debt capital markets introduction and overview

Debt Capital MarketsIntroduction and Overview

2023-04-19 08:50 PM

FOR DISCUSSION

• xxxxx

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Executive Summary

Executive Summary

With many developed markets struggling and many eyes focused on Africa we believe one of the key growth areas will be the growth of the Debt Capital Market. This will complement any existing bank funding with the capital market offering disintermediation of the banking market.

The Benefits of a DMTN Programme and Private Placements

The Bond market typically offers longer duration than bank funding

Fewer financial covenants giving more flexibility to the issuer to raise funding

Legal documentation is standardised and can be reused on a regular basis. These programmes can be listed or non-listed allowing for private placements with specific Asset Managers and Pension Funds

Different notes can be issued under one single legal document being the Domestic Medium Term Note Programme(“DMTN”) giving standard terms and conditions

Bespoke bonds can be arranged to allow either an issuer or investor to make specific requirements achievable under one set of documents

Why Deal Bridge Group

Rob Moody under the Deal Bridge banner has a wealth of experience in the African Debt Capital markets, having worked in DCM teams for major South African and international banks

There is a team to work on these transactions offering support during the process ensuring conclusion of these transactions that often take several months to conclude

Some of the African markets where Deal Bridge has experience include:

South Africa

Botswana

Tanzania

Kenya

Zambia

Nigeria

Ghana

Debt Capital market funding is a viable funding solution allowing for the disintermediation of bank funding Deal Bridge is in a

unique position to be able to offer medium to large companies Debt Capital market solutions, throughout Africa

We have the capability to offer DCM solutions that is on par with any bank.

DCM Funding typically compliments bank funding, providing a viable alternative sourse.

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Capital Market Summary

Was Botswana Ghana Kenya Nigeria Tanzania Uganda Zambia S. Africa

Potential Issuance Size BWP 100 - 200mn

(USD 15-30mn)GHS 45 - 75mn(USD 30-50mn)

KES 25 - 30bn(USD 250-300mn)

NGN 15 - 30bn(USD 100-200mn)

TZS 30-45bn(USD 20-30mn)

UGX 48 – 72bn(20-30mn)

ZMK 380 – 476bn(USD 80-100mn)

Up to ZAR 1.2bn(USD 150mn)

Preferred Tenor 3-5 years (10 is also possible) 2-3 year sweet spot 5-7 years 5-7 years 5 year sweet spot (7 year

is also possible)3 to 10 years (shorter

tenors more liquid) 3-5 years 5 years

Reference Rate91-day Bank of Botswana

Certificates (BoBC) 182 day T-bill Government T-bond of equal tenor

Government T-bond or T-bill of equal tenor



Government T-Bond / 182 day T bills

3 Month JibarFixed rate

Indicative Pricing for a Highly Rated Credits 130-180bps 250-350bps 100-150bps 50-75bps 200-250bps 200 – 300bps 250 – 350bps 180 – 250bps

Accessibility for international issuers

Coy Act requirements and a local counsel must

provide a legal opinion that the above is

complied with. No other restrictions

No restrictions but a local counsel opinion is advised



No restrictions but a local counsel opinion is

advised

Bonds and Programme have to be listed on the USE to have access to the greatest pool of

pension funds. Requirement of the Pension Fund Act


There are provisions for Inward listing on the JSE.

Exchange control requirements are a

formality

Documentation Standalone DMTN Programme DMTN Programme DMTN Programme DMTN Programme DMTN Programme DMTN Programme EMTN or Standalone

(DMTN program)

Local Registration Process

Approval by the BSE Approval by the GSE Considerations need to be given to the approval of the Capital Markets Authority and NSE requirements.

Approval by the SEC first then by the NSE if listing is required

Approval from the Capital Markets and Securities Authority

Dar Es Salaam Stock Exchange (DSE) requirements must be met

Considerations need to be given to the approval of the Capital Markets Authority and USE requirements

Considerations need to be given to the approval

of the Securities Commission and LuSE

requirements

Subject to approval from SA Financial Surveillance Department for inward listing

Requires Exchange Control approval from the South African Reserve Bank

Other Considerations

Floating rate preferred Banks do not hold

corporate bonds on their books, hence it is likely that the issue will be marketed to the 8 major asset managers in the market.

Investor preference is for bond proceeds to be utilized locally in the Botswana economy.

Pension sector reforms are well underway, such that there is expected to be increased appetite for local currency corporate bonds across a variety of institutional fund managers (with less over-reliance on SSNIT, the government-backed social security fund)

Preference for fixed rate

Market tends to be quite selective on credits

Asset managers tend to prefer longer tenors (can consider 5 to 10 years)

Market influenced to a great extent by funds managers and banks

5 years is the sweet-spot and the most liquid part of the long-end of the curve

7 years is less liquid

Market preference is for fixed rate issuance but FRN is possible

Investor preference is for bond proceeds to be utilized locally in the Tanzanian economy.

No preference for fixed or floating rate issues as market is liquidity driven. Great focus is on the quality of the credit and the market tends to be quite selective

Asset Managers prefer longer tenors (5 – 10 years)

Market influenced to a great extent by Fund Managers and provident funds

No preference for fixed or floating rate issues as the market is liquidity driven. Focus is on the quality of the credit and the market tends to be quite selective

Listing on JSE is mandatory

Vostro-style account must be opened for duration of the listing with an Authorized Dealer

SA market does not see significant volatility in credit spreads

Steady increase in inward listed bonds by foreign issuers seen since the first one in 2006.

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DCM Targets with Advantages and Considerations

Source: xxxxxz

• Any private or listed company that has existing debt or requires debt for growth• Disclosure requirements can be handled sensitively by Non Disclosure Agreements

• Smallest debt raising is about USD 10 million in the respective local currency• Set up costs have to make economic sense

• Maximum debt raising is limited to the capacity of the borrowing company and the local market investment restraints• Reasonably sound companies with at least a 3 year audited financial track record. A profit is preferable • Some Key ratios:

Debt/Equity: 50 to 90%Debt cover: < 4XDebt/EBITDA: ≤2.5XLoan / Value: 70 to 80%

• Alternative source of funding• Short Commercial Paper is achievable, from 3 months longer dated bonds up to 10 years for highly rated corporate

companies and 30 years for Governments• Competitive pricing with Investors not required to hold capital or reserving costs• Standardisation of documentation that can be reused more frequently by using a Medium Term Note Programme

• Stand alone documentation is acceptable to investors• Private placement is possible• Public listing is possible

• Setting up costs can be high but can be amortised over the life of the bond and programme• Issuer disclosure section can be time consuming and may be problematic for private coys• Set up process can be time consuming – up to 10 weeks but will always depend on the intricacy of the deal and country

Considerations

Advantages

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Rules & Regulations

Source: xxxxxz

In South Africa• Regulation 28 of the Pension Fund Act controls the reporting and compliance obligation on trustees of

retirement funds that include the kind of asset the fund manager can buy, using the look through principle. Preventing over exposure to lowly rated and risky assets

• Exchange control restricts the percentage of foreign assets the fund manager may hold. Retirement funds and long term insurance = 25% of AUM and for the Collective investment scheme (unit trusts) = 35% of AUM

• Collective Investment Scheme Act regulates the investor that manages unit trust investments• Inward listing of a foreign entity may enter the SA market and use proceeds anywhere in the world,

conditional of Surveillance approval at the SARB (EXCON)• No trustee required for normal corporate bond issue, Trustee is required for a securitisation & SPV

structures• JSE is the regulator for listed bonds – non required for private placements• Companies Act restrict non-listed entities from listing bonds on JSE

Rest of Africa• Require trustees to look after interest of the note holder• Securities Exchange Commission (SEC) or equivalent is the bond market regulator for listed and

unlisted bonds – this is a tedious, timeous exercise but required if targeting a large pool of investors• Listing via the Stock exchange is subsequent to the SEC approval but not required for a Private

Placement

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Indicative Costs and Expenses

Source: xxxxxz

Issue Size in million ZAR 500 000 000USD Equivalent USD 55 555 556Assumed FX Rate USD/ZAR 9

Third Party Fees & Expenses (Upfront costs for initial issue - ZAR) Cost (ZAR) Cost (USD)Arrangers fee based on Issue size @ .25% 1 250 000 138 889 Arrangers Counsel - Legal Fees (acting for arranger) 250 000 27 778 Issuers (review) Counsel - Legal Fees (acting for issuer) 100 000 11 111 Rating agency fees 300 000 33 333 Custody & Settlement 100 000 11 111 STRATE clearing 50 000 5 556 JSE approval & Listing 15 000 1 667 Printing and courier & sundry 10 000 1 111 Roadshow expenses 30 000 3 333 Total upfront cost 2 105 000 233 889 Upfront cost ratio (excluding arranger's fee) 0.42%

Recurrent costs (p.a.)

Custody & Settlement 50 000 Rating agency fees 100 000 STRATE clearing 30 000 JSE Fees 15 000 Total recurring cost 195 000 21 667

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Indicative Costs and Expenses

Source: xxxxxz

Issue Size in million KES 1 000 000 000

USD Equivalent USD 11 519 410

Assumed FX Rate USD/KES/ZAR 86.81 9

Third Party Fees & Expenses (Upfront costs for initial issue - KES) Cost (KES) Cost (USD) Cost (ZAR)Arrangers fee at 1% 10 000 000 115 194 1 036 746.92 Local Counsel - Legal Fees (acting for arranger) 3 000 000 34 558 311 024 Review Counsel - Legal Fees (acting for issuer) 1 000 000 11 519 103 674.69 Reporting Accountants - - - Sponsoring Broker's fee 3 000 000 34 558 311 024.08 Placing Agent's fees 3 225 000 37 150 334 351 Note Agent's fees 2 000 000 23 039 207 349.38 Trustees fees 1 000 000 11 519 103 675 CMA Approval fees 2 490 000 28 683 258 149.98 NSE listing fees 311 250 3 585 32 269 Roadshow expenses 4 150 000 47 806 430 249.97 Total upfront cost 20 176 250 232 419 2 091 767 Upfront cost ratio (excluding arranger's fee) 2.02%

Recurrent costs (p.a.)

Note Agents' fees 500 000 Trustee fees 1 000 000 NSE Fees 311 250 Total recurring cost 1 811 250 20 865

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Deal Bridge as a Lead Transaction Advisor / Arranger to Meet Your Strategic Objectives

Our Understanding of Your Requirements

Certainty of seamless transaction execution

Appropriate credit positioning for transaction over-subscription to achieve the tightest pricing

Set the right pricing benchmark for future issuances and diversify funding sources by marketing to a broad and diverse base of investors

Overall co-ordination of the issuance process, due diligence, documentation, other advisors, legal counsels and transaction third parties

Facilitate and oversee interactions with key stakeholders and regulators

Guide Client with the rating process if required. Using SA or international rating agencies

Key Deliverables to Provide Execution Comfort

Inception report , to include: Draft Report, to contain: Deal Bible and Transaction Summary Report, to include:

Strategy and timeline for the establishment of the MTN Programme

Preliminary terms and conditions of the MTN Programme

Roles and responsibilities for all working parties

Working Party Contact List

Preliminary credit analysis and success prospects for the issue

Due diligence report

Rating reports (if required)

Offering circular

Other legal agreements

Roadshow presentation

List of suggested target investors.

All signed legal agreements and the final Offering Circular

Summary of the entire transaction:

Due diligence questionnaire

Investor meetings presentation

Investor interactions schedule

Bookbuilding process/ Final order book.

Explanation of the paying agent process

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In Focus: Domestic Medium Term Notes Programmes

What is Domestic Medium Term Note

Programme?

A Domestic Medium Term Note (“DMTN”) programme offers flexibility. If a company planned to only issue a single one off transaction without any real likelihood of future issuance, then a standalone transaction would be optimal. However, if your company plans to issue more frequently than once every 2-3 years, then the MTN Programme offers significant cost savings.

Why a MTN Programme?

The programme allows a wide variety of tenors, amounts (and potentially even currencies) so that issuance can be designed to suit your requirements at the time.

Structurally various issues can be undertaken from the same programme, for instance both secured, unsecured and guaranteed issuances can all be undertaken using the same basic documentation and the same basic disclosure.

Cost Advantages

The programme uses one base set of documentation and a standard set of disclosure information which provides cost savings as: Legal fees for the initial issuance under the DMTN Programme are only minimally above those of a single issue transaction,

however legal expenditures are considerably reduced at the time of each subsequent issue following the debut tranche The documentation is designed to allow transactions to be executed at short notice (as short as one week) so that a wide variety

of transactions are feasible as pockets of investor interest /liquidity open and close. As such, DMTN Programmes offer significant cost savings when contrasted against processing fresh set of documentation each time a standalone issue is undertaken.

Relevance A DMTN programme is particularly useful in a volatile market where a company may find that it needs to fulfil its issuance targets in a

series of issuances rather than a single transaction. The multiple issuance flexibility of the programme is designed to easily allow this with minimal additional documentation.

Flexibility

The structure allows for multiple dealers so there is no restriction in competition whereby you would be tied to the Programme Arranger.

The DMTN programme allows any company to access even very small pockets of demand on a cost effective basis as and when they arise without needing to have identified sufficient liquidity for a larger transaction.

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Key Considerations

PRIVATE AND CONFIDENTIAL

Rating Agency Process

In South Africa a rating is normally required but not essential There are three international and one South African agency based in South Africa, depending on the requirement and potentila size

of the issue the different agencies will play a role In the rest of Africa a rating is not essential but I believe that will start to change gradually

Economic and Market Trends

There are a number of market trends to give due consideration at this point: Scheduled Central Bank Government auction need to be considered. We recommend that an issuer remains cognizant of this timeline

and plan to issue the first tranche of DMTN before this date to maximize investor participation Market preference is for floating rate issues but fixed issues are also an option depending on Interest rate cycle Investor preference is for bond proceeds to be utilized locally in the economy Investors exhibit different levels of liquidity and are very keen to expand their risk positions. The strong flow into EM equity and debt

funds continues unabated. If you desire a more immediate execution, we would be happy to discuss between now and the half year close period.

Due Diligence and Documentation

We believe it will take 8 - 12 weeks to conclude documentation on the transaction. As such, we strongly recommend that any company commences the process of appointing third parties and legal counsels for this transaction so that you can be adequately positioned to tap the market when an opportunistic market window is presented

Deal Bridge is happy to lead the conversation on the selection of issuer’s counsel

Roadshow

We believe that a deal-related roadshow, especially targeted to local Asset managers and South African institutional investors is advisable. We do not expect significant bids outside of these two priority locations

A locally centred roadshow will help maximise investor interest and increase the likelihood of bringing in new investors who have not previously participated in Sub-Saharan Africa transactions

As the main impetus for demand on this transaction will be mainly driven by South African asset managers as they are expanding into Africa all the time.

The roadshow will usually take the form of one-on-one meetings with the investors. Senior DCM experts from Deal Bridge will accompany you on the roadshow and will assist the issuer to accurately and advantageously position its credit profile before investors.

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Lead Arranger Perspective: Note Issue & Management Spectrum


Process Management & Oversight

Documentation Marketing Financial Model Structuring Roadshow Sales / Distribution

Legal

Commercial

Comprehensive Coverage Positioning

Selling

Risk Factors

Linked Model Terms & ConditionsTransaction

Docs

Presentation

Logistics

Investor Q&A

Pricing / Allocation

ClosingFinancial

Docs Include: but not limited to Working Party

Contact List Preliminary Credit

Analysis Auditor issued

Comfort Letter Legal Opinion

from Transaction Counsel

Board Resolution Written Approval

- Regulator Due Diligence

Report Offering Circular Summary of

Entire Transaction

Positioning and selling the credit profile of the Issue would ensure that investors gain a full appreciation of strength of the deal’s credit fundamentals

Evaluate levels of investor interest (both local and international)

Preparation of fully linked model to facilitate pricing and structuring

Pricing based on received orders

The relevant terms and conditions of the proposed issue would be formulated, taking into account prevailing market conditions

Revised draft term sheets are produced at this stage – before the optimal structure is finalised

Preparation of Roadshow Presentation

Organization of roadshow logistics (investor invites / flights / hotels etc…)

Investor Q&A prepared to aid the Issuer in answering potential investor questions

Targeted Core Investors1-on-1 meetings in addition to the main roadshow

Bookbuilding

Target key accounts

Maximize distribution to widest possible account and drive tight pricing

Pre Deal Research

Preparatory & Due Diligence

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Proposed End-to-End Execution Timeline


Below is an indicative execution timeline

AFTERMARKETPREPARATION & STRUCTURING

Start Drafting of Offering Circular

Pre-marketing

Roadshow and Bookbuilding

Aftermarket Support

Update Business & Legal Due Diligence

DEMAND GENERATION ROADSHOW

Phase I (6 weeks)

Start Pre-Marketing Deal Announcement Pricing

Legal Documents & Approvals

Settlement

Roadshow Presentation

Update OCwith Financials

Phase IV( 2 weeks)Phase III (3 weeks)

Settlement

Ratings (if necessary)

Phase II (3 weeks)

The schedule below indicates how a roadshow could be structured between Johannesburg and Capetown

Draft Investor Meetings Itinerary

8:00 am – 8:30 amMorning briefing session with Arranger

9:00 am – 10:00 amOne-on-One meeting with Investor

10:30 am – 11:30 amOne-on-One meeting with Investor

2:30 pm – 3:30 pmOne-on-One meeting with Investor

4:00 pm – 5:00 pmOne-on-One meeting with Investor

Arranger will advise on the best timing for roadshow/investor meetings

Arranger shall utilize our experience in the respective countries to set up meetings with key investors

Arranger will work with you to prepare a concise presentation, highlighting the companies credit fundamentals and relative value proposition contrasted positively against comparables

Senior members of the Arranger DCM team will accompany the Issuer on the roadshow/investor meetings

Investors AUM Description

Coronation Fund Managers

USD 30.1 billion

Coronation Fund Managers, headquartered in Cape Town, is a pure fund management business that provides both individual and institutional investors with access to markets across a number of geographies

Coronation currently manages institutional assets on behalf of more than 300 clients, including pension funds, provident funds, medical aid schemes and trusts and offers a diverse range of products equity, fixed interest and property markets

Old Mutual Investment Group

USD 12.7 billion

Old Mutual Investment Group (SA) is a multi-boutique asset management and investment business that offers clients access to a full array of investment offerings, styles and asset

Old Mutual has a history of more than 150 years as a South African based mutual society prior to its public listing in 1999

Momentum Asset Managers

USD 48.8 billion

Momentum Asset Management is a result of the merged entity between RMB Asset Management and Metropolitan Asset Managers and it forms one of the six business units of Momentum Investments. the result of the merger between Momentum and Metropolitan (which were categorized as some of South Africa's biggest investments players)

Sanlam Investment Management

USD 35.4 billion

Sanlam Investment Management is one of SA’s largest asset management companies; offering a diverse range of investment products, such as collective investment schemes, life-pooled products and segregated portfolios for third-party institutional and retail clients as well as the Sanlam Group (established 1918)

Road show and SA Investor profile

Indicative Terms

Issuer XXXX(Pty) Ltd

Purpose To support long term funding needs and general corporate purposes

Issue Type Medium Term Note Programme

Programme Size Up to ZAR [1.0] billion in two tranches: A and B

Lead Arranger & Advisor Deal Bridge Group (“Arranger”)

Instrument Type Senior, Unsecured Notes/ Secured/ Subordinated

Form of Instrument Floating / Fixed Rate Notes

Mode of Issue Book-building on a best effort basis or via direct placement on a best effort basis

Ranking Pari passu with other unsecured and senior creditors of the Issuer

Tranches Tranche A(1) Tranche A(2) Tranche B(1) Tranche B(2)

Tranche Size ZAR [250]mn ZAR [250]mn ZAR [250]mn ZAR [250]mn

Maturity [3] Years [5] Years [5] Years [7] Years

Indicative Spread [130]bps [150]bps [150]bps [165]bps

Benchmark 91 Day BoBC 91 Day BoBC 91 Day BoBC 91 Day BoBC

Proposed Issue Date Aug/Sept 2011 Aug/Sept 2011 Mar/Apr 2012 Mar/Apr 2012

Repayment Bullet on Maturity Date

Listing XXXXX Stock Exchange (“JSE’)

Clearing TBA

Applicable Law South Africa

BoBC: Bank of Botswana Certificate

Pricing

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Recent Transactions


GHS40 million

Produce Buying Company (“PBC”)

Commercial Paper Note Purchase Agreement Due March 2012

Series 1Ghana

Sole Manager & Underwriter

September 2011

TZS16.35 billion

Export Trading Company (“ETC”)

12.40% Commercial Paper Note Purchase Agreement Due March

2012Series 1Tanzania

Sole Manager & Underwriter

September 2011

NGN35 billion

United Bank for Africa

14% Subordinated Fixed Rate Bond Due September 2018

NigeriaJoint Issuing House and

Underwriter

September 2011

BWP70 million

Standard Chartered Bank Botswana Ltd

May 2011

Subordinated Floating Rate Notes Due 2021 Botswana

Sole Mandated Lead Arranger and Joint Bookrunner

GHS25 million

Produce Buying Company (“PBC”)

Commercial Paper Note Purchase Agreement Due October 2011

GhanaSole Manager & Underwriter

April 2011

UGX40 billion

Standard Chartered Bank Uganda Limited

December 2010

13% Fixed Rate Notes(Callable from 2015) Due 2020

UgandaLead Arranger

NGN11.8 billion

October 2011

11.5% Fixed Rate Notes Due October 2014 Nigeria Joint

Issuing House

Lafarge Cement WAPCO

South African DCM Transactions• Absa Tier II• Transnet• Telkom• DBSA• Resilient• Sappi