African Financing Faces Mounting Challenges

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International banks are increasingly reluctant to commit to African projects, although domestic banks are growing with an eye on filling this gap.

International banks are increasingly reluctant to commit to African projects, although domestic banks are growing with an eye on filling this gap.

“We have seen a significant reduction in appetite of international banks to lend to the energy and natural resource sector,” Standard Chartered’s managing director for the sector Ade Adeola said, during a panel at Sub Saharan Africa International Petroleum Exhibition and Conference (SAIPEC).

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Banks’ interest in the sector had already begun to wane before COVID-19 and much of the current push for the energy transition.

“There’s a narrowing base of international players willing to commit capital to the mid and upstream,” Adeola said.

Those that are still working in the area have cut the amount they are willing to provide.

Alternatives

Adeola suggested there were still ways to secure financing, though. Borrowers can work to layer various capital structures, he advised. Furthermore, for large transactions, export credit agencies (ECAs) have a role to play.

“The other piece is local, and regional, banks,” Adeola said.

EY director of EMEIA oil and gas transactions Tabrez Khan agreed that there was an increased opportunity for local banks. These will likely focus on smaller projects, such as CNG or small pipelines, he said. “For the development of Africa, local capital needs to be more actively deployed than it ever has been.”

One advantage of local banks is they may be more willing to lend in local currencies.

“There’s always a perception that borrowing in naira will be more expensive. It can actually be a lot cheaper to borrow in naira,” the banker said. “Ultimately, pricing doesn’t matter. Liquidity is the most important piece of the puzzle.”

Adeola predicted that African development finance institutions (DFIs), such as Development Bank of Southern Africa (DBSA) and African Export-Import Bank would play an increasingly important role in the next five years.

Time frame

Société Générale’s co-head of advisory and project finance Katan Hirachand noted the challenges around long-term borrowing.

“Time horizons from energy transition and net zero targets are becoming more and more prominent. There needs to be a move towards medium term borrowing,” Hirachand said.

Société Générale acted as financial advisor to the $15 billion Mozambique LNG financing. “I don’t think long term offtake agreements will be easily available any more,” Hirachand said. These agreements have been seen as a key part of securing financing.

“We need to become comfortable [with shorter offtakes] or not be in,” Hirachand continued.

Another area of opportunity is in recycling capital. Companies can refinance assets that are already operating, the executive said, possibly with less conventional sources of funding. “This would free up ECAs to fund new development projects.”

In order to secure funding, borrowers will need to be able to demonstrate their ESG qualities.

“You want public money? You’ll have to go down that route,” Hirachand said. Operators must think about how to track greenhouse gas emissions, capture carbon, incorporate new technology and consider alternative power sources, such as solar.

“I don’t think investors will allow you to get away without enshrining that and minimising carbon as much as possible.” For those companies that can take steps in this direction, he continued, loans will be available at cheaper prices.

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