andrew millard, head of specialized finance

1

Increasing Capital Flows to

Africa

The Corporate Council on Africa

Debt Capital Markets Working

Group

29 September 2004

2

Overview

• Imperial Bank in the African debt markets

• New products and local capital market development

• Case Study – Eagle Bonds

3

Imperial Bank in the African debt markets

4

Imperial Bank

• Corporate profile

• Owned 50.1% by Nedbank, 49.9% by Imperial Holdings

• Specialist South African asset-based finance bank

• Key markets

• Motor Finance

• Aviation finance

• Corporate equipment asset finance

• Property finance

• Medical finance

5

Imperial Bank

• Specialised Finance & Treasury

• Integrated approach to traditional merchant banking products

• Transportation finance niche

• Southern Africa focus

• Products

• Debt Capital Markets

• Specialised Finance

• Corporate Finance & Investment Banking

• Transport Infrastructure finance

• Treasury

6

Imperial Bank

• Typical roles

• Arranger of the Guarantee and underlying transaction

• 7th internationally for Exim Bank large aircraft deals in 2003

• Originator and administrator of the Eagle Bonds programme

• Advisor to the purchaser

• Post implementation administration

7

Imperial Bank

Asset

fin

an

ce

Cap

ital

mark

ets

R725 000 000

Aircraft financing

Sole Arranger

2000

R450 000 000

Aircraft financing

Sole Arranger

2001

R1 500 000 000

Aircraft financing

Sole Arranger

2002

R300 000 000

Ship financing

Sole Arranger

2002

R930 000 000

US Ex-Im Bank

guaranteed aircraft finance

Sole Arranger

2003

R431 000 000

US Ex-Im Bank

guaranteed aircraft finance

Sole Arranger

2004

R2 300 000 000

Commercial paper

programme

Sole Arranger & Manager

2000

R3 500 000 000

DMTN Programme

Originator & arranger

2001

R2 600 000 000

IPL1, IPL2 & IPL3 bonds

Originator & arranger2001/3

R515 000 000

IBP1 tier 2 capital bond

Arranger & Manager

2002

R930 000 000

EGL01 ECA guaranteed

bond

Manager & arranger

2003

R431 000 000

EGL02 ECA guaranteed

bond

Manager & arranger

2004

8

New products and local capital market development

9

New products

• Corporate bonds, securitisation and commercial paper being augmented by:

• Wrapped notes (incl. ECA-wrapped notes)

• Secured notes

• High yield

• Project bonds

• Multi-jurisdictional listings

10

Eagle Bonds Case Study

Increasing Capital Flows to Africa

11

Features of the Programme


12

• Eagle Bonds is a South African commercial paper conduit

• All Notes must directly or indirectly carry an Exim Bank guarantee

• Set up to raise Exim Bank guaranteed finance in Rand directly from the debt markets

• R1.4 bn has been raised via Eagle Bonds (for some R2 bn of imports)

• Originated and administered, by Imperial Bank



13

• Credit profile

• Notes carry the full faith and credit of the US Government

• Issuance is subject to compliance with the Exim Bank-approved implementation process

• Capital and accrued interest (including post-default interest) is guaranteed

• Guarantee is unconditional, subject to timely claim



14

• Currency

• The Guarantee may relate USD or ZAR-denominated funding

• Possibilities for other currencies in the Exim Bank local currency guarantee programme

• Allows importers to match the currency risk between assets and liabilities

• Obviates the need for expensive, volatile long dated currency hedges

• Presents currency risk for Exim Bank (movements between delivery and financing date)

• Loan to value risk where USD assets are financed in ZAR



15

• Rating Agency

• Initial transaction’s Notes are rated Aaa (global scale) and Aaa.zaf (SA scale) by Moodys

• Highest rated paper in the SA debt capital markets (higher than the Sovereign)

• Required Rating Agency satisfaction with:

• Procedures to ensure timely claim under the Guarantee

• Payment and administration procedures

• Structural controls



16

• Legal jurisdiction

• All programme & transaction documentation except the Guarantee are subject to SA law

• Documentation framed in a legal context with which the importer was familiar

• Required detailed scrutiny of inter alia South African insolvency and capital markets law

• Should translate into a cost saving for future transactions (use of local legal counsel)



17

• Calculation of the exposure fee

• Influenced by:

• Country risk (foreign exchange cover, stability etc.)

• Credit risk (e.g. importer creditworthiness, security structure)

• Asset risk (e.g. new vs second hand, resaleability, independent appraisal)

• Structure risk (e.g. local currency, Exim Bank product used, contractual framework)

• Transaction risk (e.g. term etc.)

• Determined either by policy (e.g. large aircraft) or the exposure fee calculator

• May be financed under some circumstances



18

• Pro forma calculation of the net-net financeable amount

= Gross purchase price

- Less non-qualifying components (local content, distributor mark ups etc)

- Less cash rebates & credit memo’s

- Less non-cash rebates & credit memo’s (training etc.)

- Less “look back” reduction (> 3 months since delivery)

= Net purchase price

x Financeable portion @ 85% (subject to Exim Bank)

+ Exim Bank exposure fee (subject to Exim Bank)

= Net-net financeable amount



19

Eagle Bonds One


20

• Abridged structure

Eagle Bonds One

Exim Bank

Debenture Trust

Capital Markets

Eagle Bonds

Eagle Assetco

Safair (Lessor)

SAA (Lessee)

Security Company

Boeing Corp.

Guarantee

Beneficial interest

Commercialpaper

Loan Security

Security

Security

Operating lease

Installment sale

Aircraft purchase

USA

South Africa


21

• Features of the Notes

• Amortising principal (to match the underlying lease cashflows)

• 8-10 years (to match the underlying lease terms)

• Fixed rate (to match the fixed rental cashflows)

• Guaranteed, unsecured

• Guarantee itself is housed in a Debenture Trust, with Noteholders as the beneficiaries

• Rated, listed on BESA

Eagle Bonds One


22

• Benefits to the Importer

• A “greenfields enterprise” leveraging the lessee’s balance sheet and good asset quality

• Efficient cost of funds

• Ability to raise substantial gearing without tying up banking lines

• Competitiveness and a neutral currency position – able to offer a Rand-based solution

Eagle Bonds One


23

• Pricing inefficiencies

• Complexity of pricing an amortising Note

• Limited scope for secondary market activity

• Coverage of the Guarantee “capped” at par (100% of issue price)

• Risk of early settlement (insurance event, default event)

• Pricing relative to the swap curve, not the bond curve (credit benchmarks)

• Hedgeability

Eagle Bonds One


24

Key Benefits of the Programme


25

• Low effective financing cost

• Credit margin is priced off Exim Bank (US Government) credit risk, not the importer

• Benefit is based on cashflow yield, not accounting yield

• Capital markets offer the importer a wholesale cost of funds

• Eagle Bonds passes its own cost of funds on to the importer

• Excludes bank regulatory costs and margins

• Includes placing commissions

• Price set in an auction environment

• Capital relief for bank investors in the paper



26

• Preservation of traditional funding lines

• Funders view Exim Bank as their credit-counterparty, not the importer

• Exim Bank becomes a new source of facilities

• Allows for traditional funding lines to be available for general corporate funding purposes

• Alignment of debt covenants between Exim Bank & other lenders (banks, capital markets)



27

• High gearing levels

• OECD guidelines allow for 85% of export cost + fees (subject to Exim Bank credit decision)

• Traditional aircraft finance banks have tightened up lending criteria (term, rate, equity)

• Exim Bank may (subject to terms) offer a higher gearing level (e.g. TSEP equipment)



28

Principal Disadvantages


29

• Operational inflexibility

• Operational covenants (maintenance of the security asset)

• Mandate restrictions (geographic restrictions etc.)

• Credit covenants (gearing levels etc.)

• Cross collateralisation/cross default of Exim Bank exposures



30

• Cashflow

• Full principal to be repaid over the term

• Only partially offset by the lower interest charge

• May be coupled with a “mismatch” facility, to provide for a capital balloon/residual

• In a lease discounting arrangement, leaves little surplus cashflow for shareholders



31

• Onerous regulatory requirements and approvals

• Capital Markets - Bond Exchange of SA and Financial Services Board

• Cross border cashflows – Exchange Controls (Guarantee, realisation of security, payments)

• Rulings - SARS, Competitions Authority, Financial Services Board (Short Term Insurance Act)

• US approvals (Exim Bank, Congressional ratification)



32

Challenges


33

Challenges


• Alternative applications for the product

• Different asset classes

• Smaller aircraft and other transport assets

• Non-transport assets

• Smaller transactions

• Implementation costs

• Accommodating smaller issuances

• Financing non-Rand (e.g. USD) transactions

• Multi-jurisdictional ECA arrangements

34

• Growing the Investor base

• Styling the Notes to achieve capital relief for bank investors

• Accessing international investors

• Concentration of investors in top grade paper in South Africa

• Investor education on probability of call, pricing

Challenges


35

• Overcoming pricing inefficiencies

• Floating rate notes

+ Reduce breakage costs, remove premium interest, remove hedging costs

- May necessitate swap counterparty thus not pure Exim Bank risk

• Short term commercial paper coupled with liquidity support

+ Rremove breakage costs, premium interest, early termination price effects, remove hedging cost

- Not pure Exim Bank risk – liquidity risk management, exposure to market disruptions, swaps

• Absolute pricing off the yield curve

+ Market consensus pricing

- Difficult to benchmark

Challenges


36

• Speedy, efficient implementation

• Execute the financing on or soon after delivery in order to:

• Remove currency risk for Exim Bank

• Remove the cost of expensive bridging finance

• Avoid commitment fees (from 60 days after term sheet/delivery)

• Strengthening currency post delivery may reduce effective Rand gearing level

• The switch from bridging to permanent, Exim Bank guaranteed funding may be notifiable

• Organised implementation process (arranger team selection)

Challenges


37

Challenges


• Optimisation of terms

• Term of the Guarantee

• Asset-type (New vs used , ability to retain value)

• Spread the costs and fees over the longest allowable term

• Maximisation of the “net net” financeable amount

• US content

• Terms of the purchase contract

• Terms relating to security requirements, credit covenants can’t be relaxed

• Management of costs

38

Transportation Security Equipment

Programme


39

• Financing for U.S. exports that improve the security of global transportation systems

• Relates to security-related machinery, equipment, goods & services, including:

• Screening and identification of cargo, baggage and passengers

• Data collection and analysis

• Communications

• Provides for:

• 85% of US content (maximum allowed under the OECD guidelines)

• Support for local costs up to 15 percent of the U.S. net contract value


Programme


40

• Amount of the Guarantee

• 85% of net net price + 100% of contracted local costs (up to 15% of US contract price)

• US contract price - “net net” after all rebates, based on US content

• For a lease discounting, may be limited to the NPV of the lease rentals

• Local costs

• Installation & other local services which the manufacturer is obliged to undertake

• Transport incl. air freight/inland freight specified in the export contract

• Sea freight on US vessels or a MARAD waiver required


Programme


41

• Amount (indicative values for illustrative purposes only)

• US contract price $100 x 85% = $85

• Contracted local content $10 x 100% = $10 (Check <15%

of $100)

• Installation $5

• Local training $2

• Transportation $3

• Sub-total $95

• Financing of the Exim Bank exposure fee $5 (assumes a 5%

exposure fee)

• Total coverage of the guarantee (plus interest) $100


Programme


42

Questions

andrew millard, head of specialized finance

Documents

increasing capital flows

africa debt capital

exim bank guaranteed

imperial bank features

capital markets law

capital bond arranger

africa features

overview imperial bank