A landmark high yield offering with a South African
exterior, but New York law interior, could set a structural
template for other African countries, lawyers in the region
The as-yet untested structure consists of a euro- or
US dollar-denominated offshore tranche and a South African
Rand-denominated onshore tranche.
Both tranches have the same covenants, the same events
of default and the same definitions. But provisions have been
inserted into the issue’s governing documents to
establish New York law, and not South African law, as the
governing law for the purposes of interpretation of the
covenants and anything related to it.
Speaking at IFLR’s inaugural Africa forum last
week, Mark Bergman of Paul, Weiss, Rifkind, Wharton &
Garrison believed such a structure would work well.
US Bank Global Corporate Trust Services’
Europe chief counsel, Edmond Leedham, said the expectation was
that South African courts would give effect to the New York law
covenant package under prevailing conflict of law
And that if a South African court faces a particular
issue of interpretation, then South Africa will accept in
effect a memorandum of law as to what the outcome would have
been in a New York court
Begman said the
application of two sets of law, would necessitate two telephone
calls for approvals, thereby increasing the likelihood of
inconsistent answers. Such a concern is magnified in a
jurisdiction that isn’t familiar with some of
these concepts and doesn’t have a history of
adjudicating these types of issues.
The panelists said the structure had already worked
well in one bond issuance by an Indian company. The
private deal had a rupee tranche on which the holders were
represented by local Indian trustee, and a US dollar tranche on
which the holders were represented by an English law trustee
operating out of London.
For the South African
transaction, the instrument would be treated as a single
tranche of debt notwithstanding the fact that it was issued in
two different markets with two different sets of
"We have tried to reduce
the friction between onshore and offshore and at the same time
create something that’s really one package so
voting is done on a collective basis" said Bergman.
Issuing an instrument in dollars and euros with the
same covenant package governed by New York law, eliminates
concerns about arbitrage or differences in
The structure also allows the issuer to naturally
hedge foreign exchange exposure by having a local obligation as
opposed to an offshore obligation.
"This is important because the
rand/dollar and the rand/euro has significant volatility, and
there’s no reason to think that will change going
forward" said Bergman.
South African issues are
typically covenant light. Leedham said an investment grade
issuer that issues debt to the markets rarely goes back to its
indenture to decide if they can or can’t do
something because there are virtually no covenants. "There
might be a negative pledge, or some restrictions, but
that’s all," he said.
In contrast, a New York law-governed high yield
package will have around 42 pages of documentation restricting
a variety of actions.
But there are several things to watch out for. To
Leedham, sufficient clarity on how bondholders are meant to
instruct the trustees is a particular concern. It is important
to establish, for instance, whether the votes of holders of the
two tranches are to be aggregated together or the matter be
passed by a majority of holders of both tranches voting
separately. Where relevant, he said it was also important to
establish if there was sufficient clarity on the exchange rate
mechanism used to determine voting proportions.
The fundamentals that have to be in place for the
model to work are a certain degree of sophistication in the
markets, and a pre-existing infrastructure and legal
A very different market
The general perception of sub-Saharan Africa capital
markets in is that there are problems of disclosure,
uncertainty with respect to local law, uneven precedents and
general transparency issues. But South Africa is very
different, said Bergman.
This is partly because historical factors have enabled
local banks to develop without external competition,
establishing a vibrant local banking market. There are also
private equity players that have done a variety of leveraged
acquisitions, with financing that has been a combination of
bank debt and high yield debt.
"The South African banks have managed to generally insulate
themselves from a number of the pressures that banks elsewhere
have faced because of the various economic crises," said
South Africa is well-positioned to provide local financing
alternatives to those of us trying to provide offshore