Issue 120 • 7 September 2007

Improved perceptions boost export financiers

The majority of African markets are still seen as ‘difficult’ by the analysts who influence the cost that exporters and their clients must pay for trade and project finance, but perceptions of risk have softened considerably over the past decade helping to reduce transaction costs and make projects possible, writes Kevin Godier.

More banks want to cover more business in sub-Saharan Africa, with trade financiers offering more complex risk mitigation instruments. Forfaiters (who buy up trade paper to offset in secondary markets) and project financiers report more activity in formerly off limits markets.

Debt forgiveness, ratings and other positives have significantly improved the trade financing climate.

In 2007, African Energy has heard of significant repayment problems in just two African commodity-importing countries, Burkina Faso and Senegal. Insurance claims have been paid out in Malawi, linked to fraudulent activity, and payments from Zambia have, occasionally, been slow, bankers report.

Another key litmus test for market confidence, risk pricing, has flashed positive for a number of markets, especially for Angola and Nigeria. There is growing demand to do business in both oil producers.

According to director, international trade services at Standard Bank’s Johannesburg headquarters Sarel Cilliers, “in Angola, there is an almost unlimited amount of banks, as the market is not mature yet, whereas in Nigeria there are around five to ten banking names that we see in trade finance, which is a big change from last year, and reflects the recapitalisation of the Nigerian banking sector”.

According to Standard Bank trade finance director Maarten van Alkemade, some observers see Africa as the world’s last big trade finance frontier, at a time when emerging market spreads have all but collapsed in Asia, Eastern Europe and Latin America.

Other bankers flagged up a renaissance of African projects, after a long period when foreign sponsors had left the continent as the global recession of the early 21st century kicked in. “People had generally forgotten Africa, but can now see decent margins and a wealth of export-import business,” van Alkemade said. With the growth in SA exports to other African markets, “our business will grow significantly in the coming years,” he forecast.

Tale of two pariahs

The turnaround in sentiment has been considerable, and not without its oddities. Zimbabwe, for example, was seen as one of Africa’s best credits a decade ago, but was the continent’s worst economic performer in 2006, with runaway inflation and a negative GDP of 4.4%, according to United Nations data.

Sanctions linked to Zimbabwe’s dire political situation plus the need to provision to meet Basel 2 terms have stopped virtually all commercial banks from structuring financing packages linked to trade transactions. “Commercial activities have almost gone underground,” said Ian Henderson, who runs the southern hemisphere office for Texel Finance in Johannesburg: “We know of ongoing trade which is practically on a barter basis.”

Conversely, former pariah Sudan has become far more acceptable during the period for trade financiers, as its oil export revenues have mushroomed. According to Malta’s FIMBank – a significant player in the à forfait market – letter of credit (l/c) confirmation and other business involving Sudanese risk has been “steadily growing”. FIMBank president Margrith Lutschg-Emmenegger said her bank had been active in Sudan for over eight years. “Sudan is now a forfaiting market, with good opportunities and some nice spreads”.

Around 6-7% over Libor is a fairly common price for Sudanese l/c confirmations in a market which “is beginning to open to longer-term credit – we recently did a two-year deal, although this is not yet typical,” she said.

Lutschg-Emmenegger underlined that “Africa, generally, is a better environment, for forfaiters – the banks in Nigeria have improved, and it is a large market now, while other improving African markets are Burkina Faso and Senegal.”

A traditional past perception of Africa as a hotbed of risk is now mostly unwarranted, said Nedbank’s head of correspondent banking Steve Meintjes: “Africa isn’t a basket case, there have been very few payment problems since the late 1990s, and risks can usually be covered.”

Insurers’ view

Export credit agencies (ECAs) and insurers share similar sentiments to trade financiers.

Belgium’s Office Nationale Ducroire Delcredere (ONDD) recently resumed cover for medium/long-term transactions with the private sector in Angola, and flagged up that it had lifted “all restrictive insurance terms” for MLT export transactions with Mali and Zambia.

Just a handful of markets are off cover for South African short-term insurer Credit Guarantee Insurance Corporation (CGIC) – including Burundi, Rwanda, Sierra Leone and Zimbabwe. By contrast, exports from clients to Zambia, Tanzania and Angola are providing significant new business, according to CGIC general manager export division Ismail Dadabhay.

“Zambia is importing huge quantities of product related primarily to the mining sector,” Dadabhay told African Energy. CGIC generally prefers to stick to private sector deals, due to its better knowledge of and links into commercial buyers.

The growing external confidence in Zambia is such that Australia’s Export Finance and Insurance Corporation (EFIC) recently led a syndicate of private and public insurers to put in place a comprehensive political risk insurance (PRI) package for the Lumwana copper mine project. A standout feature of EFIC’s cover package was a hedging insurance facility, which it structured to cover the currency exposures necessary to support the project. “We believed this to be the first of its kind from an ECA,” said EFIC’s executive director of origination and portfolio management Peter Field.

EFIC has said that its support for business in Africa is increasing, in response to Australian companies that are active in a wide range of countries, including South Africa, Democratic Republic of Congo, Tanzania, Botswana and Zambia, and to a lesser extent in Namibia, Ghana, Mali, Niger and Mauritania. “Existing and prospective resource investment in Africa by Australian companies looks to be worth around $15bn,” according to EFIC chief economist Roger Donnelly.

Nigeria the focus for many funders, risk mitigators

The external spotlight on Nigeria appears to be brighter than ever. Another major ECA, the Export-Import Bank of the United States (Ex-Im Bank), has heavily promoted a financing package covering 14 Nigerian banks. The US agency recently increased the programme’s credit ceiling to $450m, after three new banks were added – United Bank for Africa, Fidelity Bank and Wema Bank. “The participating banks have undergone major growth over the past year, and we hope to see increased use of the facility,” said Ex-Im Bank chairman James H Lambright.

According to Danish state insurer EKF’s managing director Lars Kolte, the domestic banking sector is so strong that “between 33% and 50% of projects there are now funded by Nigerian banks”. Kolte noted that EKF had insured a handful of cement deals in Nigeria, with “no problems at all – everything runs in orderly fashion”.

At the International Finance Corporation (IFC), which operates a Global Trade Finance Programme (GTFP), Nigeria has triggered the most requests for risk mitigation to date, said head of trade operations Scott Stevenson. “Nigeria is still the area seeing the highest demand. We have six active Nigerian banks in the programme, and two or three others coming along. The usual confirming banks are willing to take a bit more risk in Nigeria now, and we are also getting a number of international banks that are willing to look for the first time.”

Africa has been a priority focus of the GTFP, which was launched in October 2005 to let the IFC step in where credit lines have become tight, tenors too limited, or the confirming and issuing institutions have little familiarity with each other.

By end-June 2007, Africa had accounted for $563m of the aggregate $1bn or so transacted under the GTFP, with 14 of the 50 issuing bank countries located in Africa. “There are issuing banks within our programme in countries such as Sierra Leone, Chad, Rwanda and Liberia, and we will be adding a good 20 banks in the next year in Africa,” said Stevenson.

IFC has found itself to be the first bank willing to countenance risk on banks in both Sierra Leone and Liberia, thereby opening a door to some of Africa’s most challenging post-conflict countries.

Project finance trends

Project finance demand centres on schemes to provide more energy capacity for SADC economies, according to bankers canvassed by African Energy – although emerging mega-markets led by Nigeria and niche projects across the continent have potential, as well.

In the SADC region energy is the focus “and a related demand for wider infrastructure, in areas such as roads and transport, water and sanitation,” Absa Capital’s regional head of investment banking Jeff Midzuk.

Mining is now the most significant sector in Africa’s project finance market, according to RMB project finance transactor Luendran Pillay. “There is lots junior mining activity out of South Africa, and a tremendous exploitation of the commodity boom in terms of equity and project financing,” he said.

RMB has also extended quite a lot of finance for “mid-tier clients in Zambia”.

Mining finance has emanated largely from South Africa, but Pillay said that, from a banking perspective, the market had become more competitive than at any time in the last 20 years. “Even hedge funds having moved in,” he said.