Africa Legal Insight Banking and financial markets Julian Nichol John Sayers Peter Wright David Nelligan Katia Merlini Simmons & Simmons 02 July 2012
Integrating DFIs, Commercial Lenders and Political Risk Guarantees: Lessons from the Kribi Power Project Julian Nichol Simmons & Simmons 02 July 2012
Setting the scene from the political risk insurer/dfi perspective Pre-global financial crisis: Strong liquidity; competition amongst banks to find borrowers Projects were considered creditworthy even with significant political risk Lender competition tightened margins, leaving no room for political risk insurance premiums Consequently, lenders either provided a loan without cover or declined to lend at all Political risk insurers were concerned about their future role in the market Global financial crisis (H2, 2008) New projects were put on hold or cancelled Liquidity largely dried-up across all markets Need to find ways to attract financing In emerging markets, political and sovereign risk is a major obstacle Key role for providers of political/sovereign risk coverage in enhancing bankability of a project Key role for DFIs in plugging the liquidity gap 3 /
Kribi power project - Cameroon Development, construction and financing of: 216 mw gas-fired power plant in Kribi, Cameroon 100km 225-kilovolt transmission line Related infrastructure includes: First gas-fired power plant in Cameroon Development of the offshore Sanaga South gas field, pipeline and gas processing facilities by Perenco Cameroon (double project risk!) Construction of an 18km onshore gas pipeline by Cameroon s national hydrocarbons company, SNH Sponsors: AES Corp. (56%) and Government of Cameroon (GOC) (44%) 4 /
Kribi power project Structure chart Senior Lenders Lenders Security Package SNH Debt Gas Sales Agr AES Corp. 56% 44% Kribi Power Development Company (KPDC) GOC GOC Government Commitment Agreement Power Purchase Agr Political Risk Guarantee IDA AES Sonel KEC (India) and Siemens (Germany) T-Line PC Contract Power Plant EPC Contract Wärtsila (Finland) Electricity Generation Licence Electricity Sales Licence Land Lease Project Insurance Package 5 /
Kribi power project Debt structure Debt/Equity ratio = 75 : 25 Total Project Cost = 263m Equity = 65m Senior Debt = 198m Senior Debt Providers: DFIs African Development Bank (AfDB) Banque de Développement des Etats de l Afrique Centrale (BDEAC) FMO (The Netherlands development agency) International Finance Corporation (IFC) European Investment Bank (EIB) Société de Promotion et de Participation pour la Coopération Economique (PROPARCO) Local Lenders Standard Chartered Bank Cameroon S.A. Afriland First Bank S.A. Banque Internationale du Cameroun pour l Epargne et le Credit Sociètè Gènèrale de Banques au Cameroon 6 /
DFIs Background What are DFIs? Government backed institutions established to promote overseas development Two types: Bilateral: FMO (Netherlands), Proparco (France) Multilateral: AfDB, ADB, EIB, BDEAC, IFC What do they do? Debt finance: IFC, FMO, AfDB Political risk guarantees: IDA, MIGA Equity finance: IFC Where do they do it? Encourage private sector participation in high risk/ politically risky markets, for example: AfDB (participating countries across Africa) BDEAC (Economic and Monetary Community of Central African States) EIB (focused on Europe, but also involved in over 150 partner countries throughout: Asia, Russia, South America, the Caribbean and Africa) ADB (Asia & Pacific) IFC (globally) In 2010, the global private sector commitment of DFIs reached $39 billion Source: Overseas Development Institute 7 /
Debt tenors A breakthrough for Africa DFIs: 14 years door-to-door Local lenders: 7 years extendable to 14 years door-to-door Innovative extension structure for Africa Prior to end of year 7, local lender notifies whether it can extend term to 14 years Local lender can put loan to market and exit at year 7 if it cannot extend Borrower has responsibility to find a buyer of loan within agreed valuation parameters GOC will act as buyer of last resort if no market interest If local lender can extend, term is automatically extended to 14 years to match DFIs Innovative structure to develop local bank market tenors Narrows gap between international and local lenders Requires government support but should expect to see similar structures in future projects LOCAL LENDERS ARE COVERED BY A PARTIAL RISK GUARANTEE PROVIDED BY IDA 8 /
The IDA guarantee IDA = International Development Association part of the World Bank IDA guarantee = a partial risk guarantee covering commercial lenders to projects for 100% of debt service defaults caused by government nonperformance Launched in 1997, only circa 15 provided so far To qualify project must be in an IDA member country (some of the world s poorest): Per capita income usually falls below a certain threshold (some exceptions called blend countries) Creditworthiness for International Bank for Reconstruction and Development (IBRD) lending needs to be constrained 9 /
The IDA guarantee (contd.) IDA guarantee covers commercial lenders to a project for 100% of principal and interest against: Government default (e.g. government breach of contract) Non-insurable force majeure affecting government obligations political risk Foreign currency convertibility risk Asset expropriation Changes in law IDA fees are fixed: Initiation fee of 0.15% or $100,000 (whichever is higher) of guaranteed principal paid as lump sum Processing fee of up to 0.5% of guaranteed principal paid as lump sum Guarantee fee of 0.75% pa of disbursed and outstanding amounts of a guaranteed financing Some limited scope to negotiate terms and conditions of IDA guarantee Host government required to indemnify IDA against any payments made by IDA under the guarantee 10 /
The IDA guarantee (contd.) Host Government Note: Indemnity Agreement 1. Indemnity Agreement is negotiated between IDA and host government and remains confidential to those parties. IDA IDA Guarantee IDA Project Agreement Commercial Lenders Borrower (Project Company) Project Debt 2. IDA is not a lender, so it is not party to Common Terms Agreement/Loan Agreements. It therefore requires Borrower to enter into a Project Agreement this is means through which IDA ensures Borrower meets IDA policy objectives through a positive and negative covenant package. 11 /
The IDA guarantee (contd.) Some key concepts in IDA Project Agreement: Proceeds of commercial loans must be used to fund IDA Eligible Costs (usual exclusions: alcohol, tobacco, radioactive materials, military goods, environmentally hazardous goods) Obligation on Borrower to provide typical project information to IDA/rights of access to project site IDA is identified as a named insured on project third party liability insurances (and insurances taken out by EPC contractor(s)) Covenants on Borrower: To execute, operate and maintain project to requisite standards Not to change any project commercial document if such change would have a material adverse effect on project To comply with World Bank Standards for environmental and social compliance and not to engage in sanctionable practice 12 /
The IDA guarantee (contd ) To put in place adequate monitoring and compliance procedures re: environmental, social and sanctionable practice compliance (e.g. air quality monitoring) To properly execute population re-settlement in accordance with a RAP Not to amend the Environment and Social Management Plan, RAP etc. To find lenders to purchase any local loans not being extended Indemnity from Borrower to IDA for Borrower s breach of IDA Project Agreement Termination: IDA Project Agreement will terminate when IDA Guarantee expires or is terminated 13 /
Multilateral Investment Guarantee Agency (MIGA) Part of World Bank Group (est. 1988) Will support IDA-eligible countries, conflict-affected countries, complex project finance transactions, transactions from one developing country to another MIGA provides political risk insurance guarantees to private sector investors and lenders to promote foreign direct investment in eligible countries MIGA expects to have issued close to US$2 billion in guarantee coverage for FY 2011 Will mediate in dispute between borrower and host government MIGA guarantees issued on over 620 projects 90 have entered dispute territory MIGA has only been required to pay 6 claims 4 of 6 claims related to war and civil disturbance coverage Afghanistan being most recent (2011) 14 /
Multilateral Investment Guarantee Agency (MIGA) (contd.) MIGA has substantial requirements economic impact analysis, environmental and social studies etc. These processes add time and expense to MIGA s internal processes reflected in the premiums MIGA charges Before 2011, MIGA could only insure project debt if a sponsor was eligible for and purchased MIGA cover for its equity investment Now, MIGA can insure project debt on a stand-alone basis MIGA can provide political risk cover to an investor acquiring an existing brownfield project 15 /
Multilateral Investment Guarantee Agency (MIGA) (contd.) Current African projects in the pipeline looking to access MIGA coverage some examples: Azito Thermal Power Project and Expansion, Côte d Ivoire What: guarantee of an equity investment by Globeleq in the project; application is for US$114m for 20 years Risks covered: transferability, expropriation, war and civil disturbance and breach of contract Takoradi 3 Power Project, Ghana What: guarantee issued to Société Générale in respect of its loan to the government of Ghana to complete the project; coverage is for US$88.4m for 15 years Risks covered: non-honouring of sovereign financial obligations 16 /
Multilateral Investment Guarantee Agency (MIGA) (contd.) Henri Konan Bédié Bridge, Côte d Ivoire What: guarantee of equity and project debt for sponsors and lenders; application is for US$218m for 15 years Risks covered: transferability, expropriation, war and civil disturbance and breach of contract Kosmos Energy, Jubilee Field, Ghana What: guarantee to Citibank of part of a loan by Citibank to project company; US$100m for 7 years Risks covered: expropriation, breach of contract, war and civil disturbance KivuWatt Power Project, Rwanda What: guarantee issued to ContourGlobal Africa for its equity investment in project company; US$95.4m for 20 years Risks covered: expropriation, transfer restriction, war and civil disturbance and breach of contract 17 /
Some Key DFI issues to note Disbursement procedure Less flexible operationally Typically 10 BD period to disburse/4 BD period to consider disbursement request Making a distribution DFIs more conservative than commercial lenders Usually, a period of successful operation post physical completion required (e.g. 6 months) before distributions to sponsors Tougher sponsor restrictions May require share retention obligations (sometimes allowing sell-down of limited interest in project in early years) May require contingent or standby equity support from sponsors Lender voting If small group of DFIs (e.g. 3): unanimity If larger group of DFIs, possibility for majority/super-majority voting on certain issues If mix of DFIs and commercial lenders, latter typically vote as single block 18 /
Financing Renewables projects under the South African Renewable IPP programme John Sayers Peter Wright Simmons & Simmons 02 July 2012
Background to the South African Electricity Market Before 2007, South Africa had a successful state-owned monopoly run electricity sector Abundant cheap coal supplies and heavy reliance on coal-fired generation In 2000, Eskom generating the cheapest electricity in the world Lack of investment since 1980s and shortfalls in the National Integrated Resource Plans led to the 2007/8 blackouts Attempted IPP process in 2007 (the Peakers) initially failed for a number of reasons Proposed Renewable Energy Feed In Tariffs (REFIT) process launched in 2009 20 /
Development of a Renewable Power Sector 2003 White Paper set target of 4% (approx 1700 MW) renewable energy by 2013. 2010 Integrated Resource Plan requires 18,000 MW by 2030 REFIT process proposed standard FIT prices for renewable electricity and provoked a lot of interest August 2011 - REFIT quietly dropped and the Renewables IPP Programme launched instead Features of the Renewables IPP programme: 3,625MW available over up to 5 bid phases Allowed maximums for various technologies Developers to bid prices for sale of power Bids judged on price and economic development Standard documents specifying risk allocation Set timetables to accelerate projects Clear stakeholder buy-in to process 21 /
REIPPP Original and Current Available Capacity Technology Original Available Capacity (MW) Current Available Capacity (MW) Onshore Wind 1,850 653.5 CSP 200 0 Solar PV 1,450 401.1 Biomass 12.5 12.5 Biogas 12.5 12.5 Landfill Gas 25 25 Small Hydro 75 60.7 TOTAL: 3,625 1,165.3 22 /
Key Features of the Project Risk Allocation Standard form PPA, IA and Transmission / Distribution & related Direct Agreements Documents take an aggressive but bankable approach, with Government contractual backing for Eskom payment obligations No Availability Payments projects are paid for generation only Local Content / Black Economic Empowerment Requirements important Documents contained some unusual risk allocations: 23 / Fixed term of PPA with no flexibility Aggressive position on delays to Scheduled COD Seller takes first slice of Grid availability risk Force Majeure limited to specified events Aggressive timelines for payments and notices
The Financing Options Available to Developers Types of funding balance sheet; project finance; ECA financing or DFI financing options The South African banking community Absa Capital Nedbank Standard Bank RMB Insurance companies DBSA ECAs DFIs 24 /
Other financing issues? Lack of broad market experience of project financing Lack of access to experienced advisers Timetable constraints BBBEE requirements Funding options for equity Corrupt lender provisions and contractors etc. 25 /
Financing Renewables projects under the South African Renewable IPP programme 26 /
Not all jurisdictions are the same: Taking security in various Africa countries David Nelligan Katia Merlini Simmons & Simmons 02 July 2012
Not all jurisdictions are the same: taking security in various Africa countries No uniform approach to taking security in Africa Even in jurisdictions that follow European systems of law there may be different conditions when taking security and perfecting security which will impact on deal structures Security structures in common law jurisdictions Recognition of security trusts South Africa uses security SPV s even though common law generally applies Use of parallel debt structure in South Africa? 28 /
Not all jurisdictions are the same: taking security in various Africa countries Security in civil law jurisdictions : recent reforms in OHADA law List of countries : Benin, Burkina Faso, Cameroon, Central African Republic, Union of Comoros, Congo, Côte d'ivoire, Gabon, Guinea, Guinea Bissau, Equatorial Guinea, Mali, Niger, Senegal, Chad and Togo General rules reflect those of the civil law systems Some specific rules are less cumbersome than those of the civil law systems and are inspired by common law First demand guarantees Security agent arrangements 29 /
Not all jurisdictions are the same: taking security in various Africa countries Registration of security Stamp Duty Financial Assistance Security in favour of Foreign Lenders Central Bank approvals for payments under security documents Enforcement 30 /
simmons-simmons.com elexica.com 31 /