Potential financing in a new economic order

Dr Sanderson Abel
It is uncontested fact that the economy has suffered a lot of deindustrialisation and of the few remaining industries are operating at below capacity. The capacity utilisation reports which have been produced by the Zimbabwe Chamber of Commerce have identified that financing has an albatross around the resuscitation of industries and improving capacity utilisation.

The various measures that the Government has put in place under the new economic order has potential to unlock funding for our ailing industries. In light of the new economic order and the economy open for business there is need to consider the different financing mechanisms that the country should be pursuing. Beyond the traditional equity and project finance routes, there are a number of financing mechanisms that can be pursued to achieve industrialisation. This article discusses some of the potential financing models that can be pursued in an endeavour to reindustrialize and improve capacity utilisation in the economy.

Structured Finance
Structured finance is a complex financial instrument offered to borrowers with unique and sophisticated needs. Generally, a simple loan will 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.

Off-taker Financing
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 offtake 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.

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 an 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.

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 nonperformance.

Dr 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