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Credit facility to boost exporters in progressing mining projects

Export Credit Insurance Corporation of South Africa COO Mandisi Nkuhlu discusses the corporation’s multicurrency guarantee facility to assist exporters in securing credit solutions

22nd January 2016

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

  

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In addition to facilitating export trade and enabling exporters to access mining project opportunities across Africa, the Export Credit Insurance Corporation (ECIC) of South Africa will this year focus on increasing awareness of its latest offering – a multicurrency guarantee facility to assist exporters in securing credit solutions.

This service offering will be highlighted at this year’s Investing in African Mining Indaba, which will take place from February 8 to 11 at the Cape Town International Convention Centre.

“The ECIC has entered into a partnership with financial institution FirstRand Bank, the parent company of Rand Merchant Bank, to create a 50:50 risk-sharing arrangement and multicurrency guarantee facility for exporters,” says ECIC COO Mandisi Nkuhlu, who will also be the corporation’s official speaker at the Indaba’s thought leadership programme.

“While the banking sector has stronger client relations with exporters, key challenges lie in most active exporters exceeding their credit limits.”

Therefore, the multicurrency guarantee facility, which was launched in November 2015 to provide additional financing solutions, will include the credit facility for performance and retention bonds.

The ECIC and FirstRand Bank partnership will also be facilitated through an umbrella risk participation agreement.

The two entities have agreed to a three-year facility of about $200-million, which could be extended. This facility aims to support credit exporters, such as mining companies or contractors, that participate in the agreement. These participants will be able to increase their limits, thereby increasing their capacity to raise bonds, while creating additional opportunity to simultaneously compete for more projects.

“This is in line with the ECIC’s mandate to facilitate export trade,” Nkuhlu stresses, suggesting that the availability of an additional debt facility will provide more direct benefit for exporters. “Moreover, by increasing the competitiveness of South African exporters, they are expected to compete more effectively on an international stage.

He notes that several international financial institutions have retracted from the project finance market, with projects currently relying on future cash flows. These types of institutions are more comfortable to lend with support from a corporate finance basis or from a sovereign basis, that is, when a country’s finance minister supports a project, he says.

Nkuhlu adds, however, that South African financial institutions have a strong record in supporting project finance in the mining sector in Africa, having experienced the downturn and upswing of the commodities cycles.

“The South African financial services sector, therefore, comprises sufficient intellectual capital to contend with any industry challenges and to improve credit facility agreements when required,” he posits.

While this insurance service offering can be regarded as a prototype, the ECIC aims to roll out a more significant offering to accommodate and benefit more exporters and key industry players in future.

This service offering is not restricted to the mining sector and will also be available to the construction, energy, agribusiness and manufacturing sectors, says Nkuhlu.

Lessons Learned
The ECIC has provided funding for several mining projects across Africa in the past two to three years, including a gold project in Liberia; a diamond project in Lesotho; and a credit facility of about $400-million for a copper project in Zambia.

Nkuhlu, however, acknowledges a decline in the corporation’s demand for services, owing to the current global commodity outlook influencing the progression of mining projects. Since some projects have been deferred, he says lessons learned in the past year include the need for ongoing projects to demonstrate increased robustness. These projects will undergo more stringent screening for debt and credit facilities in future.

“The challenge for mining projects is the need for sponsors to be financially strong, bearing enough equity, as venturing into the equity markets in the current global economic downturn is difficult.”

Nkuhlu explains that during the commodities boom, many junior sponsors attempted to finance projects by structuring them on a project finance basis. However, he believes these single-asset companies continue to find it difficult to raise debt in this manner. .

“This is another key challenge – to address a suitable blend of finance, incorporating debt deferral or restructuring that would be able to support such junior sponsors.”

He, therefore, avers that, since South Africa understands the mining industry well, the country maintains flexibility when providing debt deferral and restructuring for these projects, with the view that they would be able to repay the debt.

Diversification Outlook
While the ECIC aims to diversify its project portfolio and increase its exposure to infrastructure and other sectors, this will not detract from the corporation’s material mining portfolio, Nkuhlu maintains.

“There are several enquiries for mining projects in countries such as Guinea and Tanzania. However, these projects would require a more sensitive financial analysis and a stringent robustness valuation based on lessons learned in the past year,” he says.

Nkuhlu stresses that the mining industry remains a significant driver and a key part of the South African economy. “The ability to attract investors and maintain South Africa as a relevant destination for foreign direct investment is crucial, as the country is a good springboard from which to explore opportunities on the rest of the continent.”

Edited by Tracy Hancock
Creamer Media Contributing Editor

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