Structured Commodity Finance in Sub-Saharan Africa

Finding resolutions

Mary Boakye, head of the Africa financial markets group at Denton Wilde Sapte, and Matthew Cox, a solicitor in the firm’s structured trade finance group, discuss the difficulties of advancing credit to borrowers in Sub-Saharan Africa.

In spite of the inherent risks (both real and, some would argue, perceived) of lending in Sub-Saharan Africa, a number of cross-border financings into and within Sub-Saharan Africa take place each year. These deals often require sophisticated structuring techniques to enable the lenders to mitigate the perceived risks to an acceptable level. As a result, the legal and financial markets in many of these jurisdictions have built a good deal of experience in relatively sophisticated structures.

As with other emerging markets, conventional financing structures and techniques must be adapted to fit the specific circumstances of the transaction. Frequently, new structures have to be created for complex issues not experienced elsewhere. This is never more the case than when working in Sub-Saharan Africa where unique country-specific and regional issues bring with them a further set of challenges, both legal and non-legal. These challenges need to be dealt with to successfully complete transactions. We follow with a breakdown of the issues commonly encountered, with suggestions on how these can be addressed.

 Requirements for the perfection of security

The credit committees of international lenders on Sub-Saharan structured finance deals will often stipulate that lenders should have some form of fully perfected and first-ranking onshore security, in addition to any offshore security that’s available. While this requirement makes good sense from a legal and risk perspective, in practice achieving this happy position in some Sub-Saharan jurisdictions can be a difficult.

The following three examples illustrate the types of issues that can come up across Sub-Saharan Africa when taking onshore security.

i. Stamp duty, registration fees and notarial fees

Significant upfront stamp duty fees, usually calculated as an ad valorem percentage of the total facility amount, are payable in most Anglophone jurisdictions in Sub-Saharan Africa, combined with punitive penalty fees for late stamping (which in many jurisdictions can have the effect of doubling the stamp duty bill).

In addition, once the stamp duty is paid, there can be further significant upfront ad valorem registration fees before the security documents can be registered at the relevant corporate affairs commission. This is necessary for the lenders to perfect their security and to establish their priority over other creditors. In Francophone Africa, there can be similar expenses as a result of notarial fees. It is crucial that lenders inform their borrowers about the timing and quantum of these fees at the beginning of the transaction.

Many, particularly smaller borrowers, will not be aware of these substantial costs, either because they have not raised secured financings before, or because their existing local lenders have not perfected their security in the past. No lender wants to have to inform its borrower just before closing that there is a stamp duty fee of several hundred thousand dollars, which the lender is unable to finance and which the borrower was unaware would be necessary to pay. There are several methods for minimising or postponing such stamp duty and registration fees, such as executing and holding the finance documents offshore. But these approaches are normally not without risk and stamping is often unavoidable.

Often, stamp duty and registration-fee rates were established when the size of financings now necessary to develop industrial or infrastructure assets was not contemplated. And these costs can have a significantly adverse impact on the viability of a financing. Such upfront costs can have a serious impact on the cash flow of many transactions and represent a significant cost of borrowing, which is ultimately borne by the Sub-Saharan borrowers themselves. 

ii. Establishing priority

Another practical problem faced by lenders is how to establish priority over other lenders. This is a problem common to many emerging market jurisdictions, and Sub-Saharan Africa is no exception. For example, a lender might find that the relevant companies registry (or its equivalent) for its borrower is located in a different city to that of the lender's local counsel, with the result that the local lawyers are required to travel long distances merely to obtain the borrower's corporate records involving significant additional delay and expense. Readers might want to factor these delays in when planning timelines for transactions. Even once the borrower's records are obtained, the information on the borrower's existing security may not be up-to-date and complete.

In many jurisdictions, and especially when dealing with state-owned or well-established borrowers, the borrower's existing lenders may not have registered their security in the past possibly to avoid the need to pay the high stamp and registration charges and/or because they are comfortable with the credit risk and take the view that they do not need fully perfected security.  The existence of such potentially first ranking security would be unknown to any subsequent international lender. Provided that lenders carry out adequate due diligence and work closely with local lawyers to obtain all publicly available corporate information on the borrower, there is no reason why adequate priority cannot be obtained for the vast majority of transactions in Sub-Saharan Africa. 

iii. Conflicts of law issues

Lenders can encounter difficulties when trying to persuade some Sub-Saharan corporate affairs offices to recognise and allow registration of foreign law security over offshore assets. For example, in some Sub-Saharan jurisdictions a charge given by a local company must be registered in the books of the conservator of mortgages. However, the conservator of mortgages will not always register a foreign charge purporting to create a fixed charge over future assets. Under the local law, a lender can only have a fixed charge over existing assets. In other words, a lender may find they have taken valid security over the offshore assets under say English law but then find they cannot register that security in the onshore jurisdiction because the local law does not recognise the offshore security as a type which is capable of registration.

For these reasons, lenders (and their insurers) may need to be prepared to take a pragmatic approach to taking and perfecting security and should work closely with international and local lawyers to analyse the risks and what they can live with in terms of onshore security. Despite the occasional problem with such conflict of law problems (which are by no means unique to Sub-Saharan Africa) one normally finds the local corporate registration systems are sophisticated enough to provide international lenders with adequate certainty as to perfection of their security.

Local bureaucracy

It is fair to say the level of bureaucratic regulation can be greater in Sub-Saharan Africa than in some other emerging markets. Foreign exchange control consents, central bank licences for offshore accounts, certificates of capital importation and approvals from the relevant governmental ministries can result in fairly extensive condition precedent checklists for many deals. Despite this, there is no reason why this should negatively impact on any transaction.

This is provided that lenders and borrowers alike focus on starting the necessary applications at the beginning of a deal, rather than just before completion, as obtaining such consents can be a time consuming affair. No-one wants drawdown to be held up because of delay in obtaining a crucial government licence without which the transaction would be unlawful. It is also important to understand intra-country and intra-regional issues as well as how different government departments interrelate. Lenders should be aware of the possible impact on transactions, particularly where ministers or other relevant government officials can change unexpectedly.

Uncertain legal/regulatory regimes

The legal systems of Sub-Saharan countries still carry the inheritance of their colonial past. When lenders and their legal representatives consider the enforceability of certain obligations and what terms will be implied into a contract, they may find there is a dearth of local formal law or precedent on the issue. As a result, the precedents and approach of the former colonial power will often be the most reliable guide to what the position is under local law. However, significant concerns remain, often with justification, as to the enforceability of contractual terms and inefficiencies in the local court system that might result in a substantially delayed or unexpected outcome.

Cross-border financings will almost always be governed by laws other than those of the jurisdiction of the borrower (e.g. English, French or New York law) with disputes subject to the jurisdiction of the courts in the jurisdiction of the governing law. But concerns remain over recognition of foreign judgments and how difficult it would be to enforce those judgments within many Sub-Saharan countries. For this reason, the bankability of many Sub-Saharan financings continues to rely heavily on the borrowers having offshore assets against which judgments can be enforced.

In situations where the bankability cannot be assured through the availability of such assets (and sometimes even if it can) lenders often require political risk insurance to protect against a wide range of risks which may afflict the borrower and/or its jurisdiction and consequently undermine the financing. Examples of such risks are expropriation of assets, non-convertibility of local currency, revolution, war and civil war. While commercial cover for Sub-Saharan countries is more available and for longer periods, it remains the case that the most difficult countries either remain off cover or involve the high cost to the borrower of a significant insurance premium. Export credit agency cover, while often essential for a deal to take place, introduces its own challenges.

Lenders often benefit from keeping their insurers involved so that they are comfortable with any changes to the structure (especially the security structure and inter-creditor arrangements) as the deal progresses. 

New legislation can introduce legal uncertainty almost overnight and in many jurisdictions the local lawyers are unable to clarify the law in certain areas because of a lack of governmental guidance. For example, half way through a recent deal in East Africa, new legislation was brought into force, which among other things provided that foreign investors would need to obtain an investment certificate before investing in that country. At the time, the government body with responsibility for issuing such investment certificates took the view that it was unable to issue any investment certificates until certain secondary legislation had been passed effectively prohibiting all foreign investment into that country. This situation was finally resolved at the beginning of this year but it serves as an example of the problems that legal uncertainty can cause.

Legal opinions

Another issue encountered regularly is that lenders expect to receive clean local law opinions as to due incorporation, capacity and authority of the borrower to enter into the transaction. Normally these capacity opinions can be obtained but in some cases the local lawyers are simply unable to provide fully clean opinions without certain qualifications and assumptions which international lenders might find unusual because they would not normally be found in an English, French or New York opinion. Often, such qualifications and assumptions will not impact negatively on the transaction and can be accepted.

In some jurisdictions corporate information is not publicly available, in others it is, although the available records are not always as up-to-date as they could be. In addition, Sub-Saharan borrowers can have a relatively uncertain internal procedure, which makes life hard for the local lawyer who is asked to opine that the borrower has duly authorised the facility. Put yourself in the position of a local lawyer asked to opine that a transaction has been properly authorised when the articles of association require a quorum of ten directors but the existing board (the appointment of which is undocumented) consists of only five members or where the relevant certificates of incorporation or change of name are not available. The lawyers can usually find practical solutions to these types of mundane (but very important) problems which crop up on a large number of deals but lenders (and their credit committees) need to be pragmatic in their requirements when doing Sub-Saharan deals subject, of course, to minimum KYC (know your customer) and other mandatory requirements.

Local experience

i. Borrowers

There are sophisticated borrowers in Sub-Saharan Africa, but there are also many who are entering the international debt/capital markets for the first time and therefore there is a steep learning curve for both lenders and borrowers. Delays also often occur due to the inexperience of first-time borrowers and their concerns over exploitation (for example, on a financing for a local telecommunications company the legal advisers of the borrower delayed the transaction by trying to negotiate the agency and other ‘intra-bank’ clauses in a facility agreement, which had little or no implications for the borrower). Quite often, in order to prevent such unnecessary delays, lawyers have to spend time explaining market standard terms to local borrowers and proving that such terms are internationally accepted as such by both borrowers and lenders.

Assisting first-time borrowers on the international markets to navigate and understand international market practices is therefore an essential aspect of the lawyer's role. It is also important for a lawyer to be able to anticipate and address issues such as these in order to progress transactions speedily and cost-efficiently. Examples include a debut local listed cross-border bond issue where it was necessary to work with all parties – including the local regulators and stock exchange – as well as structuring and tailoring the issue documents to meet local requirements. Another illustration is a transaction where a local borrower's differing perception of a syndication, and apprehension of what was afoot, led to the transaction being structured and documented not as a syndication as one would understand it, but as a series of bilateral loans within a framework facility agreement.

ii. Local lawyers

Experience of cross-border financings in each Sub-Saharan country typically resides with very few legal practitioners. The lawyer who issued the legal opinion on the first financing often ends up as the only person deemed acceptable to international financiers. Often also the leading lawyers are principally advocates with a busy court schedule and little support available to assist them. These circumstances create their own challenges in the financing, however simple or complex the transaction structure.

Syndicated deals and local banks

The market is seeing an increasing number of syndicated or ‘multi-lender’ transactions in Sub-Saharan Africa, although not as many as it would like. One finds that it is not unusual for the inter-bank negotiations (whether in respect of a true syndicated facility agreement or intercreditor arrangements) to take longer than the negotiations with the borrower. In some cases this is a result of the local banks being unfamiliar with the bespoke English law finance documentation favoured by international lenders and in other cases by the fact that these banks often have long-standing existing relationships with the borrower and have a different way of doing things. Sometimes this can cause tension. From the local banks' point of view the process of producing documentation appropriate for the international market can seem excessively time-consuming and onerous.

Lenders should not necessarily expect their local bank partners (or even their own local branches) to automatically accept Loan Market Association standard documentation which was drafted with investment grade UK-based borrowers in mind when doing deals in this region. International lenders will benefit from bearing in mind local banks are likely to have very different views of the risks involved in lending in their home jurisdiction, as well as the importance of documentary risk and the credit risk of the borrower. Often the local banks will have long-standing relationships with the borrower, which need to be taken into account.

The importance of partnerships with local Sub-Saharan legal counsel and other advisers

The importance of working in partnership with local lawyers on both sides, regulators and government to conclude transactions should not be underestimated. This is especially important when dealing with government lawyers as they can kill a deal if they do not understand it or do not want to understand it.

In most of the Sub-Saharan jurisdictions there are established legal firms which monopolise the bulk of the international legal work in that jurisdiction. These firms have excellent local knowledge and relationships with borrowers, local lenders, government agencies and regulatory offices, which can often prove invaluable to lenders in getting deals structured correctly at the outset, highlighting potential problems early on and assisting borrowers to obtain any relevant authorisations and other conditions precedent to drawdown.

As is the case in other parts of the world, experience and knowledge of Sub-Saharan Africa and of approaches which have been used previously to resolve particular difficulties are invaluable. Lawyers with an in-depth understanding of the region can add significant value, particularly in order to structure, document and complete negotiations expeditiously.

Denton Wilde Sapte's international specialist team of more than 20 lawyers has extensive experience and knowledge on structured trade and commodity finance transactions, particularly in the emerging markets in Africa, Asia, Latin America, Central and Eastern Europe and the CIS, as well as the Middle East. The firm was recognised as the African Law Firm of the Year by Chambers Global in 2004.