In extending maturities for domestic and offshore debt with maturity and partial credit guarantees In reducing currency and interest rate mismatches Via better FX indexation, liquidity, currency and rate swaps In attracting a wider investor base and reducing costs In distributing lenders’ risks post-construction via poolingġ2. 10 Risk Mitigation Can Help Viable Projects In mitigating policy and non-policy risks With PRI, PRGWith PCG, monoline or multiline guarantees, etc. 9 ĻB or Higher-Rated African Countries ġ0. 7 Ratings Can Reduce Perceived Risks 12 African countries rated B or lower Unrated African countries could consider getting ratings 6 rated BB- or higher including four rated investment grade Benefits of ratings Investment grade ratings are necessary for many investors Even non-investment grade ratings can help access capital Ratings can expand universe of potential investors Ratings are an independent opinion of the creditworthiness of a country Well accepted by international investors in bond markets Growing use in loan markets, bank regulation and domestic markets Impose a market discipline on country leadership International rating agencies rate both FX and LC obligations Local market rating agencies are also making progressĩ. 6 What Makes a Project Viable? Predictable country risks (with country ratings), transparent legal / business environment Sound infrastructure sector strategies and policies Acceptable country risk (could be measured with credit ratings)Willingness to abide by contracts and enforce arbitral awards Sound deal economics Experienced and reliable sponsors Secure supplies with agreed or acceptable price expectations Adequate demand at affordable prices generating attractive ROI Sensible, transparent, affordable PPAs or other support payments Exit options via IPOs or sale to strategic investors or a handover to the government after expiration of the concession periodAdequate local / international financing and risk mitigationNo substitute for sound policies and sound project economicsħ. But no substitute for project fundamentals Local capital markets have a key role to playĦ. 5 Key Project Finance Lessons Projects should be economically viable - provide essential services on an affordable and a profitable basisOnly possible within a framework of sound sector strategies, good policy planning and a long-term commitment to improving country ratings Requires willingness to uphold legal contracts, even in adversity But poor project economics enhance pressures to renege on policy protections, e.g., take or pay contracts and commitments to raise rates Poor project design / poor public policy can hurt (Maylinad)Even good documentation cannot offset weak demand (Meizhou Wan)Poor projects may exacerbate direct / indirect public contingent liabilities Financial engineering / risk mitigation (PCG, PRG, full wrap) can help Attract foreign investors, extend maturities, reduce costs, etc. 4 Importance of Debt for Africa Commercial debt is considered inappropriate for public sector borrowers in HIPC countries by IMF / World Bank To do so without any concern for the merits of the project and the financing is a big mistakeBecause debt is a fundamental component of corporate finance Most projects combine 20% 40% equity financing with the remainder in debt Debt is available for African projects In international capital markets In local capital marketsConstraints are credit quality and require credit strategiesĥ. My focus here: Credit ratings Credit enhancement / risk mitigation Importance of local capital marketsĤ. 3 Objectives To recognize the importance of debt capital for African financings To explore means to raise debt capital In domestic debt capital markets In international debt capital markets SCIC - A financial advisory firm providing advice to emerging market clients on credit. Workshop on Debt Markets: Importance of Debt Capital for Africaģ.
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