their customers to microgrids and/or individual systems. DESCOs revenue are always in local currency.

12 DESCOs are exposed to LCY devaluation and currency shocks Consider the balance sheet of typical DESCOs like M-Kopa, Mobisol etc.: 1. The largest asset of these companies are customer receivables: Payments are in local currency and can be up to 3-years in the future There is a limited ability to adjust existing pay-plans to inflation It is contrary to commercial interest to transfer FX Volatility to customers, as it creates price uncertainty and affordability issues and may hurt competitiveness 2. The largest liability is typically a USD loan or USD equity. As a result, DESCOs (and their investors) lose money if local currencies weaken 3. DESCO s can - or may be required by their lenders to do so - hedge their USD liabilities (effectively converting them from USD into LCY liabilities), or they can/are required to borrow in LCY.

13 Lend in local currency? Borrow in local currency! t = 0; August 15, 2015 Assets [Present value cash in-flow] USD denom. LCY denom. Cash 200 Inventory incl. good in transit 1,563 Present value of contractual revenue 7,915 Liabilities [Present value of cash out-flow] Working capital facility 2,344 Consumer finance loan 5,541 Present value of operating costs 1,500 Equity 293 Net position (short) / long LCY 6,415 t = 0; August 15, 2015 Assets [Present value cash in-flow] USD denom. LCY denom. Cash 200 Inventory incl. good in transit 1,563 Present value of contractual revenue 7,915 Liabilities [Present value of cash out-flow] Working capital facility 2,344 Consumer finance loan in LCY 5,541 Present value of operating costs 1,500 Equity 293 Net position (short) / long LCY 875 Borrowing locally balances a local current asset (the receivables) with a local currency liability. Selling the locally currency asset in a securitization for example, removes a the local currency asset from the balance sheet. A derivative transaction replicates the effect of a local loan. In this example a 10% devaluation of the currency would reduce the asset value of the un-hedged (un-balanced) company by ~$0.6m. The hedged (balanced) company would face a reduced asset value and(!) a reduced liability value with a P&L effect close to 0.

14 Borrow in LCY w/o local lenders Possible structures 1. An off-shore USD lender offers a LCY denominated loan and enters into a hedge (a non-deliverable swap or forward) to transfer the FX risk to the hedge provider (a synthetic LCY loan => while it is a LCY loan, a LCY asset/liability, all cash flows are in USD) 2. An off-shore USD lender offers a USD denominated loan and the borrower deposits the USD loan proceeds with a local bank and that bank lends in LCY against the USD cash collateral (back-to-back structure). 3. An off-shore USD lender offers a USD denominated loan and the borrower takes out the hedge (a non-deliverable swap or forward) with the hedge provider; Most DESCOs will depend on a USD lender s/investors ability to arrange a hedge with any of the few intermediaries (such as TCX and MFX) willing to cover illiquid currencies (TCX and MFX to discuss further).

15 Summary DESCO create LCY denominated assets and are naturally long LCYs and LCYs can loose value quickly and are very volatile! Don t risk it! DESCOs should borrow in LCY to match their LCY assets and mitigate their FX exposure. Local debt markets are the most logical source (GuarantCo to comment further) The cost of borrowing in LCY is lower than high interest rates suggest (TCX to comment further) If local debt markets are not sufficiently available, LCY can be sourced through international investors and/or directly/indirectly through FX hedge providers (TCX/MFX) DESCOs and their equity investors need to build the capacity to measure and mitigate their currency risk and Lenders should develop capacity to lend in local currencies.

16 Appendix For more details see our 2015 report on currency risk and mitigation measures for the offgrid energy sector.

17 How to Manage Currency Risks for Renewable Energy Projects in Africa Tuesday 20 September 2016, 5:00 PM - 6:00 PM CEST Organized and hosted by

18 TCX Fund absorbs FX risk in frontier markets DFI effort to promote LCY funding and develop hedge markets Offers long term hedges in > 70 currencies, > USD 4bn closed Cooperate closely with DFIS, commercial banks and institutional investors to deepen local markets: additionality + risk-reflective pricing A scaleable solution: global diversification and stable operating costs. 18

19 Frontier market currency volatility 60.0% Africa average annual depreciation 1/8/13-1/8/ % 40.0% 30.0% 20.0% 10.0% 0.0% BWP EGP ETB GHS KES MAD MWK MZN NGN RWF TND TZS UGX XAF XOF ZMW 19

20 Impact of FX volatility on grids The USD PPA passes FX risk to the utility => vol and losses are borne by the utility and/or by consumers and/or by taxpayers and/or by donors Results in weak utilities, high government deficits and tariff volatility Impaired budgeting & planning and hampered sector expansion Fuels inflation and a weaker macro climate DFI Lenders USD funding FX risk off-shore on-shore Project FX risk USD PPA Utility FX risk LCY tariff Consumers FX risk Government FX risk Taxpayers/donors 20

21 Hedging utilities Donors DFIs/MLAs DFI Lenders Hedge provider credit risk Guarantor USD funding FX risk FX risk off-shore on-shore Project FX risk USD PPA Utility LCY tariff Consumers 21

22 As markets develop PPAs will move to LCY Donors DFIs/MLAs DFI Lenders LCY funding FX risk Hedge provider off-shore on-shore Project LCY PPA Utility LCY Tariff Consumers LCY funding Onshore banks Guaranteed? 22

23 But hedging / LCY is expensive!? The statement hedging or LCY is expensive is JUST AS UNFOUNDED as the belief that USD funding is cheap 23

24 In theory similar expectation Cost % Hedge premium Risk charges Annual Depreciation Nominal LCY Interest rates Nominal USD interest rates Hedged The LCY option Unhedged The USD option

25 The cost of local currency Africa average annual depreciation 1/8/13-1/8/ % 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% BWP EGP ETB GHS KES MAD MWK MZN NGN RWF TND TZS UGX XAF XOF ZMW -10.0% -20.0%

26 You hedge to eliminate risk and volatility 30 % 20% 10% annual depreciation => if unhedged, full impact on P&L and cash a fixed hedge rate => volatility has no impact on P&L or cash years

27 Considering options I can just take the bet and increase my prices if unlucky The hedge rate I pay, may be higher than the FX loss I avoid! For me that is a cost Local currency nominal interest rates are (much) higher than USD rates!

28 Considering options

29 Considering options I can just take the bet and increase my prices if unlucky The hedge rate I pay, may highger than the FX loss I avoid! For me that is a cost Local currency nominal interest rates are (much) higher! Than USD rates! I sleep a lot better! I get better credit terms and more leverage I don t need to increase my prices!! I have stable costs & predictable P&L And I am fully protected against currency shocks Losses due to annual depreciation are avoided. That balances hedge rates

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31 Lenders FX risk Hedge provider credit risk MFX/Guarantors off-shore on-shore LCY funding Any off-grid LCY funding Lenders No exposure to FX volatility Certain and predictable debt obligations Less credit risk; better trerms, more leverage Can offer price stability to customers Competitive advantage? A currency shock has limited impact on business Less managerial stress Guaranteed? Guarantco 31

32 How to Manage Currency Risks for Renewable Energy Projects in Africa Tuesday 20 September 2016, 5:00 PM - 6:00 PM CEST Organized and hosted by

33 GuarantCo Local Currency Solutions

34 GuarantCo Profile Only DFI focused on supporting local financing of infrastructure in lower income countries Backed by 5 OECD governments Conceived to address existing constraints in the supply of local financing. Bridges the gap between the project s requirements and the local market. Crowds in the local commercial sector Aims to build self sufficiency within the countries in which it operates. Rated AA- Fitch, A1 Moody s, AAA Bloomfield, AAA PACRA (LCY rating)

35 Financing Options For on-grid and larger off-grid: Project financing Tariff Tenor and amount Requires understanding of cash flow based financing Corporate (or quasi project/corp) financing Track record Sponsor support 35

36 Financing Options For smaller off-grid or solar home solutions Trade Financing For example LCs for inventory Corporate financing For example, Discounting and warehouse Capital Markets Corporate bonds Securitisation Direct lending Other benefits Brand recognition Sharing of analytics and distribution 36

37 How to Manage Currency Risks for Renewable Energy Projects in Africa Tuesday 20 September 2016, 5:00 PM - 6:00 PM CEST Organized and hosted by

38 MFX Profile Who we are: MFX Solutions, close partner and shareholder of TCX, is a currency hedging facility created by and for impact investment - a.o. in microfinance, SMEs, Renewable Energy - in developing markets worldwide What we do: MFX is a market intermediary that helps make it easier for impact investors and borrowers to hedge their currency risk MFX can hedge loans in almost any currency thanks to hedging relationships with TCX and international banks Thanks to guarantees from US and Dutch governments (OPIC and FMO), MFX can offer most clients hedging without requiring cash collateral Hence: MFX facilitates access to hedge providers while optimizing hedging conditions, by reducing the complexity and liquidity impact of collateral Track record: MFX has hedged over USD 1.1 billion in loans with over 80 impact investors covering more than 45 currencies

39 Liquid Marke t Risk Allocating risk to the right place Diversification Illiquid Market Risk Bank Market Risk Credit Risk Credit Risk Market Risk Business Risk Market Risk Swap markets

40 Structure when a solar provider is borrowing from a fund Hedge (no collateral) Funds DESCO/Solar project Loan and repayment in local currency Clients LCY Sales

41 Structure when borrowing from OPIC DESCO Hedge (no collateral) Loan and payments in local currency* Clients LCY Sales *Loan includes a clause that gives payments on the swap seniority over the lender in the cash waterfall

42 Other structures Alternatives: All require OPIC approval 1) Guarantee on the swap from a creditworthy lender 2) Collateral from the borrower 3) Seniority for the swap in the loan agreement Commercial lender/other DFI Loan and payments in hard currency Hedge Hedge (w/ colateral*) DESCO/Solar project Clients LCY Sales

43 Hedging with MFX vs. hedging directly with TCX or a bank MFX clients are charged 50 bps over MFX cost of hedging charged by TCX or commercial banks MFX s hedging cost with TCX is lower than for a non-investor in TCX. So including MFX s spread the effective cost of hedging with MFX vs hedging directly with TCX is roughly the same For liquid currencies MFX clients can get access to multiple international bank bids, due to MFX existing hedge lines based on its AAA credit support from OPIC. Most structures can be done without any collateral avoiding the (often high) opportunity cost of having to keep significant USD liquidity to fund the banks or TCX s collateral requirements.

44 Q&A time Borja Gutierrez Skype: borja.solarplaza Phone: Eveline Jansen Skype: eveline.solarplaza Phone: Website:

45 Upcoming Events Solar Asset Management LATAM September 2016 Santiago, Chile Solar Asset Management Europe 9-10 November 2016 Milan, Italy Renewable Energy Trade Mission Iran October 2016 Tehran, Iran The Solar Future NL May 2017 The Netherlands Unlocking Solar Capital Africa 1-2 November 2016 Nairobi, Kenya