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

2. 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

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

4. 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

5. 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

6. 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

7. 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 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.

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

9. 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.

10. 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

11. 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.

12. 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

13. 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.

14. 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

15. 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

16. 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 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

17. 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.

18. 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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