Africa Rail 2009 Workshop 23 June 2009 Different Types of Financing for Mobile Equipment Greg McKenzie Head of Asset Finance, Investment Banking Division, Rand Merchant Bank

Conventional Debt Funding Alternatives to Debt Funding Financing Mechanisms Export Credit Finance Introduction Conclusion

3Strictly Private and Confidential Introduction how you want to finance understand the risks and rewards impact on your business and strategy Asset Knowledge and Expertise Understand your business and financial strategy Diversification was a previous corporate strategy de-leveraging unprecedented leverage Complex financial structures Know what is happening to asset prices Know your environment, the market and trends

Alternatives to Debt Funding Financing Mechanisms Export Credit Finance Conventional Debt Funding Introduction Conclusion

5Strictly Private and Confidential Conventional Debt Funding Raising finance, pay back the principal, interest as a return. What is it? Characteristics Fixed or Floating Term Cash flow profile Covenants Convertibility Senior, Junior, Mezzanine Security shareholder loans Banks Capital Markets Investors Third Party Funds Where can you raise it?

Alternatives to Debt Funding Financing Mechanisms Export Credit Finance Conventional Debt Funding Introduction Conclusion

7Strictly Private and Confidential Alternatives to Debt Financing share capital in a company, riskiest element of finance used to finance an asset Equity in assets has previously been very low (aggressive) Equity Financing Hybrid financing combination of both debt and equity. complex financing structures inflation linked instruments, derivatives, convertible instruments, perpetual instruments unsecured debt, can also be convertible into equity Interest serviced, capital being repaid either out of the sale of the asset Mezzanine financing

Financing Mechanisms Alternatives to Debt Funding Export Credit Finance Conventional Debt Funding Introduction Conclusion

9Strictly Private and Confidential Financing Mechanisms transaction is small in value Not necessarily the norm for large exposures Single Bank Underwriting / Syndication norm in the “previous” financial markets provide underwriting position but already have commitments secure large funding requirements with one party. funding of larger projects compromise on onerous requirements engage parties with small contributions appoint a lead arranger Multi-Bank group of financing parties get together Future funding can also be secured through same parties. Club Loans and Third Party Funds

10Strictly Private and Confidential Financing Mechanisms Financing is arranged for an underlying asset Similar to a loan profile Instalment sales Sale and Leaseback popular mechanism to raise further funding sell a locomotive to a financier and then lease it back to you Funding is typically linked to the useful life of the asset asset funding can be arranged on a with recourse or without recourse financier / supplier with have further recourse to a company (borrower) financiers claim is limited to the asset Recourse and Non- recourse financing negotiate realistic flexibility in your cash flows dependent on interest rates, business cash flows, asset values Cash flow flexibility

11Strictly Private and Confidential Financing Mechanisms repay the full capital cost Risks and rewards Accounted for on Balance Sheet of Lessee Rentals normally include a tax benefit assessed from a pre and post tax position. structured on a triple-net basis Ownership Finance Leases Operating Leases not a finance lease, then it is classified as an operating lease. off balance sheet do not repay in excess of 85% of the capital required to insure, repair and maintain. significant cash flow benefits. third parties are assuming asset risk acquire ownership by paying market value.

Alternatives to Debt Funding Financing Mechanisms Conventional Debt Funding Introduction Export Credit Finance Conclusion

13Strictly Private and Confidential Export Credit Financing – Export Credit Insurance Corporation (ECIC) facilitate and encourage exports from South Africa Objective Requirements commercially viable. minimum of 50% SA content, scores at least 30 on the BEE score card. ECIC charges a premium on its facilities 15% equity requirement. Political and Commercial risk cover long tenor cover Interest subsidy Attractive / comparable pricing. How does it achieve this engage with ECIC Conclusion

Alternatives to Debt Funding Financing Mechanisms Conventional Debt Funding Introduction Conclusion Export Credit Finance

15Strictly Private and Confidential Conclusion circumstances and strategy effects of the various funding options Complexity interest and available liquidity informed decision