FEATURES
A CHATTERING OF STARLINGS – AFRICAN HOLDCOS
EARLIER THIS YEAR , A CONSORTIUM LED BY INFINITY ENERGY AND MASDAR ACQUIRED ONSHORE WIND PLATFORM LEKELA POWER FROM EMERGING MARKETS PRIVATE EQUITY POWERHOUSE ACTIS AND INTERNATIONAL RENEWABLES DEVELOPER MAINSTREAM RENEWABLE POWER IN ONE OF THE LARGEST M & A TRANSACTIONS IN THE ENERGY AND INFRASTRUCTURE SPACE ON THE AFRICAN CONTINENT IN YEARS . ALONGSIDE THE EQUITY PROVIDED BY THE CONSORTIUM ’ S SPONSORS , THE ACQUISITION WAS FUNDED USING HOLDCO FINANCE FOR THE BIDCO , WHILE LEAVING THE PROJECT FINANCE DEBT AT THE PROJECT ( S ) LEVEL IN PLACE . BY TOM JAMIESON , PARTNER , GORDON STEWART , PARTNER , AT BRACEWELL ( UK ) LLP , AND NK NAGINLAL MODI , SENIOR RELATIONSHIP MANAGER POWER AND INFRASTRUCTURE AT MAURITIUS COMMERCIAL BANK LIMITED .
This transaction is an augur of several macro themes playing out in the African E & I sector , including :
• Changing of the guard – The rising star of regional and African headquartered owners – alongside Infinity and Masdar , the Africa Finance Corporation holds significant equity in the acquisition vehicle – taking over from a retreating cadre of international developers now increasingly looking to more nascent emerging markets in their hunt for returns ;
• Old trading partners – The historic trading relationship between the Arabian gulf and Africa that has long brought riches through the Indian ocean trading routes are now bringing comparatively cheap Middle Eastern equity into the sector , reducing the delta between the cost of equity and debt financing as global inflation pushes rates higher ;
• Sophistication of financing structures – The innovation in accessing additional sources and pools of liquidity through the increasing use of holdco financing structures for portfolios of assets more commonly established in the developed markets ; and
• New frontiers for traditional PF – The structuring of transactions to reduce their exposure to sovereign credit risk at a time when the Covid-19 pandemic and the existing model of IPPs have put a tremendous strain on African government balance sheets .
While all of these trends would merit exploration , this article will focus on the last two . And in particular , it will offer some suggestions for how the African E & I market could embrace more of the flexibility and efficiencies offered from holdco financing structures , by encompassing the optional debt platform structures available with holdco financing , and with it , continue to reduce the traditional concentration of risk on sovereign balance sheets .
Evolution of portfolio holdcos The holdco finance structures for portfolios of power assets originated from the debt platforms and structured financings for European infrastructure including airports , shipping lines and rolling stock with regulated and often inflation-linked returns . These structures were designed to maximise the sources of liquidity and optimise the cost of capital , with “ bank and bond ” debt platform structures to accommodate their funding base of traditional commercial banks as well as pension funds and other institutional investors in the private placement markets .
As quantitative easing swelled the coffers of the asset managers and infrastructure funds , they started seeking to deploy capital into the power sector . The power sector was going through its own evolution as a result of the quickening energy generation , with smaller individual assets to be financed – say a 15MW solar PV as against a 1.2GW CCGT , for example – and with it , in the subsidised world of renewable obligation certificates , contracts for difference and feed in tariffs , a revenue stream that resembled infrastructure assets .
The small scale of the renewables posed an issue for the large international investors and financiers from a human resource perspective as the amount of work involved in a 15MW solar project might still be the same as in a 1.2GW CCGT , but without the same amount of capital deployed . The solution was the aggregation of large numbers of projects into portfolios of a magnitude that could put significant capital to work in a single transactional structure .
Additionally , the use of the debt platform structure to provide a permitted acquisition and permitted additional debt regime , within the financing terms and conditions , allowed sponsors to buy and sell individual assets within the portfolio and raise new debt against the asset base without the need for time-consuming consent processes or costly refinancings .
This offered a neat solution to both equity and debt providers that wanted to see larger amounts of MWs being developed at greater speed and scale , without the lag of having to consider each individual project . And it is these debt platform structures that are as yet , still to arrive in the African market .
66 Project Finance International September 6 2023