DealMakers Africa 2018 Annual

From the editor’s desk
Significant progress continues to be made in Africa’s political and economic transformation although the continent still faces significant challenges. The fragility of some economies is increasingly exacerbated by the continued existence of pockets of conflict and by climate-related environmental vulnerability.

Over the past few years, oil-producing countries have experienced slower economic growth while other countries have experienced growth rates in excess of 5%. There is general consensus that in 2019 and beyond roughly half of the world’s fastest-growing economies will be located on the African continent. Forcasts see as many as 20 economies expanding at an average rate of 5% or higher over the next five years, this exceeds the global economy growth rate forecast at around 3.6%. This is good news for merger and acquisition activity on the continent as political stability and economic growth go hand-inhand to boost investor confidence. DealMakers Africa looks forward to increased M&A activity during 2019, and to adding to its extensive online database built up over the past ten years.
It is fitting that, 10 years after the launch in 2008 of DealMakers Africa as a run of book in DealMakers (South Africa), it has now been published as a stand-alone publication to coincide with the holding of the first DealMakers Africa Awards event held in Nairobi, Kenya on February 26. In the past six months, DealMakers has endeavoured to build relationships with the advisory firms mainly in East and West Africa, which have already yielded a better understanding of the M&A space in these areas and assisted in shaping bespoke league tables and awards fully reflecting the type of work undertaken by advisory firms.

With this in mind, analysis of the data for 2018 (see page 2) is categorised into local and foreign transactions. DealMakers Africa classifies deals by the location of the target’s Head Office or that of the acquirer/seller. Where the target has subsidiaries in an African country, the deal/transaction is classified as a foreign deal/transaction in that country. Local deal value for Africa (excluding South Africa) in 2018 was US$11,46bn from 412 deals. Deal value in West Africa was the highest at $4,6bn followed by North Africa ($3,7bn) and East Africa ($1,7bn). Drilling down to country level, Nigeria executed 59 deals with a total value of $4bn, Egypt 22 deals valued at $2bn, Morocco 8 deals totalling $1,2bn and the most active by deal flow Kenya with 71 deals valued at $814,6m. Adding back the foreign deals, the total value for deals on the continent stood at $31bn from 450 deals.

Of the top 10 local deals announced (page 3) during the year, three regions featured; West and North Africa recorded four each with East Africa the remainder. The largest deal, by value, was the disposal by Petrobras of its 50% stake in Petrobras Oil & Gas (located in Nigeria) to Petrovida. This was followed by Sanlam Emerging Markets Ireland’s acquisition of a 53.37% stake in Moroccan Saham Finances and the disposal by Eni of a 10% stake in the offshore Shorouk concession (Egypt) to Mubadala Petroleum.
I would like to take this opportunity to thank Vanessa Aitken who has trawled tirelessly through the
Google alerts, stock exchange releases, company announcements and media reports to ensure that all
transactions out there are captured in the DealMakers Africa database. •


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Deal of the Year (East Africa)

Rubis Energie – harnessing a golden opporutnity

The announcement in October 2018, that an offer had been made for KenolKobil, the pan-African downstream oil company, did not come as a complete surprise. Market whispers had been doing the rounds as early as February. Talk of
internal restructurings within the company had fuelled speculation that the oil firm could be prepping for another takeover offer, though who the suitor was, was unclear.

KenolKobil has its roots in the Kenya Oil Company founded in 1959, the first petroleum company to be quoted on the Nairobi Securities Exchange. Kenol was placed in receivership from 1980 to 1983 after which Kenol and Kobil Petroleum entered into a joint operations and management agreement. A successful partnership saw the expansion, via acquisitions,
into Uganda, Tanzania, Zambia, Ethiopia and Rwanda. The agreement came to an end in 2007 when Kenol acquired 100%
of the shares in Kobil Petroleum. The Group’s name changed to KenolKobil. Since, it has broadened its reach further into Zimbabwe, Mozambique and the Democratic Republic of the Congo.

Unlike the previous attempted takeover bid by Puma Energy, the Swiss conglomerate which met with resistance from employees, the offer by Rubis Energie (Rubis) appears to have been well thought through.


The Euronext-listed company acquired on the open market a 24.99% stake in KenolKobil from Wells Petroleum, the company’s largest shareholder. The timing was opportune as the Estate of Nicholas Biwott, in which the stake was held, was in the process of being executed. With that firmly in the bag, Rubis announced its proposal to acquire the remaining shares in the Kenyan oil marketer at KSh23 per share – representing a 50% premium on the closing price of October 22, 2018, placing a valuation on the company of KSh35,7bn ($353m). The offer closed on February 18, 2019.

To ensure no unexpected pitfalls, Rubis has secured undertakings from shareholders Tasmin (4,17% stake) and CEO David Ohana (5,52% stake). The attractive offer per share is estimated by Rubis to be around five times the basic earnings per share that KenolKobil reported for the half year to end June 2018 and at least 13 times more based on the financial
results for the year ended December 2017.

The cash offer has been recommended for acceptance by KenolKobil directors and has received most of the requisite regulatory approvals. The transaction involved complex regulatory hurdles across multiple jurisdictions. The acquisition will be financed by the Group’s available cash and from existing credit facilities, making the transaction immediately accretive.

KenolKobil fits perfectly with Rubis’ investment objectives and criteria which are to expand its African footprint particularly in East Africa, which has seen steady growth in the petroleum distributions segment, driven by demographic development,
urbanisation and investment in infrastructure. Rubis currently operates in 12 African countries in the downstream market. This deal is a worthy winner. 

Financial Advisers: Stanbic Bank Kenya; SBG Securities; Standard Investment Bank
Legal Advisers: Bowmans (Coulson Harney); BLM Avocats; Kaplan & Stratton; Daly & Inamdar



Pick of the Best
Safeguarding shareholders interests

This deal is an interesting one as the history behind the transaction reveals a process of solutionist thinking. A strategic repurchase of 23,34% of Britam Holdings in 2016 was triggered by the decision of the Mauritian Government, through the Financial Services Commission of Mauritius, to place Britam’s single largest shareholder British-American (Kenya)’s parent under special administration owing to certain malpractices.

In a move to protect Britam from a possible hostile takeover, as the company’s shares lost value affected by events in Mauritius, concerned shareholders entered into an agreement involving the Kenyan and Mauritian governments, as well as the relevant regulatory authorities, to allow for the purchase of the shares, their warehousing and subsequent sale in time to a like-minded strategic

Kenyan businessman Peter Munga, through a special purpose vehicle, Plum LLP, set up for the acquisition of the 23,34% equity interest in Britam, acquired the stake seized from Sawood Rawat, an individual accused of running a Ponzi scheme. Munga set a self-imposed time limit in which to dispose of the shares.

In July 2018, Plum LLP, Britam’s second largest shareholder entered into a share purchase agreement with Swiss Re Asset Management Geneva SA. Though no value has been officially disclosed for the disposal of the 13,81% stake (348,5m shares), the shares were trading at the time at KSh13,6, giving the deal a potential value of KSh4,7bn. For Swiss Re, which already has a footprint in East Africa, having acquired a 26,9% stake in Apollo Investments with operations in Kenya, Tanzania and Uganda, the deal exposes it to the life insurance business which, due to low penetration rates of fewer than 10% of the population, has good growth potential.

Britam is the biggest company in the Kenyan life insurance and pension annuity sector with just over one fifth of the market share. The group offers a wide range of financial products and services in insurance asset management, property and banking across the Eastern and Southern African region, with operations in Kenya, Uganda, Tanzania, Rwanda, South Sudan, Mozambique and Malawi.

The deal required regulatory approvals from the Capital Markets Authority, Insurance Regulatory Authority and the Central Bank of Kenya. Bowmans (Coulson Harney), which was the sole adviser to Plum LLP on both transactions, says the initial transaction was a complicated undertaking in
light of the urgency of the transaction and the need for funds by the Government of Mauritius as a result of the unfolding events. Extensive negotiations were required with the Capital Markets

Authority on disclosures, as well as shareholder approvals across three jurisdictions of Kenya,
Mauritius and Switzerland. The subsequent sale to Swiss Re as part of the self-imposed commitment by Plum LLP to reduce its shareholding considering regulatory restrictions, reaffirmed the good intention to safeguard Britam’s interest and growth prospects through the search for a strategic investor.

The addition of Swiss Re as a large shareholder, alongside AfricInvest and the IFC, adds value for minorities, bringing diversity to the board as well as expertise in insurance operations and riskmanagement. Swiss Re’s prominence and size – it is the world’s second largest reinsurer – will also provide benefits to the Kenyan insurer in mergers and acquisitions, capital raising and expansion strategies, as well as enhancing Britam’s financial flexibility and underwriting capabilities. 

Legal Adviser: Bowmans (Coulson Harney); Anjarwalla & Khanna

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Private Equity Deal of the Year (East Africa)

Gearing up for a larger slice of the fintech pie

Cellulant, a leading one-stop digital payments company on the continent, is not shy when it comes to grabbing the media headlines. The company has been recognised for its transformational work in digital payments for the agricultural sector in Africa, the creation of new jobs, democratising access and bridging the digital financial empowerment gap to banking by empowering micro-entrepreneurs.

It made headlines again in May 2018 when it attracted the attention of The Rise Fund, the world’s largest global fund committed to achieving measurable, positive social and environmental outcomes alongside competitive financial returns. Led by a group of influential thought-leaders who include Bono, Mo Ibrahim, Richard Branson and Pierre Omidyar, the Fund is managed by TPG Growth, the global equity and middle market buyout
platform of alternative asset firm TPG.

In this, its first investment in Africa, the Fund led a $47,5m Series C financing round alongside Endeavor Catalyst and Satya Capital, to buy an unspecified stake in the digital payments provider. Cellulant’s existing shareholders are Velocity Capital Private Equity, Progression Capital Africa and TBL Mirror Fund.

Cellulant initially launched as a music ringtone business that saw musicians earn a share of the money paid by music-lovers to access their favourite songs. In 2004, the conviction to provide​ solutions to everyday challenges saw the launch of a business model that first debuted in Kenya and Nigeria and has since expanded its services to 11 countries including Zambia, Ghana, Zimbabwe, Tanzania, Uganda, Botswana, Mozambique, Malawi and Liberia.

Serving more than seven million farmers across the continent, Cellulant has three service offerings – Mula, Tingg and Agrikore, a blockchain-based, smart-contracting payments and market space system. According to the company, a potential agriculture financier would be unable to incentivise production, processing and marketing, but the platform enables them to provide the needed liquidity, either as a loan or grant and, at the same time, provides access and the ability to monitor to ensure the application of the financial input.

The potential the investment provides is enormous; the payment market on the continent is said to be worth anywhere between $20bn and $40bn over the next few years – the extent of the range highlights the upside, especially when considering that collectively, according to Ken Njoroge, Cellulant’s co-founder and CE, fintech players currently generate as little as $2bn.

The transaction was complex given the interplay of a substantial number of geographic territories in which the group has operations, and accordingly a multitude of regulatory bodies had to be timeously engaged. The Rise Fund’s global reach could lead to Cellulant expanding further beyond its already impressive presence in Africa.

TPG’s investments historically run for up to seven years, which suggests this new partnership could go some way in accessing those individuals who remain unbanked by scaling-up strategy in the agricultural sector, digital banking and internet payments, as well as introducing consumer-focused products to complement the
enterprise products already in existence.


This deal is a worthy winner of the DealMakers Africa Private Equity Award. 


Financial Adviser: Magister Advisors
Legal Advisers: Iseme Kamau & Maema; Anjarwalla & Khanna; DLA Piper (London); Orrick; n.dowuona & Company; Reindorf Chambers; ATZ Law Chambers; Minchin & Kelly; Dube, Manikai & Hwacha; Sebalu & Lule Advocates; MMAKS Advocates; Savjani & Co; Chibesakunda & Co; Musa Dudhia & Co; SAL & Caldeira Advogados Lda; ABCC



Pick of the best

Bigger can be better

Catalyst Principal Partners, a Nairobi-based private equity firm, acquired in 2018 a majority interest in three top tier mattress manufacturers: Superfoam (Kenya), Euroflex (Uganda), and Vitafoam (Malawi) to form the largest mattress manufacturing operation in East Africa. The three family-owned polyurethane foam and spring
mattress manufacturers were merged into a consolidated company named Mammoth Foam Africa, held by the newly created entity Catalyst Mattress Africa (CMA) in an investment valued at c. $22m.

The bespoke transaction involved the amalgamation of ownership of the three businesses through a combination of share acquisitions and share subscriptions under the newly created Mauritian holding company. The combined benefits will be seen in the brand heritage, synergy in management, systems and processes, and bulk procurement. Catalyst Principle Partners sees growth achieved through increased production and improvement in operational efficiency, but at the same time retaining management’s skills to help grow the new mattress conglomerate to be the leading producer of mattresses in sub-Saharan Africa. CMA will immediately have turnover of $45m, selling products to seven countries in COMESA.

The acquisitions underwent regulatory scrutiny from the COMESA Competition Commission and the Competition Authority of Kenya unconditionally approved the acquisition of Superfoam. 

Financial Adviser: StratLink
Legal Advisers: Bowmans (Coulson Harney); Anjarwalla & Khanna; MMAKS Advocates; Savjani & Co



DealMakers Africa’s awards are based essentially on objective evidence the value of deals or transactions, and the number of them. In limited instances judgment has to be applied on the categorisation and value ascribed to a particular deal or transaction. In only two of the awards is selection subjective and we approach these with considerable circumspection; they are for the Deal of the Year and the Private Equity Deal of the Year.

The first stage with both Deal of the Year and Private Equity Deal of the Year is that the DealMakers Africa editorial team, with nominations from the advisory firms, produce a short list of those it believes best qualify for consideration with input from the Independent Panel. The papers and press comment on each deal is then bundled and delivered to the members of the panel.

The Panel ranked the deals on the following criteria:

Deal of the Year:

Transformational transaction – does the deal or transaction transform the business or even the industry in which it operates? What is the extent of potential transformation as a result?

Execution complexity – does the overall deal or transaction involve multiple steps/a number of smaller inter related deals? Are there numerous conditions precedent that need to be fulfilled? Does it involve many and/or complex regulatory approvals?  Are there related debt/equity raising processes and how difficult are they to implement? Was there significant time pressure to conclude the deal/transaction? Did the deal/transaction exhibit innovative structuring?

• Deal size – not an over-riding determinant but a significant factor.

• Potential value creation – to what extent could shareholders and other stakeholders transaction over time?

Private Equity Deal of the Year:

• Asset with good private equity characteristics – cashflow generative business and able to service an appropriate level of debt? A business model that is resilient to competitor action and downturns in the economic cycle? Strong management team that is well aligned with shareholders and capable of managing a private equity balance sheet? Predictable capex requirements that can be appropriately funded?

• Deal size – is a factor to filter deals but plays a limited role for acquisitions. It does carry more weight for disposals.

• Potential/ actual value creation – was the asset acquired at an attractive multiple? If the deal is a disposal was it sold at an attractive price? What is the estimated times money back and/or internal rate of return?


There is limited information available in the public domain on the private equity deals, and even somewhat educated guess work doesn't provide all answers in all instances.

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Deal of the Year (West Africa)

Cementing the future

In a deal first announced in July 2018, and the largest transaction completed in the Nigerian capital markets last year, the Cement Company of Northern Nigeria plc (CCNN) was transformed into an enlarged company with a market capitalisation of ₦329bn, shooting it into the top eight listed companies by market capitalisation (from 41) on the Nigerian Stock Exchange, and the second largest cement company on the NSE after African behemoth Dangote Cement.

The Board of Directors of CCNN and Kalambaina Cement Company (KCC), a wholly-owned subsidiary of BUA Cement (a shareholder in CCNN), put forward a proposal to merge the companies which would, post-merger, see KCC shareholders owning 90% of the enlarged entity’s issued share capital.

CCNN is primarily engaged in the manufacturing and sale of cement in and outside Nigeria, with its headquarters in Sokoto State. KCC, also based in Sokoto State, is engaged in the business of quarrying, extracting and processing limestone, and the manufacture of cement.


The merger, says Stanbic IBTC Capital who was the financial adviser on the deal acting for CCNN, was driven by a joint aspiration of the merging entities to create value for stakeholders and enhance the competitive positon of both companies amongst Nigerian cement manufacturers. The opportunity to capture significant synergies in a highly competitive market, with players competing on price, quality of product and distribution network, was very compelling.

The mechanics of the transaction saw a total of 11,886,823,259 new CCNN shares issued to KCC at ₦25,99 per share at a ratio of 19,811,372 CCNN shares for every 100,000 ordinary shares held in KCC. Global standards were used to determine the value of CCNN, which stood up to the scrutiny of independent reviews. Stanbic
IBTC Capital says the deal received overwhelming support from shareholders with over 99% of minority shareholders voting in favour of the merger, significantly exceeding the statutory requirement threshold of 75%.

The merger results in a combined post-merger capacity of 2 million metric tonnes per annum, which is four times CCNN’s current installed capacity. The new combined company, which has adopted the CCNN corporate name, will benefit not only from the consolidated capacity but also the expanded growth prospects, which will enable it to better compete within the industry.

Stanbic IBTC Capital says the enlarged entity will also leverage the cost and energy efficiency of the state of the art KCC plant, to provide additional value for customers through its products in terms of better quality, high yields and a strong cement brand. 

Financial Advisers: Stanbic IBTC Capital; Union Capital Markets
Legal Advisers: G. Elias & Company; Jackson Etti & Edu 


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Pick of the best

Igniting competition through restructuring

This deal has been an interesting one to watch as it evolved. In May last year, Forte Oil, listed on the Nigerian Stock Exchange, received shareholders’ approval to divest from the group’s upstream services and power-generating businesses, as well as its downstream business in Ghana. The restructuring was aimed at streamlining the company’s operations to focus on its Nigerian downstream marketing business.

Forte Oil, which is one of the top five downstream players in Nigeria, said the rationale for the strategic business change and its decision to divest from upstream services and power-generating businesses would boost its distributable earnings for the benefit of shareholders.

However, in December Forte Oil announced majority shareholder Femi Otedola would dispose of his entire 75% holding in the company in order to focus on opportunities in refinery and petrochemicals. The sale included his 186,3m direct shares and 838,5m indirect shares. The acquirer of the stake was Prudent Energy through Ignite Investments and Commodities.

While no official value has yet been attributed to the transaction, analysts estimate that, at the time, the 75% stake was worth around ₦25bn, on a straight-line, market-based fair value estimate.

Otedola’s Zenon Petroleum and Gas Company and Thames Investment are the major shareholders in Forte Oil, a legacy company that was privatised by the Federal Government. Forte Oil was incorporated in December 1964 as British Petroleum, and became African Petroleum under the nationalisation policy of the Federal Government in 1979.

Forte Oil Group includes the downstream parent company and three subsidiaries – Forte Upstream Services Limited, AP Oil and Gas Ghana Limited – two wholly-owned subsidiaries –and Amperion Power Distribution Company Limited, where Forte Oil holds 57% majority equity stake. Amperion Power Distribution Company Limited holds the majority equity stake in the lucrative Geregu Power Plc. Forte Oil has over 400 retail outlets across 35 states of Nigeria. It owns oil storage depots and manufactures its own line of engine oils.

The divestment was a major U-turn for Otedola and according to the company, following the significant changes in the oil and gas industry in recent years, only downstream operators with significant investments in both storage and distribution infrastructures can remain competitive and operationally efficient in the long run.

For Prudent Energy, the deal offers an opportunity for rapid business expansion and growth in the downstream sector of the industry. Financial adviser to the company, Stanbic ICBT Capital says that core shareholder of Ignite Investments, Abdulwasiu Sowami will, through his investments in the downstream oil and gas sector,
be in a position to drive Forte Oil’s future growth by increasing focus on its high margin products, optimising existing retail outlets and expanding its retail footprint.

It has since emerged that Prudent Energy, the new owner of Forte Oil, has opted to divest its power generating and upstream services businesses to focus on its core oil marketing business. Efforts to dispose of the assets via a public tender sale process attracted low interest in the bidding process and low price expectations. And the twist in the tale is that Femi Otedola has emerged as the front runner for these assets, expressing interest to participate in the divestment opportunity and acquire the power generating and upstream services businesses. 

Financial Advisers: Stanbic IBTC Capital; PricewaterhouseCoopers; Standard Chartered (Dubai)
Legal Advisers: Olaniwun Ajayi; Sefton Fross

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2018 Year in Review - PE and M&A Markets

by Edward Burbidge


2018 was a turbulent year for East African markets partly due to some of the events unfolding on the international stage. The year saw a stronger dollar bolstered by the four US Fed rate hikes; volatility triggered by events such as the rising tensions between China and the US; and increased contagion risk in emerging markets due to economic turbulence in Turkey and Argentina.

Nonetheless, the year was more vibrant for Private Equity in East Africa compared with 2017, with an increase in both the number and value of deals. The number of deals increased by 83% to reach 53 deals (including exits) compared with the 29 deals reported in the previous year. Similarly, the total value of deals increased by 49% to US$715.2m compared with $480.4m in 2017.


Some key PE exits in 2018 included: Actis LLP’s sale of a majority stake in Mentor Management Limited (MML) to Turner & Townsend; Centum Investment’s sale of its 25% stake in Platcorp Holdings (the holding company of Platinum Credit) and AfricInvest’s exit from Kiboko Holdings Limited (KHL) following KHL’s sale of a controlling stake in its pharmaceutical
subsidiary, AK Life Sciences Ltd, to the Carlyle Group.


The highest volume of deals was done in the financial services sector with nine PE deals. Other sectors that had significant deal activity are the energy, oil & gas sector and the ICT sectors with seven and four deals respectively.

In trade seller to trade buyer M&A transactions, 56 deals were recorded across all sectors in East Africa, a 19% increase from the 47 deals in 2017.

The total value of M&A deals decreased by 41% to c. $2.2bn from $3.8bn 2017. The median deal size, however, increased from $20m in 2017 to $32m in 2018.

Once again, the financial services sector had the highest number of consolidations in the EA region with 14 deals, four higher than in 2017. With the implementation of IFRS 9 underway, we may witness even more consolidations in the medium term. The energy and oil and gas sectors overtook the manufacturing sector with nine deals while the latter posted three deals.

Kenya, once again, recorded the largest number of deals, with a total of 72 deals in the year albeit with a lower proportion – 58.5% in 2018 down from 74.8% in 2017. Uganda, Tanzania, Rwanda and Ethiopia recorded 13, 18, seven and six deals respectively. •

Burbidge is CEO, I&M Burbidge Capital Limited.

Cross-border loan transactions from a South African


by Lischa Gerstle


This is the first in a series of articles addressing questions that frequently arise when arranging syndicated and cross-border loan transactions involving South African parties.

The South African loan market regularly sees syndicated and cross-border loan transactions. It is common that these transactions involve a number of legal jurisdictions and that the documents used in these transactions are governed by a legal system other than South African law. The need then arises to reconcile the requirements and practices of the different systems of law to ensure that such transactions are commercially viable, bankable and consistent.

One such requirement that must be addressed at the outset of every cross-border transaction is its exchange control analysis pursuant to the South African Exchange Control Regulations,1961 (Regulations). South Africa has extensive rules concerning exchange controls which are applicable to any cross-border lending transaction, as well as the granting of South African security in relation to foreign loans. Typically, obtaining the appropriate exchange control approval from the Financial Capital Surveillance Department of the South African Reserve Bank (FSD) will be included as a condition precedent in the relevant loan agreement.

Use authorised dealers only
The Regulations provide that no person in South Africa is permitted to borrow any foreign currency from any person who is not an authorised dealer, unless that borrower has obtained the prior approval of the FSD, and then only in accordance with such conditions as the FSD may impose. Therefore, a resident borrower will need to apply to an authorised dealer of the FSD for exchange control approval prior to effecting the relevant borrowing from a non-resident lender.

FSD approval is also required where a resident lender relies on the security provided by a nonresident for a loan made to a resident borrower; or conversely, where the security is provided by a resident in respect of a loan made by a non-resident lender to a non-resident borrower. Even an unsecured foreign loan to a South African borrower requires exchange control approval.

So-called loop structures are considered to be contrary to the FSD’s policy. A loop structure is created when South African residents acquire interests in foreign entities, which in turn make investments in or advance loans to South African residents. For instance, a South African resident is not permitted to invest in a foreign incorporated company which advances funds to a resident of South Africa. Certain exceptions apply to this policy. Also, South African residents are allowed to invest without restriction into a foreign company that has a secondary listing on the Johannesburg Stock Exchange.

The Exchange Control Manual, which is available on the website of the South African Reserve Bank (, sets out guidelines for South African residents wishing to obtain offshore loans. The Manual also sets outs the terms and conditions of loans which may be approved by an authorised dealer. Note that most large South African commercial banks are authorised dealers of the FSD. An application to the FSD must be submitted via an authorised dealer and is typically processed between four and six weeks after its submission.

Onus is on the SA resident
It is important to note that the requirement to obtain exchange control approval is a regulatory burden placed on the South African exchange control resident, not the offshore transaction parties. It is nevertheless prudent for an offshore lender to take adequate steps to ensure that the requisite approval has been properly and timeously obtained by the South African borrower and, to this end, Bowmans recommends the inclusion of appropriate conditions precedent, as well as representations and warranties, in the transaction documentation.

The FSD imposes limits on the interest that a non-resident lender may charge a South African borrower on certain loans. These limits differ depending on whether the lender is a shareholder of the borrower or a third party and whether the loan is denominated in South African Rand or another currency.

Note that where a borrower wishes to repay a loan early (in whole or in part), this will not be permitted without the FSD’s specific prior approval, which must be obtained at the time of the proposed early repayment. The rationale behind this is that agreeing to early repayment is not the FSD’s general policy.

Once the underlying loan agreement has been approved, the interest payable and the repayments in respect of the principal foreign loan, are freely transferable offshore. The application to the FSD will typically set out the term of the loan, the rate of interest and how it needs to be calculated, as well as when interest or capital payments will be due under the loan.

If the requisite FSD approval is not obtained in respect to a cross-border transaction, an offshore lender’s claim (whether for repayment of the loan or the enforcement of any security granted by a South African obligor) against the South African borrower or security provider will be at risk. The FSD has the authority to prevent such repayment or enforcement and to declare the relevant transaction documents invalid. South African case law confirms that a lack of exchange control approval from the FSD does not render an agreement void but that it can be declared invalid by the FSD on the basis that it contravenes the Regulations.

Notably, the FSD can grant the requisite exchange control approval after the fact, but this could lead to the imposition of penalties on the South African exchange control residents who are a party to the relevant cross-border transaction.

The next article in this series will consider the requirements that a foreign lender and a local borrower must bear in mind when entering into cross-border loan transactions. •

Gerstle is a Partner in Bowmans’ Banking and Finance Department.

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Kenya's Road Annuity Programme Project

by Pareet Shah


In recent years, the Government of Kenya (GoK) has spent a large part of its budget on road infrastructure to fulfil the country’s economic growth strategy; infrastructure development is one of the key pillars of “Kenya’s Vision 2030”.

The financing of road construction and maintenance in Kenya primarily depends on the annual budget from the National
Treasury and proceeds from the Road Maintenance Levy Fund. The GoK continues to encounter challenges due to budgetary constraints, high unit costs and escalation of costs. The widening infrastructure gap requires the need for alternative financing methodologies.

The Roads Annuity Programme (RAP) in Kenya was launched in 2014 and subsequently approved by the Cabinet in 2015. Under the Programme, the GoK would procure long-term contracts for design, finance, construction and maintenance of identified roads under a public private partnership (PPP) arrangement under the PPA Act, 2013. These projects would be funded under the Annuity Roads Financing Model (ARFM).

Award of Kenya’s RAP Project Intex Construction Limited, one of Kenya’s largest road contractors, participated as one of
the bidders under the RAP. The Company was successfully awarded Lot 33 under the RAP. Intex Construction has over 30 years of experience in the construction industry, with the capabilities to deliver complex civil engineering projects.

The project is being undertaken under a fully owned Special Purpose Vehicle (SPV), Intex RAF1 Limited, and involves the construction of the roads from Ngong to Isinya and from Kajiado to Mashuru, financed on a Design, Build, Finance, Operate and Maintain (DBFOM) basis with an approximate length of 90.5 kilometres. Intex RAF1 will construct the roads
over two years and maintain them for a further eight years.

Financial Close and Project Implementation

Horizon Africa Capital Limited, a boutique Investment Banking Advisory firm based in Kenya, acted as Transaction Advisor to Intex Construction, and alongside the Company’s legal counsel Bowmans, advised the client to successfully achieve financial close on the project. The senior debt facility was arranged through KCB Bank.

The Project was launched in May 2018 and Intex RAF1 has completed 42% of the project to-date.

Annuity Roads Financing Model (ARFM)
Traditionally, most investments in road infrastructure have originated from the Government budget, although there is now a concerted effort to shift a proportion of this investment to the private sector. The ARFM represents a major shift from the traditional road development financing models such as the EPC (Engineering, Procurement and Construction) and the BOT-Toll (Build, Operate, Transfer) models.

The Government will fund its annuity payments to Intex RAF1 through periodic payments to be made through the Roads Annuity Fund, which was established by The Public Finance Management (Roads Annuity Fund) Regulations, 2015.
The model has been tried successfully in road construction in other countries but Kenya is the first African country to use this model. 

Shah is Principal and Head of Corporate Finance at Horizon Africa Capital.

Hybrid Capital Solutions to Support the Next Phase of Inclusive Growth

by Edmund Higenbottam and Raj Domun


In recent years, the Inclusive Financial Institution sector has grown significantly in Africa and elsewhere, driven in part by growth in the global specialist investor base supporting the sector, and in part due to the growth of local debt markets. In Africa, this growth has stretched the equity capital bases of many institutions - and of the sector as a whole - due to the narrow range of equity and equity-like capital sources and instruments available to these institutions.

One solution to this problem is hybrid capital, an intermediate capital type that sits between debt and equity while meeting the regulatory capital requirements of financial institutions. In Africa, hybrid capital can provide funding that can be leveraged by both specialist global (debt) investors and local debt investors, thereby achieving a multiplier of developmental impact: “crowding-in.”

The term “Inclusive Financial Institution” describes financial institutions with broader developmental impact than traditional banks, including those that serve previously unbanked populations and smaller companies. In contrast, the impact of African commercial banks on broad-based economic development can be narrow, due to their tendency to focus on lending to multinationals and the largest local corporates as well as investing in government bonds and bills.

Inclusive Financial Institutions are active in segments such as “traditional microfinance” (microloans for individual traders and other microentrepreneurs), simple savings products, lending to SMEs (often described as the “missing middle”), housing finance, education finance, health finance and agri-value chain financing. Some of these lenders specialize in asset classes that disproportionately appeal to small and medium-sized enterprises, e.g. leasing, invoice discounting and merchant credit advances. Fintechs can be considered Inclusive Financial Institutions, especially if their core technology is used to reduce transaction costs and enable services such as borrowing, savings or payments on a micro scale. The term “microfinance” is often used as a catch-all to describe the full range of such institutions, and the global specialist investor base is typically described as “microfinance investment vehicles” or “MIVs.”

Over the last decade and a half, Inclusive Financial Institutions have experienced tremendous growth, and many have undergone transitions to acquire full banking licences. Perhaps the most famous example is Equity Bank in Kenya. More recent examples include Ghana Home Loans as well as Letshego, which is registered as a bank in many of the 11 countries it serves. The growth in the sector has been driven in part by the growth of the MIV community. According to the “2018 Symbiotics MIV Survey,” the global microfinance asset class totals US$15.8bn, approximately eight times larger than it was 10 years earlier.

The community of MIVs has established itself as a niche asset class in the global investment universe. The growth of this asset class is testament to the strength of its financial performance, including a positive return every year since 2006, coupled with much lower volatility than other fixed-income benchmarks such as the JPMorgan Global Bond Index.

The growth of MIVs has been matched in many markets by growth in local bond markets. Institutions such as afb in Ghana and Madison Finance in Zambia, both of which first issued bonds in 2015, are blazing a trail for other Inclusive Financial Institutions to follow in their home markets.

Meanwhile, this growth in debt funding has exacerbated the imbalance between the availability of equity and debt capital. Another factor is that many IPO markets in Africa are highly illiquid. Most Inclusive Financial Institutions are too small to tap the IPO markets effectively, i.e. to offer an IPO large enough to create meaningful liquidity in the secondary market. In this respect, the contrast between Africa and other markets is stark. According to Caspian Impact Adviser, a leading Indian MIV, 72 Indian microfinance institutions have launched IPOs since 2011, compared with only 17
on the African continent.

Hybrid capital includes a range of instruments - from subordinated debt to preferred equity - which are popular in the banking sector globally, but rarely available to financial institutions in Africa. Hybrid capital instruments enable regulatory capital to be tiered according to factors such as tenor, degree of subordination and loss-absorption capacity. They also allow for fixed redemption, exit and other contractual terms, which can help balance the requirements of regulators with the needs of investors. Finally, and perhaps most importantly, hybrid capital can bring into play new investors, which
otherwise might not have invested in the sector.

Typical Inclusive Financial Institutions leverage their regulatory capital four or five times with senior debt. In other words, their regulatory capital typically represents 20 to 25 percent of their total assets. Thus, an investment of $100 into hybrid capital instruments can facilitate a loan of $400 to $500 to a small or medium-sized enterprise, a school, or a family buying a home.

Verdant Capital recently launched the Verdant Capital Hybrid Fund, which will invest hybrid capital in Inclusive Financial
Institutions in Africa. The fund is a limited partnership, established under the laws of Mauritius, with a 12-year life and a targeted size of $80m. The fund has secured initial approval for a commitment from its anchor investor, a leading European development finance institution. The Verdant Capital Hybrid Fund is scheduled to close in 2019. 

Higenbottam is Managing Director of Verdant Capital and Domun a Director and Fund Manager of the Verdant Capital Hybrid Fund.