CONFIDENTIAL Private Bank & Financing in Africa Henry K. Hall, CFA Managing Director GEM Equity...
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Transcript of CONFIDENTIAL Private Bank & Financing in Africa Henry K. Hall, CFA Managing Director GEM Equity...
CONFIDENTIAL
Private Bank &
Financing in Africa
Private Bank &
Financing in Africa
Henry K. Hall, CFAManaging Director
GEM Equity Derivative Sales, Structuring and Financing
24 June 2008
24 June 2008
2
Equity Linked Financing
3
Collateral Value Liquid Shares: possible to use market trading value Illiquid shares: need to rely on a new valuation based on trading levels of comparable companies. Market price used as reference only.
This method has been recently applied by Merrill Lynch share financings in the CIS1 region
Margining If the value of the portfolio decreases below a pre-determined value, the borrower would be expected to post margin payments (cash
and/or acceptable securities). In special circumstances the bank may allow for the first call to be made in shares, and then switch to cash The deadline for posting cash of share collateral in most cases shall be 1 or 2 days If the secured shares are not a reliable margining benchmark, a proxy index or basket of shares can be used Alternatively - margining is based on audited accounts as a function of EBITDA, Sales or other financial indication multiple If the share value drops substantially, then the bank has the right to accelerate the loan
Legal Structure The most simple version is the pledge of the local shares by the owner to the lender, but this works if the legal system in the jurisdiction if
robust enough to allow easy and immediate enforcement of the pledge To ease the legal issues of the pledge, investors prefer an outright sale and repurchase of shares by the pledgor to the lender (assurances
can be given for dividend pass through and proxy voting) in a Repo (Sale and Repurchase) transaction. Alternatively, if the holding company is in an offshore jurisdiction with English or similar law (e.g. Cyprus, BVI), a combination of local law
pledge onshore and English law pledge of the shares in holding company can be used. The due diligence process shall specifically focus on the shareholder agreements and any side agreements that might contain pre-emptive
shareholders rights.
Note: 1 CIS region means Commonwealth of Independent States and include former USSR countries
Basic Concept
Equity Linked Financing
4
Financing is provided to the holding company (or SPV), which owns or intends to own (in the case of acquisition financing) a portfolio of shares in an operating company(ies)
In general such structures centre around the shareholder’s aim to obtain financing for developing new parts of the portfolio by unlocking value of the more developed parts of the portfolio
Furthermore this type of loan does not interfere with the business of the operating asset itself
We assume that the financing is provided at the holding company (HoldCo) level without recourse to the operating company (OpCo).
This means that there is usually no operating company guarantee and the shares are the only security available to the lenders
These structures generally require share collateral and participation in equity upside in addition to usual credit terms
$ Loan
Hold Co
[]% Ownership
[]% Share Pledge
Op. Co.
Interest,Principal & Equity Upside
Sub 2Sub 1 Sub 3
$ Project or Acquisition
Potential Share Pledge
Financing Structure
Equity Linked Financing
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If the shares are not liquid
The loan needs higher collateral coverage: ([3]x-[4]x of the loan amount)
A specific exit strategy is evaluated
Dividends commitment
Expected liquidity event, such as the sale of the investment project or an acquired asset
Expected IPO of the operating company / assets
Sale for a strategic buyer
Block sale of some assets if there’s a strategic buyer available
Put option from a strategic buyer or an investor
If the shares are liquid, the sale and repurchase of shares in the open market may be possible
Loan size equivalent to approximately [10] business days of average trading volume.
The trading volume would normally include the aggregate volume of the local currency markets and the Global and/or American Depositary Receipts if applicable.
Leverage Restrictions Financing amount may be influenced by the
amount of debt at the operating company level The leverage of the operating company also
has effect on the valuation of the shares After the financing is in place, certain
covenants will be put on the loan The Bank will also look at the total leverage (at
the holding and operating company)
Upside If the borrower is not prepared to pay a higher
spread, one way to achieve an equitable return for investors would be to give them some equity upside, for example, a call option on a portion of the shares in the secured portfolio
This component becomes essential if the financing is extended for more than 1-1.5 year
Repayment of Loan Deal Parameters
Equity Linked Financing
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KES Senior Unsecured Loan
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KES Senior Unsecured LoanStructure and Benefits
Transaction Description
Client receives a loan of KES [6.7] billion for [3] years from Merrill Lynch
Client pays [16.00]% per annum, calculated on the KES Loan Amount paid in USD using the then spot FX rate
Client redeems the loan at the then equivalent USD Loan Amount
[16.00]% x KES Loan Amountpaid in USD at
thethen KES/USD
rate
[6.7] billion KES Loan
ClientClient Merrill LynchMerrill Lynch
Salient Features
Client borrows in local currency (KES)
Long Term Funding – 3 to 5 year maturities available from Merrill Lynch
Attractive rate and size
Financing from an International Institution
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KES Senior Unsecured Loan
Summary of Terms
Borrower: Kenyan bank or a Corporate
Ranking: Senior unsecured borrowed money obligation of the Borrower
KES Loan Amount: KES [6.7] billion equivalent to USD 100 million on the Loan start date
Drawdown Date: No later than 30 days after Trade Date. Should the Loan not be drawn on or before the Maximum Drawdown Date, the Commitment Fee will be paid by the Borrower to the Lender upon request
Business Days: London, New York and Nairobi, Following business day convention
Tenor / Repayment: [3] years / Bullet at maturity
Repayment Amount: KES Loan Amount / Periodic FX Rate set 5 Business Days before Repayment Date
Periodic FX Rate: On any Business Day, the USD/KES bid exchange rate (quoted as KES per 1 USD)
Interest Rate: [16.00]% p.a (Quarterly, Act/360) calculated on the KES Loan Amount but paid in USD using the then Periodic FX Rate
Arrangement Fee: USD equivalent of [2.00]% of the KES Loan Amount, to be paid on the Drawdown Date
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Dual Currency KES/USD Senior Unsecured Loan
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Dual Currency (KES/USD) Senior Unsecured LoanStructure and Benefits
Transaction Description
Client receives a loan of KES [6.7] billion for 3 years
Client pays
[14.00]% per annum, calculated on the KES Loan Amount paid in USD using the then FX rate; or
USD Libor +[2.00%] on the USD Loan Amount, at Merrill Lynch’s option
Client redeems the loan at
the then equivalent USD Loan Amount in KES; or
the USD Loan Amount; at Merrill Lynch’s option
[14.00]% x KES Loan Amount
paid in USD OR
(LIBOR +[2.00%] x USD Notional Amount
[6.7] billion KES Loan
ClientClientMerrill LynchMerrill Lynch
Redemption KES [6.7] billion
ORUSD 100 million
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Dual Currency (KES /USD) Senior Unsecured LoanStructure and Benefits
Salient Features
Client borrows in local currency (KES)
Lower cost of financing due to dual currency optionality given to Merrill Lynch
ML can choose one of the two coupon options on the Interest Payment Date, therefore making the whole loan cheaper for the borrower
This loan has a tighter margin than either borrowing in just USD or borrowing in just KES
If the KES devalues strongly, loan repayments nominated by Merrill Lynch are likely to be in USD. If this is the case, it is more cost efficient than a straight USD Loan as the interest payments under the proposed structure are lower than interest payments that would be due under a straight USD Loan
No risk of mismatch between Client’s assets and liabilities, as Client likely has revenues both in USD and in KES. Client is therefore monetising the optionality to use KES or USD balances that are prevalent on their balance sheet by lowering their cost of funding
Financing from an International Institution
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KES Dual Currency Senior Unsecured Loan
Summary of Terms
Borrower: Kenyan bank, or Corporate
Ranking: Senior unsecured borrowed money obligation of the Borrower
KES Loan Amount: KES [6.7] billion
USD Loan Amount: USD 100 million
Drawdown Date: No later than 30 days after Trade Date. Should the Loan not be drawn on or before the Maximum Drawdown Date, the Commitment Fee will be paid by the Borrower to the Lender upon request
Business Days: London, New York and Nairobi, Following business day convention
Tenor / Repayment: 3 years / Bullet at maturity
Repayment Amount: (i) USD Loan Amount; or
(ii) KES Loan Amount / Periodic FX Rate at Maturity, At ML’s option
Periodic FX Rate: On any Business Day, the USD/KES bid exchange rate (quoted as KES per 1 USD)
Interest Rate: (i) 3 month USD LIBOR + [2.00]% (p.a., Actual/360) calculated on the USD Loan Amount; OR
(ii) [14.00]% (p.a., 30/360) calculated on the KES Loan Amount divided by the then Periodic FX Rate,
as selected by Merrill Lynch by notifying the Borrower at least 5 Business Days in advance
Arrangement Fee: USD equivalent of [2.00]% of the NGN Loan Amount, to be paid on the Drawdown Date
13
Convertible Loan Financings
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Convertible Financing
Basic Structure
Convertible loans, which convert to a fixed number of shares at maturity, at the option of the lender
A typical maturity would be for 3-5 years
By providing a call option on the shares of the company to the Lender through a convertible structure, the funding cost is more attractive than senior unsecured funding levels
At maturity the borrower will have the obligation to either repay the Loan to the Lenders in Cash or Shares
The strike price of the convertible is generally set above current market level which allows the Borrower to sell his stock in the future at higher prices, should the convertibility option at maturity be exercised by the Lender
Lenders generally require that the Borrower facilitates the borrowing of the shares from the Company to the Lenders
The structure also generally provides for protection to the Lenders against any change in dividend policies and anti-dilution and takeover protection
In come structures investors may put the convertible bond back to the Issuer prior to maturity at a predefined Put Price
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Convertible FinancingKey Indicative Deal Terms
Issuer
Issue Size
Maturity
Security
Selling Restrictions
Coupon
Conversion Rights
Early Redemption
Put Option
Currency
Governing Law
A Kenyan registered commercial banking company, or a Corporate
US$ [100],000,000 preferred stock/convertible loan (the “Loan")
2012 (5 year tenor)
Shares pledged of the issued share capital of Issuer
None. Private transaction between Kenyan bank or a Corporate and Merrill Lynch
[●]% paid semi annually
Lenders can choose to be repaid by receiving shares at a conversion price equal to [110]% of current share price
None
Puttable at year [3] at the Put Price (to be determined) by the Lenders
US Dollars
English
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Benefits
Cheaper cost of financing, than senior unsecured loan
Sale of company stock at higher prices that the current stock price
Treatment as senior unsecured debt
Additional leverage for existing shareholders
Compared to an equity issuance, the dilution effect is deferred until maturity of the Financing
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Typical Deal Timeline
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Indicative Timetable: 6 – 8 weeks
Typical Deal Timeline
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7
Discuss the Structure Mandate & Term Sheet Credit Due Diligence Legal Due Diligence Documentation Internal Approvals Signing Conditions Precedent Funding
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Trade Ideas and Equity SecuredFinancing Case Studies
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Case Study
Majority owner of a private metal sector company seeks 1 year bridge financing to purchase shares in a listed company
Other commitments require funding solution using only his private equity stake in company
1 year financing is arranged using control stake of private equity worth 4 times the value of the loan
Legal structure and multiple layers of pledge – onshore and offshore ensure full creditor access to collateral
Offshore
Onshore
Blocking Share of OpCo
Pledged &
Portion of HoldCo Pledged
Ownership
Offshore Holding
CompanyClean SPV
Onshore Operating Company
Interest + Principal
Loan
Target Company
Use of Proceeds
Payback
Financing Trade Ideas and Equity SecuredFinancing Case Studies
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Iron Ore Mining Rights Financing
ML’s structuring expertise and openness to non-standard risks can lead to attractive deals for investors
Example:
Majority owner of speculative natural resource company sought financing to buyout minority shareholders
Company’s sole assets are iron ore mining rights premium
Exit from the loan through international auction of mining rights by Merrill Lynch
Merrill Lynch receives interest payment + equity upside determined at the time of the auction
30% Shareholding
20% Shareholding
SPV purchases
30% stake
Before Funding:50% shareholding
After Funding:100% shareholding
SPV purchases
20% stake
Selling Shareholder
1
Company (Limited
Company)
Selling Shareholder
2
Borrower(Panamian SPV)
Loan
Pledge of 100% of
Company shares
Cash paid directly by ML to shareholder
Cash paid directly by ML to shareholder
Loan
Financing Trade Ideas and Equity SecuredFinancing Case Studies
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Private Equity / Mezzanine Finance - Iron Ore Mining Rights Financing
Financing for LBO in attractive agro-business sector
The exit is in three years via an IPO or trade sale
Merrill Lynch arranging:
USD30m Private Equity; and USD70m Mezzanine Debt financing in partnership with the management team
2-3 year trade with high risk/high reward characteristics
Equity target ROE is >30% Management
to augment or replace existing
team with experienced individuals
Merrill Lynch- Agent
And/or Partial investor
$30m Equityinvestment
$70 MMMezzanine
Financing+ Principal repayment
+ Asset security
Debt
Equity
AgribusinessCompany
Financing Trade Ideas and Equity SecuredFinancing Case Studies
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Case Study: Oceanic Bank Bilateral Loan
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Oceanic Bank – US$175m Bilateral LoanTransaction Summary
Summary Terms & ConditionsTransaction Overview
Geographical Distribution of Allocations
Investor Type Distribution of Allocations
In May 2007, Merrill Lynch closed a US$175m bi-lateral financing with Oceanic Bank International Plc
Financing in both Nigerian Naira (NGN) and US dollars
First ever multi currency loan in Sub Saharan Africa
Longest maturity bank financing to date from Nigeria
The orderbook encompassed hedge funds, banks and asset managers from 6 countries
Orders were received from the United States, UK, Asia, and Scandinavia
Hedge Funds77%
Bank3%
Investment Manager
11%
Asset Management
9%
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Oceanic Bank – US$175m Bilateral LoanTransaction Structure
Merrill Lynch International
Hedge Funds /Asset Managers
Counterparties
Oceanic Bank
Nigeria
Risk Syndication
Dual Currency Loan
Interest & Principal Payments
Loan Agreement
Offshore
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May 2007
Oceanic Bank – US$175mn Bilateral Dual Currency LoanPress Coverage
27
Merrill Lynch - Africa Credentials
Merrill Lynch Africa Credentials, 2000-2007
2005
US$1,553 million
Multi-Tranche OilReceivables Securitisation
EGPC
2004
€450 million
Due April 2011Joint Lead Manger
Republic of Tunisia
2003
€400 million
Due July 2008Joint Lead Manager
Kingdom of Morocco
2004
Advisor on Securitisationof Future Flows
National Bank of Egypt
2003
€330 million
Due Feb 2013Joint Lead Manger
Republic of Tunisia
2001
¥20 billion
4.2% Global Samurai BondDue 2031
Sole Bookrunner
Central Bank of Tunisia
2001
US$1.5 billion
Inaugural BondJoint Lead Manager
Government of Egypt
2004
¥15 billion
First Ever 4.3% Global Samurai Bond Due 2030
Sole Bookrunner
Central Bank of Tunisia
2002
US$650 million
7.325% Global BondDue 2012
Lead Manager
Central Bank of Tunisia
2001
¥35 billion
2.27% Global Samurai Bond Due 2006
Sole Bookrunner
Central Bank of Tunisia
2000
¥35 billion
3.3% Global Samurai Bond Due 2010
Sole Bookrunner
Central Bank of Tunisia
March 2007
$480,000,000
Federal Republicof Nigeria
Final London Club Debt Repayment
March 2007
$175,000,000
First Bank of Nigeria
9.750% LT2 10NC5
2001
€500 million
7.000% due April 2008Joint Lead Manager
Republic of South Africa
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Discussion Parameters The preceding information is intended to you with general market views and information, and is not based on the individualized characteristics of any
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Bid and/or ask prices are estimated values only. The values given for "reference" reflect closing prices of the underlying security as indicated in the presentation. There can be no assurance that actual trades in the securities, or their underlying reference securities, could be completed at such values. The information was obtained from various sources and is not guaranteed for accuracy or completeness.
The estimated values may vary significantly from actual trade prices as a result of various factors, may not be representative of any internal valuations employed by Merrill for its own purposes, may vary during the course of any particular day and may vary significantly from the estimates or quotations that would be given by another dealer. You should consult with your own accounting or other advisors as to the adequacy of this information for your purposes. Merrill Lynch makes no representation and shall have no liability in any way to you or any other entity for any loss or damage, direct or indirect, arising from the use of this information.
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29
Disclaimer
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