EQUITY BANK LIMITED

Funding Options
Konza Techno City

Konza Techno City Investor’s Conference – 8th August 2012

 Africa’s Infrastructure Funding
Requirements
• Infrastructure funding requirements for MIC African
nations estimated at about 10% of GDP p.a. until 2020
• For LIC, their investment needs are even higher
estimated at 15% of GDP annually
• About 25% of Kenya government budget is allocated to
infrastructure
• In 2008, the United Nations had estimated the need of
investing 52 billion dollars annually; about 75% of which
is to go to MICs for infrastructure developments
• Traditional sources insufficient, alternative sources of
funding required
 Proportion of Foreign Aid that
goes to Infrastructure
37.8%
4500 48.6%
4000
3500
3000 54.9% 22.0% 12.5%

2500
2000 1.2% 20.2% 15.3% Infrastructure Aid
1500 ($ mn)
7.6%
1000 0.2% Total Aid ($ mn)
500
0
 Funding Options for African
Infrastructure Development
• Project Finance includes various funding sources:
Commercial Banks
Export Credit Agencies (ECAs)

• Development Financial Institutions (DFIs)

ADB
World Bank & Other DFIs

• Project/Infrastructure Bonds
• Private Equity Funds
 Funding Options for African
Infrastructure Development
• Delivery Mechanisms:

Public Private Partnerships

Concessions

Build, Operate-Transfer
 Commercial Banks

Key Features International Banks Local Banks

• Proven funding • Reduced liquidity • Usually follow

solution and players international banks
• Structuring • Are constrained by but some of them
capabilities high liquidity costs could accept more
• Solutions oriented • Shorter tenor aggressive
expected in light of structures provided
• Work with more
implementation of they can obtain a
flexible guidelines
Basel III higher return
with respect to ratios
and economic • Remain constrained • Limited pool of
analysis by host country risk liquidity
• Offer fast execution appetite and may • Limited international
process require political risk track record
cover /
• Limited appetite for
local currency risk
 Export Credit Agencies (ECAs)
Key Features
• Provide political and / or
commercial risk cover to lenders
• Can finance part of local
costs, ECA premium and financing
costs
• Also act as catalyst to banks
presence: enhance liquidity
Reduce banks’ exposure to country
/ industry concentration
risk
• Enable longer tenors
• Improving flexibility: ECAs tend to
limit their requirement and work
more closely with the same
requirements as banks
To Consider
• Amount linked to eligible
procurement (tied schemes)
Usually offer attractive fixed rate
CIRR option i.e. “free swap”
• Refinancing limitations (premium
paid upfront)
• Require an adaptation of the
procurement strategy, as their
involvement is constrained by
eligibility requirements
 Development Financial
Institutions (DFIs)
Key Features
• Promote sustainable private
sector investment through
financing in the form of
loans, guarantees or equity
• Typically provide long-term
financing
• Maintain a high level of due
diligence, with a focus on
environmental and social aspects
• Provide confidence to
commercial banks
• Two main categories:
• National or Regional
Development Banks
• Multilateral or International DFIs
To Consider
• The involvement of DFIs could be
considered provided that the
project is strategic for the country
and is significantly positive for its
development
• DFIs usually take political risk
• Can offer embedded fixed rates
• Some of them offer A/B Loan
structure: A loan perceived by
commercial banks as an umbrella
for B Loan
• Can also contribute through
various forms of junior funding
 Project/Infrastructure Bonds

Key Features To Consider

• Project bonds have been overshadowed • Require ratings

by the bank market to date, but • Minimum size
increasing interest from both sponsors • No commitment prior to execution
and bond investors
• Negative carry/ make-whole provisions
• Project bonds can be incorporated into
the majority of well structure project
financings across a range of
infrastructure and energy sectors
(transportation, power, PPP, renewable
and oil & gas)
• Large size project bonds are achievable;
full range of tenors available
 Private Equity/Venture Capital
Funds
Financial investors - Players
• Infrastructure funds / Direct
investment by institutional
investors
• Sovereign wealth funds
• Specialized private equity
funds
To Consider
• Investors interested in
attractive class of
asset, diversification, stable
returns and long term yields
Highly liquid
• Lower appetite for
construction risk or demand
risk
• Some will require
involvement of strategic
player
 Challenges to finance
infrastructure projects
Traditional bank lending
cannot meet financing needs
• Certain banks have either
materially reduced lending
or refocused activities
toward their domestic
markets
• Elevated funding costs
especially in non-domestic
currencies
• Constraints for long term
financing
• Uncertainties around the
impact of future bank
regulation and Basel
III, with associated higher
capital constraints
Project bonds to bridge the
financing gap
• Important additional source
of liquidity
• Fixed income investors have
money to invest and are
diversifying away from pure
corporate and sovereign
risks
• Diversification of the
sources of funding as it
does not use banking lines
• Long dated maturities and
bullet structures are
available (less constrained
than on-balance sheet
lending for banks)
 Funding Solution –
Project/Infrastructure Bonds
For Issuers For Investors

• Opportunity to lock in fixed rate • Secured against real assets

funding without the use of swaps
• Solid and comprehensive security
• Underlying yield environment packages
remains favourable
• Portfolio diversification
• Flexibility to adjust the repayment
profile • Solid secondary trading
• Can sit alongside other financings performances
(bank and ECA financing)
• Pre-vetted by lending banks
• Recent credit spread tightening has
resulted in materially better margins • Attractive yields
on offer, particularly in growth
markets
 Challenges and considerations
of Project Bonds
For Issuers For Investors

• Information -Up-front and ongoing • Project information need

disclosure
• Government support; strategic
• Structure importance
• Potential negative carry issues
• Can be more expensive to refinance • Profit sharing, geopolitical &
before maturity sovereign risks concerns
• Limited currency choices
• Construction risk and mitigation
• Bond features measures
• Assignment of credit ratings
• Exchange listing • Relative complexity of the structure

• Amortizing structures difficult to

value

• Liquidity
 Equity Bank and Infrastructure
Funding
• Equity Bank is active in infrastructure projects in
Kenya for example:
Under-writing of KPLC rights issue to fund
infrastructure projects
Funding of Rift Valley Railways (RVR) upgrading
$20m
Funding of oil terminal construction in Mombasa
Proposed funding of a hydro power project in
Rwanda
THANK YOU

Web site: www.equitybank.co.ke

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