Financing in Africa by China, Japan and South Korea Chris Brown Partner, Head of Financial Investors Group Norton Rose Fulbright LLP June 2015

WHAT MAKES CHINESE FINANCING IN AFRICA IMPORTANT In 2010, Chinese policy banks lent more to African countries than the World Bank Chinese money = a much needed source of financing in Africa and one that commercial banks cannot always compete with

WHAT MAKES CHINESE FINANCING IN AFRICA DIFFERENT Four key distinguishing features: Resource nexus; Chinese content; Security and credit comfort; and Government involvement

Traditional Project Financing Traditional project finance Security and no credit comfort other than parent company guarantee usually Parent company guarantee Lender Parent KEY - Resource nexus - Chinese content - Security and credit comfort - Government involvement Loan $ Holdco Security over shares in Holdco No resource nexus as income stream from offtake usually: forms part of the security in favour Lender; and critical to bankability as it gives Lender certainty on Projectco’s ability to repay the loan. Security over shares in Projectco Product $ Offtaker Projectco EPC Contractor Construction services No mandated Chinese or other content in EPC arrangements Security over receivables $ Security over rights against EPC contractor Permitting Host country government Project assets Security over Project assets (including account balances, licences and other assets) No government involvement other than grant of permits and/or a concession

CHINESE FINANCING Parent Chinese government Host country government KEY - Resource nexus - Chinese content - Security and credit comfort - Government involvement CHINESE FINANCING Government involvement Security and credit comfort Parent Chinese government Host country government Framework agreement Loan $ Holdco Chinese content Payment of loan obligations until Project operational Sovereign guarantee $ Chinese EPC contractor Chinese lender Projectco Construction services Chinese offtaker Product RESOURCE NEXUS $ Project assets Permitting

RESOURCE NEXUS Between 40% and 60% of every mineral that gets mined anywhere in the world ends up in China Strategic interest No commodity price hedging

RESOURCE NEXUS: AN EXAMPLE China Exim financing of post-war reconstruction in Angola USD 2 billion oil-backed loan. Margin = 1.5%. China = major importer of Angolan crude oil e.g. between 2002 and 2008, Angolan oil exports to China have increased seven-fold. Proceeds of oil sales to China offset against amounts owing under the loan. Oil revenues deposited into a China Exim escrow account from which the debt service amounts are directly deducted. Off-take arrangement = real “value” extracted for the USD 2 billion Chinese loan. No hedging.

CHINESE CONTENT Chinese goods and/or services Indirect support = inter- governmental loan Direct support = export buyer’s credit

CHINESE CONTENT: SOME EXAMPLES China Exim financing of the Kariba power station in Zimbabwe USD 319 million inter-governmental loan to Zimbabwe. Deeply concessional loan. Interest rate = 2%. Contract for the expansion work for the project “awarded” to Sinohydro, a Chinese state-owned hydropower engineering and construction company. Value of contract = USD 319 million. China Exim financing of telecom infrastructure in Nigeria USD 200 million commercial export buyer’s credit. Tied to the purchase of a Chinese made satellite.

SECURITY AND CREDIT COMFORT Full project finance style security rarely asked for Ranges from no security to limited security usually where there is a strategic interest for China Other forms of credit support Innovative methods of credit comfort for Chinese policy banks

SECURITY AND CREDIT COMFORT: AN EXAMPLE China Exim financing of mining and infrastructure in the DRC USD 6.2 billion inter-governmental loan. No asset security. China Exim got “comfortable” because it: had direct recourse to the DRC government under a sovereign guarantee for the inter-governmental infrastructure loan; had access to 68% of shares in Sicomines, the DRC mining company being financed (through the Chinese state-owned entities, CREC and Sinyhydro that were joint shareholders in Sicomines); and would get the non-guaranteed mining loan repaid ahead of the guaranteed inter-governmental infrastructure loan.

GOVERNMENT INVOLVEMENT From the Chinese government = to serve strategic interests of China From government of the host country = to reduce risk profile for Chinese policy banks

GOVERNMENT INVOLVEMENT: SOME EXAMPLES China Exim financing of infrastructure in Togo Framework agreement with the government of Togo. China Exim financing of the Bui Dam in Ghana Framework agreement with the government of Ghana. Until the Bui Dam is operational, the government of Ghana will make interest payments to China Exim which will be reimbursed by the project company once the Bui Dam is operational.

Assignment of Promissory Notes and Projectco security Chinese government NEW STRUCTURES KEY - Resource nexus - Chinese content - Security and credit comfort - Government involvement Chinese Lender Sinosure Sinosure cover No recourse except in limited circumstances Assignment of Promissory Notes and Projectco security Monthly drawdowns to settle invoices Loan $ Projectco Upfront 15% Advance Payment Chinese EPC contractor Promissory notes Security Construction services Parent company guarantee for full contract price Bank guarantee/bond for 15% Advance Payment

KEY TERMS: LOAN TERMS Loan amount includes contract price (less Advance Payment), capitalised interest, lender and Sinosure fees and expenses Terms agreed upfront with Project Company No amendments to loan / terms with Project Company consent Limited Events of Default No acceleration or enforcement for Contractor defaults Only Project Company defaults are insolvency, validity of mining licence; failure to pay under promissory notes Promissory notes and Project Company security assigned by Contractor to Lenders Project Company security Only enforceable for agreed Project Company risks (as above) Limited in value up to the lower of (i) issued promissory notes and (2) independent valuer’s assessment of value of works completed to date

KEY TERMS: PROMISSORY NOTES & SECURITY Invoices to be validated by Project Company to confirm the relevant works have been completed Issued for 85% of each validated invoice – remaining 15% set off against advance payment Payable on 24-36 months, with interest to match the agreed rate of the loan Contain limited defaults (non-payment, invalidity of mining licence) which will cross- default the loan Will allow set-off of amounts owing by the Contractor to the Project Company Project Company Security Share security and mining assets Only enforceable for agreed Project Company risks Limited in value up to the lower of (i) issued promissory notes and (2) independent valuer’s assessment of value of works completed to date Released if Project Company terminates EPC Contract for Contractor default, following payment of outstanding liabilities

JAPANESE FINANCING IN AFRICA Japan = most active Asian project finance sponsor in Africa in the last year. Particular focus so far on Nigeria and Morocco. Strategic partnerships between Japanese commercial banks and local commercial banks e.g. Sumitomo Mitsui Banking Corporation has formed a partnership with Absa Bank focussed on the development of Mozambique’s natural resources, infrastructure and water security. Japanese consortium financing of Safi Energy coal power project in Morocco USD 2.1 billion commercial loan to Moroccan JV partly owned by Mitsui & Co. Backed by Nippon Export and Investment Insurance. Syndicate of lenders = JBIC, Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation and Mizuho Bank.

SOUTH KOREAN FINANCING IN AFRICA South Korea follows the Chinese model = loan afforded through its development bank to an African government on the condition that the loan is used to finance infrastructure projects that are managed by South Korean companies. KEXIM is the main lender. KEXIM financing of Ghanaian power transmission lines in Ghana USD 60 million concessional loan. Conditional on two South Korean companies, GS Engineering & Construction and Samsung, undertaking the project construction.

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