A tale of two sectors

How best to profit from Africa's many investment opportunities, as well as the legal and regulatory hurdles to negotiate when doing so, formed the centre of debate at IFLR's second annual Africa Forum on May 14. More than 200 in-house counsel, private practitioners and corporate officers attended the event, at the Waldorf in London, to hear eight specialist panels give their insight on the areas would-be investors must focus on when looking at the asset-rich continent.

With an increasing number of complex projects successfully reaching completion, several factors are shaping investor decisions. According to IMF forecasts, Africa will account for seven of the world's top 10 fastest-growing economies between 2011 and 2015.

The long-awaited completion of the Egyptian Refining Company (ERC) Mostorod project, Africa's biggest financing, was a watershed moment for the continent's project sector. Although not every deal is as complex or high-profile as Mostorod, preparing for projects in Africa involves numerous considerations. For Ade Adeola, managing director with Standard Chartered, there are three crucial factors to look at: the quality of the underlying assets; the involvement of quality developers with a realistic and executable strategy; and, legal protection and governance/enforceability rights.

The attitude of the local population, however, can also play a make-or-break role in determining a deal's success. Forging connections within the community and addressing the interests of the local population is key. "All of the stakeholders need to be incentivised to get the project done; companies need to go in with an everybody-wins attitude," said London-based Tom Eldridge of Dentons, chair of the panel.

Africa is reaching an important juncture in its development, as it transitions from pure resource-based to complex infrastructure projects that impact the wider economy. This change brings a new level of challenges, many of which relate to local content requirements. "We're seeing increasing participation and even leadership of African financial institutions, particularly in Nigeria and South Africa," said Adeola.

Ade Adeola Standard Chartered

"We’re seeing increasing participation and even leadership of African financial institutions"

"Irrespective of the local content laws that are rolling out, having local finance institutions on transactions is itself a way of mitigating country risk and can help to manage a lot of the complexities on the ground" he said. Indeed, any government looking to nationalise a project might be less enthusiastic if its plans involve writing off a significant portion of the savings of its local bank. Local bank participation means companies can procure political risk cover without having to pay a premium.

Regime change presents another thorny issue. In some cases, the combination of presidential elections and parliamentary changes can leave as little as two years to deliver a project. The traditional way to mitigate these risks is to involve export credit agencies, development finance institutions, and the World Bank. Having these institutions on board provides a sense of stability and the ability to deal with regime change by means of a bilateral relationship. "The commercial PRI [political risk insurance] markets are also a mitigant but there are expenses associated with buying [this type of] product," said Eldridge.

South Africa key takeaways

The size of the continent, Nigeria's ascendancy, and the rise of Ghana and Angola all bring into question South Africa's ability to act as a springboard for investment into Africa; 2012's so-called wildcat strikes revealed tensions within the country's mining unions, making it difficult for mine owners and other businesses to know with whom they should be negotiating; It is unclear what form Black Economic Empowerment will continue to take. Notably Africa's richest man, Nigerian Aliko Dangote, recently warned that the policy was crippling intracontinental trade and relations; Attempts to develop onshore debt capital markets have been trumped by more streamlined and lucrative offshore issuances; For the domestic debt market to take off, bond terms must be standardised to create a fungible, and therefore liquid, product.

Another panel revealed how foreign investors can capitalise on the continent's expanding debt capital markets. Sovereigns have led an exponential increase in African debt deals over the past 12 months. Most recently, Rwanda became the first east African country to turn to the international markets, with the April launch of a $400 million 10-year bond.

More deals are expected. According to figures from data-provider Dealogic, five African countries have raised almost $2 billion of dollar-denominated debt this year, compared with $1.8 billion from three borrowers at the same time last year.

Citi's deputy general counsel, Tim Odell, said sovereigns were typically the first borrowers to come to market in developing markets such as Africa. But Barclays' Amol Prahbu said the market was just beginning to diversify, with evidence of increasing client and product variety. Both warned underwriters of primary market eurobonds looking to this market must be aware of the legal and franchise risks they take on. Such risks inevitably feature in Africa, Odell said.

Responding to request for proposals (RFPs) requires considerable focus and resourcing, Prahbu explained. RFPs are often based on any kind of product that the sovereign in question hopes to obtain advice on. The ministers providing the proposal are also often reluctant to change the RFP form, as doing so requires lengthy negotiations with various committees and approvals from senior ministers.

Deal counsel must work hard to manipulate often inappropriate documentation to the correct form in a manner that enables them to present a proper proposal to the government, while also protecting the bank's interests. "Often you are required to provide detailed structuring solutions as well as agree to a form of engagement letter upfront," Prahbu said. "You have to consider carefully which terms are absolute must-haves over the nice-to-haves."

Equity key takeaways

There are 29 stock exchanges representing 37 nations in Africa; There is still significant room for growth. When discussing Africa's equity explosion, margin is the key factor; Kenya offers a good example of a regulatory authority that's being proactive in taking its stock exchange forward and recognising the fact that stock markets play a key role in emerging economies; Negative prospect drivers include: Africa's exchanges are relatively small; lack of liquidity; lack of market participants; comparative IT shortcomings; and, barriers to harmonisation; Corporate governance guidelines in Africa are rarely binding. As such, there won't necessarily be a dramatic improvement in corporate governance simply because a company has listed.

The relevant government's support for the bond issue is incredibly important. "Having a proactive client, who particularly in the case of sovereigns, has the full political support to get the deal done is absolutely key to pushing the deal forward and successfully executing it," said Prahbu.

Dentons' Mary Boakye said deal counsel rely heavily on support from the issuing sovereign's finance ministries when it comes to disclosure. The goal in terms of disclosure is to support and explain to the issuer why they need to provide the relevant information. This information can then be distilled down into a relevant offering circular. "You need to explain the risk of legal liability, if material information is left out of the prospectus or other disclosure documents," Boakye said. "You need to explain to them, if they put in any inaccurate or misleading information it could lead to problems for them and/or the banks."

Obtaining disclosure information is a time-consuming task, she warned. She believed it was advisable to have a project leader at the ministry of finance who coordinated and dealt with all other ministries and relevant government departments. "Also set aside a certain number of days where everybody gets together to provide and go through the required information," she advised. "And make sure the lead manager circulates a due diligence questionnaire very well in advance so that this can be sent to the various ministries so they are aware what's required of them at an early stage."

The mandate letter usually requires similarly lengthy discussions, she warned. To avoid difficult conversations almost every bank has a standard form mandate letter which does not impose a commitment on the underwriting bank to purchase the bonds. But governments, particularly first-time issuers, may be unsure or unwary about this term.

"It's very important to explain to them why there is no commitment at this early stage," Boakye said. "Take time to explain that this is usual when no due diligence has been carried out, no road show taken place, no prospectus prepared, and no investors approached or pricing agreed." Explaining the default implications and ongoing duties post-issue is important too, she added.

International markets are a huge step up for many African issuers more accustomed to a vibrant local bond market governed by local law. Financials can prove an obstacle for many. "Some entities are in a transition phase at the moment moving to IFRS [International Financial Reporting Standards]," Prahbu said. "Until they go through that process, it can be difficult for them to access the international capital markets."

And local currency deals remain challenging, with many variables involved, including the form of securities, clearing, settlement and relevant approvals. Even so, Prahbu was optimistic. "There is an increasing demand for local currency deals as investors look not only for a flight to yield but also for flight to safety away from the eurozone," he said.

Africa's burgeoning Islamic finance market could also present enticing opportunities for foreign investors. Prahbu warned the success of this market rode on the introduction of all-encompassing legislation. Educating the market to foster greater understanding of this product, its idiosyncrasies and garnering support from the appropriate stakeholders should also prove critical.

For full coverage of IFLR's Africa Forum visit www.iflr.com/AfricaForum2013coverage