Financing Considerations for Africa’s Corporates

Although African telecom operators are potentially attractive to banks and non-bank lenders, they must have strong finance teams to deal with lenders, Sophie Papasavva

The media are awash with the merits for investors to enter the African continent boasting plentiful manifold and seemingly endless the opportunities. With private equity investors and bankers rushing to offer liquidity to Africa’s fast-growing corporates, this is the time for Africa’s businesses to thrive. Focus has aimed on several countries, and in several sectors… Infrastructure remains a primary focus: building roads, building houses.. and national communications networks that are absolutely key in facilitating development, with an absolute, immediate and proven direct benefit to GDP anywhere they appear. While the reasons for Africa being ‘all the rave’ in financial circles these days are beyond the scope of this article, we explore the risks of being caught up in this hype.

Liquidity is plentiful
Between 1998 and 2008, an average of $5 billion a year was invested in sub-Saharan Africa’s telecoms sector, with investment mainly targeting mobile infrastructure development following the liberalisation of various markets. Several commercial bankers have been financing such projects across Africa for decades. Similarly, Development Finance Institutions (DFIs) are estimated to have contributed $2.5 billion since 1998 to telecom projects in this sub region with multilaterals lending a further US$1 billion.

There is certainly no shortage of liquidity from lenders that have been active on the continent for decades, and as overall sentiment continues to improve so some more cautious banks seem to have returned after a few years of absence from the African finance markets. These days, all a (credit-worthy) telecom operator needs to do is raise his hand and ask for financing and the funds will become available. Add a broadband project to the mix and lenders will be falling over themselves to lend!

African businesses and their finance teams owe it to themselves and their shareholders to tread cautiously. Whilst liquidity is plentiful, with bankers knocking on corporates’ doors, a common challenge in times of fast growing business is an under-resourced finance team. Raising finance…, is a highly disruptive process to senior management. Bankers lend every day, all day long. Corporates tap into the loan market on average once every three to five years. The odds will always be in favour of the lenders. With this current wave of broadband financings across the continent, here are some thoughts on the challenges facing telco CFOs.

Four common mistakes
Loan financing take six or nine months or even longer in emerging markets. And this is even with the best intentions on the part of both CFO and the bankers. Very often for telcos, this unfortunate situation stems from the unfounded belief that the Mandated Lead Arranger (MLA) bank that was appointed to arrange the syndicated loan acts on behalf of the telecom operator. They most certainly do not.

Being unprepared
This may seem obvious, yet most often than not the loan process begins with a phone call by the telco’s CFO to one or two house banks with a request… Telcos need to prepare well-thought through, benchmarked, (independently) validated set of financial projections to support the loan’s purpose, its size and its structure? The banks will need it and they will ask for it in the absence of which bankers are caught going back and forth asking questions and telcos adjusting a model before they can even begin to talk about indicative terms – let alone a term sheet. Yet, based on a bankable set of financial projections, the CFO can review options with regard to the loan’s structure and already has in mind some key parameters that the business can support in terms of security, grace periods, financial covenants and other restrictions.

Comfort vs loyalty
Banks are not loyal to corporates, so the latter shouldn’t be either. It is surprising to see that very few telcos, with huge capex requirements, and hence financing needs, not spending a few weeks to assess the bank market and pick the right MLA instead of returning to the same house bank again and again. In times of ample bank liquidity, shopping around offers the benefit of competitive tension, which should lead to lower pricing and a better overall deal for the borrower. In times of restricted lending, shopping around could offer an opportunity to tap into otherwise unexplored pockets of liquidity.

Where is the Request For Proposal (RFP)? Based on the bankable set of projections, this invaluable document serves to lay out the borrower’s financing needs as well as key requirements, preferences and expectations as to loan structure. A broadband project has wide appeal to a variety of lenders: local banks offer local currency for working capital and in-country civil works, vendor financiers offer dollars for purchase of their equipment. Similarly international banks offer the same, with longer tenor. Finally, DFIs, come in with local and dollar liquidity offering the longest tenor of all, and, one might add, often at the lowest pricing.

So where is the request to prospective MLA banks, asking them to present their telecom finance credentials, their overview of market appetite for the loan, thoughts on syndicate participants, benchmarked pricing and terms? Bankers should be made to work harder to win the business; after all they will be paid millions of dollars in arrangement fees.

Expecting fast results
Most banks and certainly all DFIs and multinationals are monolithic institutions steeped in process and regulatory requirement. While frustrating at times, this is also a positive, as financial institutions have developed standards and processes to facilitate the lending process, and while clearly bespoke to each borrower’s needs, the lending process also follows a conveyor-belt approach to ensure a successful outcome. In other words, there is a standardised process that is absolutely required to be followed for the quickest result. Key steps in the process include: Performing due diligence, Agreeing a conservative base case, structuring (and pricing) a marketable term sheet, writing a comprehensive information memorandum, obtaining credit approval for the MLA, launching into syndication, more due diligence, lender Q&A for credit approval, documentation, meeting of conditions precedent.

Approaching potential lenders before the necessary steps are complete or presented in a manner other than the one they expect, risks a disorganised financing process, which will inevitably lead to delays.

Telcos are to assist the MLA with all of the above. Surely this cannot fall on the CFO challenged with multitasks with the rest of senior management. Telcos seeking to raise bank debt always underestimate the time and effort it takes to put a loan in place.

Thinking the MLA is on your side
The deepest secret of syndicated lending is that MLAs act on behalf of the syndicate of lenders, not on behalf of the borrower. It is a common misconception that when a CFO (backed by his board) appoints an MLA to arrange a syndicated financing for the telco, that this MLA will represent the operator’s interests. Of course, everyone wants a successful transaction and for several weeks (or months) the interests of the borrower and the MLA may be aligned: agree the model, write the info memo, credit submission, select the list of lenders, etc. What happens after credit approval, launch of syndication? What happens during documentation? The MLA… sits across the table from the borrower, negotiating the facility agreement against the telco.

While this is not quite a conflict of interest, it is, however, a quirk of syndicated lending. MLA banks are absolutely necessary for an efficient syndication, no matter its size, as they will have the depth of reach into the bank market to ensure any little morsel of liquidity is tapped into. These banks have the resources to embark on such a mammoth task. Self arranged deals are simply inefficient in terms of the time it takes management to put the loan in place. MLA banks are necessary for an efficient loan-raising exercise, but CFOs of telecom operators riding Africa’s broadband wave should always be aware that MLAs will not have aligned interests with the telecom operator.

‘Broadband’ is the Magic Word
While broadband today is the magic word that opens lenders’ coffers like few other sectors, several African telcos are in the enviable position of having banks and non-bank lenders knocking on their doors to offer finance. Many Central and East European telcos are watching in envy, as they have certainly lost favour in recent years. But while the markets are liquid for many African countries and while telcos on the continent are seeking loan finance to expedite their roll-out plans, they need to pause and do it right. Raising bank debt is not astrophysics – it is just a process. It is a detailed process, with its own quirks and needs. The onus is on the telecom operator CFOs to approach this serious task well-prepared and with adequate due diligence on their own part.

Sophie Papasavva

Sophie Papasavva

Sophie Papasavva is the Founding Partner of EMFC Loan Syndications (“EMFC”), a boutique firm assisting companies seeking to raise bank debt. EMFC offers Loan Execution Support, acting as an additional ‘in-house’ resource to time-constrained finance teams. Prior to establishing EMFC, Sophie was a loans banker for 12 years, first as telecoms, media & technology relationship manager and later in loan syndications and sales, where she gained experience in multiple sectors such as oil & gas, mining, infrastructure, agribusiness and others. Sophie has originated, structured, executed, sold, restructured and syndicated loan financings ranging from simple bespoke bilaterals to complex multi-billion dollar, multi-currency syndicated transactions. Her expertise lies in arranging structured, bespoke financings for corporate borrowers operating in the emerging markets. To contact Sophie, please e-mail her directly at or follow her on Twitter at @Sophie_EMFC.