Chronicle Editor
Sanderson Abel—
It is a fact that the economy is hungry for new capital and the rate of foreign capital inflows remains erratic. In the liquidity constrained environment characterising Zimbabwe, banks are not in a position to meet the capitalisation needs of our industry.There is need for a contextualisation of the abilities of the local banking sector as well as having a clear understanding of the limitations of the local stock exchange in attracting sufficient levels of capital for the mining sector. It is imperative to look at the alternatives sources of financing to circumvent the liquidity challenges affecting the country.
There is need for captains of industry to think outside the box and try and pursue non-conventional funding sources to spur industrialisation. The non-conventional method simply implies the innovative methods outside the traditional ones.
The methods require that industrialists understand the following facts:
Knowing where the money is – this is a proactive route of following the money rather than waiting for the money to come to you i.e. Zimbabwean companies now need to know where the source of funds rather than passively waiting for investors to come.
Ability to sell the tangible product that investors can be attracted to. This requires that there be a holistic review of the legal, structural and operational frameworks that makes an investor attracted to come to Zimbabwe and invest.
An understanding that since the Global Financial Crisis, traditional funding sources for capital have been inward looking, seeking funds to stimulate their own economies.
Alternative sources must be explored in order to secure the needed investment capital ( conventional or unconventional)
What are the financing options available?
Beyond the traditional equity and project finance routes, there are a number of financing mechanisms that can be pursued to achieve industrialisation. This section discusses some of the potential for financing industrialisation in Zimbabwe:
Debt Financing
Under the current indigenisation laws some potential investors might not be willing to take up share ownership in a corporate but might be willing to pour in some resources as loan to the corporate hence the best method might be debt financing. Debt financing means borrowing money and not giving up ownership. Debt financing often comes with strict conditions or covenants in addition to having to pay interest and principal at specified dates. Adding too much debt will increase the company’s future cost of borrowing money and it adds risk for the company. This differs from the equity financing Equity financing often means issuing additional shares of common stock to an investor.
Structured Finance
Structured finance is a complex financial instrument offered to borrowers with unique and sophisticated needs. Generally, a simple loan not suffice for the borrower so these more complex and risky finance instruments are implemented. Structured financial products are not offered by all lenders and, in almost all cases, are not transferable between other types of debt in the same way as a straightforward loan. They are usually only offered to large borrowers needing a vast injection of capital or another source of income.
Syndicated Loans
Syndicated loans, also known as a syndicated bank facilities are loans offered by a coordinated group of lenders – referred to as a syndicate – that work together to provide funds for a single borrower. The borrower could be a corporation, a large project or a sovereign government. Syndicated loans can involve a fixed amount of funds, a credit line or a combination of the two.
Such loans arise when a project requires a sum too large for a single lender to put together or when a project needs a specialised lenders with expertise in a specific asset classes. Syndicating the loan on a project allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital bases. Interest rates on this type of loan can be fixed or floating. And they can be short or very long term loans. They are ideal for financing capital projects because large amounts can be raised and different lenders can take care of different aspects in financing an industrial complex.
For example a large factory can be financed by a combination of lender who fund the factory complex, machinery and equipment etc. depending on their interest, expertise, capacity and competence. The main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders such as banks, or institutional investors such as pension funds and hedge funds.
Because syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower defaulting could cripple a single lender. Syndicated loans are also used in the leveraged buyout community to fund large corporate takeovers with primarily debt funding.
Private Placements
Private placement are a method of capital raising through the sale of securities to a relatively small number of carefully selected investors. Private placements will be undertaken typically by large banks, institutional investors such as mutual funds, insurance companies, pension funds and venture capital funds. Private placements are different from publicly issued securities which are made available for sale on the open market to any type of investor usually through a regulated exchange.
The advantages of private placements are that they face less bureaucracy and regulation since a private placement is offered to a few select individuals, the placement does not usually have to be registered with the Securities and Exchange Commission (SEC). In many cases, detailed financial information is not disclosed and the investment is not sold by prospectus. This gives flexibility to the company raising funds and can significantly speed up the fund raising process and lower costs of raising new capital.
The disadvantages of this process are that the buyer of a private placement securities especially bonds may expect higher rates of interest than they would earn on a equivalent publicly traded securities. Privately placed debt securities may also come with stringent collateral requirements because the credit rating may not be easy to establish, whilst buyers of privately placed equity stock may demand a higher level of ownership or control in the business or call for a fixed dividend policy on their share of stock.
Corporate bonds
A corporate bond is a bond issue by a corporation. It is a bond that a corporation issues to raise money effectively in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. These can be structured in five, ten, fifteen and twenty year maturities depending on the mineral under consideration.
Royalty funding
Royalty based financing is an innovative way to raise capital for mining businesses. The model for royalty based financing is not new, and has been in use for countless decades in oil and gas reserves and other stream of income trusts. The interesting part about royalty based financing or “RBF” is that you can get the money you need while decreasing the amount of equity you have to give up. In exchange for less equity, the investor receives a regular dividend that is equal to some percentage of the gross revenues of the business
Off-taker Financing/Toll Manufacturing
An agreement between a producer of a resource and a buyer of a resource to purchase/sell portions of the producer’s future production. An off-take agreement is normally negotiated prior to the start of a project in order to secure a market for the future output of the facility. This type of arrangement is suitable for minerals such as chrome and consumer manufactured goods.
Streaming arrangements
These are contracts for ongoing supply of mineral production under which upon advance payments of a premium, the buyer agrees to purchase at a fixed , discounted and predetermined price, all or part of the mineral to be extracted by a mining company during a certain period or throughout the life of a mine. The mining company receives an upfront payment, which enables it to develop, construct and or expand the mine. This arrangement allows the mining company to capitalise on the basis of proven but still unexplored mineral reserves at a cost usually below that of loans.
Project finance
Under this arrangement the project itself and its assets are used as security for loans advanced to the project. This means that the risks that lenders assume as well as the liabilities of the project sponsors are all tied to the project.
Joint venture partnerships
A joint venture is a temporary partnership that two companies form to gain mutual benefits by sharing costs, risks and rewards. In this case the mining companies need look outside the country for potential suitors brings in money, capital and relevant skills. The arrangement should have the exit strategy and should have a predefined lifespan.
Partnerships with contractors to fund projects
Increasingly, contractors bidding for mining infrastructure projects are also being invited to contribute equity to secure a favourable outcome for their bids. Before investing equity into any project, contractors undertake proper due diligence into the financial feasibility of the company as well as the project.
Escrow account arrangement
An Escrow account arrangement entails establishing a bank account with a reputable bank for purposes of managing working capital drawdowns for specific projects on the understanding that proceeds from the sale of resultant products are deposited with the bank that controls the account.
In a depressed economy such as the Zimbabwean economy where the risk attending to the economy are high, an Escrow account can be established offshore with a tight legal agreement/arrangement possibly with offshore guarantees, in order to support working capital requirements for mining companies. This arrangement will give comfort to the financiers whose fears will be based on non-performance.
What conditions should we meet first?
The IMF staff monitored programme recently endorsed by the cabinet will go a long way of allaying any fear of potential country risk as the programme will entail transparency in Government dealings
The Government should adhere to the debt clearing strategy so as to reduce the perceived country risk
There is need for policy consistency in implementing the country’s laws and policies so as not to confuse the potential investors.
Conducive investment environment with clarity particularly on the resource nationalism and indigenisation issues.
The country should further strive to harmonise the mechanics of business so that the country’s world ranking in terms of doing business improves significantly.
In the near term, a peaceful credible election leading to an acceptable outcome will go a long way in changing the attitudes of global financiers on Zimbabwe and unlocking the full potential of mining.
Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008
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