The Trade Finance Bank for Africa Alternative Financing Model, Country Experiences Presented by Mr....

The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa

Alternative Financing Model, Country Experiences

Presented by Mr. Kofi Adomakoh

Director, Project and Export Development Finance Afreximbank

AADFI/ADFIAP CEO Forum November 4th to 6th 2014 Kuala Lumpur, Malaysia

AADFI/ADFIAP CEO Forum November 4th to 6th 2014 Kuala Lumpur, Malaysia

Development Financing Alternative Models in a Changing World


Content

1. Overview of Afreximbank;

2. Access to finance in Africa;

3. Structured Trade Finance “A Tool

to de-bottlenecking Africa’s

financing challenges”:

4. Alternative financing provided by

Afreximbank.2

In this presentation, I shall:


1. Overview of Afreximbank

The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (4)

It is headquartered in Cairo, Egypt and has branch offices

in Abuja (Nigeria) and Harare (Zimbabwe). It offers credit

(trade and project finance), risk bearing and trade

information/ advisory services.

By way of introduction, Afreximbank is a Pan-African

Multilateral Financial Institution created in 1993 as an

international public private partnership to promote and

finance intra- and extra- African trade.

The Bank


Overview of AfreximbankHas preferred creditor status in its member countriesMission is to:

Stimulate a consistent expansion, diversification and Development of African Trade while operating as a first-class, profit-oriented, socially responsible financial institution, and a center of excellence in African trade matters.The Bank’s trade finance activities complements the work of other development banks, e.g IBRD, EIB and AfDB.The Bank works with African and non-African Export Credit Agencies, Development Finance Institutions, Commercial Banks and other Multilateral Institutions to support trade finance activities in Africa.


2.Access to Finance: A challenge to Africa.

6


2.1 Access to Finance: A Challenge in Africa

Africa’s slow pace of development, particularly during 1980s

and 1990s has been attributed to weak state of infrastructure

across the continent.

The infrastructure gap in many parts of the continent stemmed

from inability of many countries to raise term funding as

many international creditors continue to perceive the continent

as high risk; and

the few funds available to African counterparties had short

tenors usually less than 1 year, high cost and with stringent

security requirements including cash collateral.

(7)


2.2 Explaining Africa’s Financing Challenges

Two major factors, political crisis and poor economic performance in

the 1980s and 1990, have contributed to the current challenges

confronting many African countries in accessing Term Funding for

infrastructure and economic development.

(8)

-2

0

2

4

6

8

1960 1970 1980 1990 2000 2010source: WDI, 2012

Trends in Africa's Economic Growth, 1960-2011, (percent)Economic Risk

In the 1980s and 1990s Africa

was generally regarded a

basket case and was shun by

many investors.

A continent that had achieved

sustained economic

expansion of over 5%

annually during 1960-1979,

could only manage a dismal

2% during 1980s and

early1990s.


Political Risk

Financing challenges in Africa is heightened frequent political

crises across the continent. For instance, in 2009 alone of the 76

socio-political crises scenarios recorded in the world most of

them took place in Africa (26 cases);

Political risk also arises from unanticipated changes in

regulations or failure by the government to implement tariff

adjustments because of some political considerations.

Politics induced quasi commercial risks may also arise when the

project is facing state-owned suppliers or customers, whose

ability or willingness to fulfill their contract obligations towards

the project is questionable.


Until post financial crisis in the mid-80s, banks involved in international finance relied on balance sheet lending and government guarantee.

Early 90s saw the introduction of Structured finance which was based on the transaction for which the finance is provided. Such techniques aim to transfer risks in financing transaction

from parties less able to support those risks to those more equipped to support them in a manner that ensures automatic reimbursement of advances from the underlying assets such as inventory and export receivables... This forms the pillar of structured trade finance.

Structured finance revolves around identify and mitigating risks associated with transactions..and convert wealth, in the form of commodities, into ready cash.

Traditional vs Structured finance.......


3. Structured Trade Finance as a Tool to de-bottlenecking

Africa’s financing challenges.


Art of transferring Risk in Financing Transactions from

Parties less able to Bear those Risks to those more

equipped to bear them in a manner that ensures

Automatic Reimbursement of Advances from the

Underlying transaction Assets.

It encompasses:

“Any structure whereby certain assets (inventory,

contract, export receivables etc) with more or less

Predictable cash-flows can be isolated from the originator,

Pledged (Sold, leased etc) and used to support the

Financing being raised (as collateral and/or source of

reimbursement or repayment) or to substitute it”(Emmanuelle Moors de Georgio)

STRUCTURED FINANCE


Accordingly, Structured Finance Converts Uncertainty

to some “Certainty” (Predictable Cash-flow) and

thereby Mitigates Risks.

Less bankable deals therefore become more bankable.


Through use of structuring techniques, financiers can control their level of risk

Without structured finance:

financier financier

Potential borrower

With structured finance:

Will the borrower reimburse?

financier

Potential borrower

With secured finance:

How to control collateral?

$

Goods

Will the borrower produce?

Potential borrower

$

Offtaker


Practical use of structured trade finance:

There are no distinct standardized types of structure trade finance transactions since one essential principle of these transaction is the ability to tailor a structure that will satisfy the needs and circumstances of all parties involved, provided that perceived or real risks are mitigated. We are going to present some basic forms of structured finance, their concept, and transactions flow.

1. Export receivables-backed financing.


Exporter

XYZ Bank

Payment after 30-90 days from B/L date through an escrow

account

Letter of Undertaking (remedial procedures in case of non-performance)

Shipment Buyers (Oil Refineries)

Letter of Acknowledgment

Payment at shipment

Assignment of contract/A/R etc..

Structured Receivables-Backed Financing

Shipment


EXAMPLE: Receivables-backed Financing

1. Underlying transaction: To trade naphtha and crude oil.

2. Lender: XYZ Bank.

3. Facility Amount: US$ 50 million for credit facility.

4. Exporter: Oil company

5.. Importers: oil refineries worldwide.

7. Tenor: 30-90 days from B/L date.

8. Collateral: Outstanding account receivables.

9. Facility Period: 1 year.

10. Each transaction amount: Over US$5 million.

This financing is given to the exporter once goods are shipped and repayment is done automatically by importer through an escrow account. This creates an automatic

reimbursement procedure.

This enables exporters to use future trade flows to raise self-liquidating export-backed financing at better cost and tenor. It also enables financiers to externalize country and credit risks by the assignment of export contracts and receivables, and by receiving payment in an offshore escrow account.


4. Alternative Financing Model provided by

Afreximbank


Instruments

Trade Expansion & Diversification

Scheme

Export Development Scheme

Dual Recourse

Non-Dual Recourse

Note Purchase Programme;

Receivable Purchase /

Discounting Programme

Syndications Programme;

Special Risks Programme;

Financial Future Flow Pre-Financing

Programme; and

Local Currency Programme

Export Development

Programme;

Project-Related Financing

Programme;

ECA Loan Facilitation

Programme;

Asset-Based Lending

Programme;

Country Programme;

AFRICOIN

Guarantee Programmes; and

Advisory Services.

BANK’S STRUCTURED PROGRAMMES & FACILITIES

The Instruments are categorised into two Groups/Schemes:

• Export Development Scheme; and

• Trade Development and Diversification Scheme.


Export Development Schemes

1. Export Development Programme (EDP)

The EDP combines Credit, Risk

Bearing, Twining, Market

Access as well as Advisory

services geared towards

facilitating non-commodity export

production, especially export

manufacturing.

(20)

Facilities under the EDS are targeted at promoting

industrialization and improving Africa’s export

competitiveness. Broadly most of the facilities under the EDS

have tenor not exceeding 7 years. Some of the programmes

are discussed hereunder


2. Project-Related Financing Programme

Through this programme, the

Bank provides limited recourse

project financing in support of

export projects, including mining,

manufacturing and other trade

related infrastructure projects.

3. Guarantee Programmes Related to Obtaining Large Contracts

a. Bid Bonds;b. Advance payment guarantees; and c. Performance guarantees

This programme is designed to create or improve the capacity of African

entrepreneurs to bid for large businesses/contracts in Africa. In this regard,

the Bank provides the following guarantee facilities:



4. Country Programme This programme is designed to assist the Bank’s member countries in peculiar difficulties not amenable to solutions offered individually by the Bank’s menu of products. This programme has been used to assist several countries in some difficulties, including Zimbabwe, Côte d’Ivoire and Sierra Leone.

5. ECA Loan Facilitation Programme Through this programme, the Bank works with other ECAs to

promote the acquisition of essential goods, especially capital goods by African Institutions.

Using this programme, the Bank provides guarantees to enable ECAs finance eligible imports of Africa.

The Bank may also take Line of Credit for direct disbursement to its clients for importation of goods from the country of origin of the creditor ECA.

(22)



1. Receivable Purchase/Discounting Programme

This programme involves a family of facilities, namely:

Forfaiting Facility

Invoice/Receivable Discounting Facility

Factoring and Receivables Management Facility

Joint Bill Discounting/Financing and Refinancing Facility:

2. Structured Pre- and Post Export Financing Facility;

3. Reimbursement Guarantee Facility;

4. Export Credit Guarantee;

5. Correspondent Banking/Africa Letter of Credit Confirmation

Facility (Africorrbanking)

Trade Expansion & Diversification Scheme


6. .Syndications Programme

This is a risk-bearing programme the Bank uses to leverage trade

and project financing into Africa. Through this programme, the

Bank arranges or joins a syndicate or club of reputable

international and/or African banks in providing financing to

African entities in trade and/or project-related activities.

7. Financial Future-Flow Pre-Financing Programme

Financial future-flow transactions refer to future-flow debt

offerings that rely upon receivables not generated from export of

physical goods for repayment. Such receivables include credit

card or cheques, migrant remittances, royalties arising from

Bilateral Air Services Agreements (BASA), over flight fees,

etcetera.



8. Country Risk Guarantee Facility

This programme is aimed at making the sovereign risk of African

countries more acceptable by transferring this risk to

Afreximbank credit risk. Under this programme, Afreximbank

guarantees international and African banks with credit exposures

to Africa against certain country risk events.

9. Local Currency Programme

This programme serves important trade facilitation function as it

helps the Bank to provide matching currency to its clients' needs,

for example, providing working capital financing for the purchase

of local inputs for export manufacturing. Further, in a number of

sub-regions operating or planning to introduce currency areas,

the local currency programme helps promote intra-regional

trade.



New Programmes & Facilities

In order to accelerate the realization of its medium term Trade Developmental goals, the Bank has introduced new programmes to augment existing ones. These include:

(26)

1. Construction/Tourism-Linked Relay Facility (CONTOUR)

This is a risk sharing facility introduced by the Bank with a view to supporting the Bank’s goal of promoting tourism in furtherance of the continent’s export diversification objective. Under the facility, the Bank shares the risk of developing hotels and tourism facilities by transferring contraction risk to parties better able to manage the risks. The facility has been fully elaborated and introduced with clear procedures, guidelines and accompanying marketing documents.


2. African Content Support Programme (ACSP)

This programme is designed to increase the capture of value accruing

to African countries from their extractive sectors;

It seeks to increase value addition in the extractive industries by

increasing the participation of African entities in these sectors;

Through this programme, the Bank will provide financing and advisory

services to entrepreneurs who provide or seek to provide support

services in the extractive industries in such a way that value –added in

Africa is increased. The ACSP includes the following facilities:

i. Mining Services/Oil Services

Facility;

ii. Facility for the Discount and/or

Purchase of Receivables; and

iii.Asset-Based Lending.

New Programmes & Facilities


3. Intra-African Trade Facilitation Programme (INTRAFAP)

Through this programme the Bank seeks to promote trade, economic

cooperation and regional integration in the African continent. It is

also designed to provide a platform for mobilizing financial, technical

and other resources for the development, promotion and financing of

intra-African trade. This programme is being implemented using 3

facilities and 2 services, namely:

i. intra-African Letter of Credit Support Facility (ILCSF);

ii. intra-African Trade Services Support (ITSS);

iii. intra-African Export Financing Facility (IAEFF);

iv. Advisory Services and Market Research; and

v. Policy Advocacy.

New Programmes & Facilities….


4. Health and Medical Tourism Programme (HMTP)

This programme is similar to Contour, in the sense that it seeks to

promote diversification of Africa’s exports by supporting the

development of world-class health facilities in Africa to meet the

growing health care needs of Africans.

Under this programme, the Bank provides appropriate financing for

the construction of first class hospitals or the purchase of modern

medical facilities across the continent.

The Bank, under this programme, will also facilitate the use of

expertise of African medical professionals domiciled abroad through

exchange programmes and/or sabbaticals.

New Programmes & Facilities……..


5. Africa Cocoa Initiative (AFRICOIN)

This initiative was designed as part of the Bank’s EDP to

hasten the pace of industrialisation of the continent by

promoting value addition in Africa’s cocoa sector.

Through this programme the Bank provide:

a)term funding to support acquisition or expansion of

existing capacity in order to increase the processing of

cocoa beans into raw materials (liquor, cocoa butter, and

powder) to feed chocolate manufacturing plants in

Europe, North America, and Asia; and

b)Cocoa bonds to support the planting of new trees and to

promote consumption of cocoa products in Africa and

Asia.

New Programmes & Facilities…….


6. African Diaspora Programme

This programme was introduced for the purpose of:

a) assisting African governments with significant remittance

receipts to access reasonably-priced external trade and project

finance from the international credit markets, using

remittances by African in the Diaspora as collateral and main

source of repayment.

b) Given the rapid growth in demand for and trade in African

ethnic foods and vegetables in Europe and the USA as the

population of Africans in the Diaspora continue to soar, the

Bank intends to facilitate the import of such goods by

supporting players in the supply chain.

New Programmes & Facilities………


7. Africa Central Bank Deposit/Investment Programmes

(ACBDP)The Bank intends to use this programme to mobilize part of the growing foreign exchange reserves of African central banks to fund viable trade and project ventures in Africa as part of on-going efforts at making Africa’s growing external reserves more supportive of the continent’s trade and economic development process while diversifying the funding sources of the Bank.

8. Non-Equity Modes (NEMs) of International ProductionThis programme is designed to complement existing programmes under the Bank’s EDP to support long-term industrial development by building capacity, including through technology dissemination and domestic enterprise development, and by helping host countries to gain access to global value chains.

NEMs will be implemented through 3 Facilities, namely Franchise Financing Facility (FFF); Export Agriculture Financing Facility (EAFF) and Contract Manufacturing Support Facility (CMSF)

New Programmes & Facilities……..


6.Conclusion


ESSENTIALS TO STRUCTURED TRADE

Enforceable commercial contracts;

Acceptable performance risk;

Acceptable off takers/payment risks;

Avoid set offs in contracts;

Do your due diligence very well;

Understand the business well; and

Avoid currency and price risks.


Conclusion

Access to financing has always been a challenge, however the introduction of structured finance has enable the continent continue its path towards development showing remarkable growth.

It is perhaps, more remarkable considering the

multiplicity of challenges that emerged in the global

output growth, notably the global financial and economic

crises that broke in 2008/9 and the sovereign debt crisis

of the Eurozone that began in 2009.

The once “hopeless continent” (by the Economist, 2010,

May 11 Edition)” achieved an enviable pace of economic

expansion of about 4.8% per annum during 2001-10,

making it, presently the second fastest growing region

behind Developing Asia


Thank you for listeningPlease visit Afreximbank

website : www.afreximbank.com

http://www.afreximbank.com/

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