greater focus is placed on the terms of the shareholder arrangements and the minority rights that the holdco borrower has ( and on which holdco lenders may look to exercise reserved discretions ).
• Pricing pressure – A rough rule of thumb for subordinated debt on single asset projects is that the margin should be around double that of the project finance debt . However , with hard currencies already facing steep interest rate increases , the economic benefits of portfolio financing structures to sponsors have to be managed . With the elevated level of the benchmark rates , eg term SOFR , there is downward pressure on interest margins in order to offer an acceptable “ all-in rate ” to sponsors for the new debt .
A portfolio financing structure provides for the diversification of credit risk through the portfolio effect . By utilising the portfolio effect , the margin requirements for portfolio debt can be kept lower than the equivalent subordinated debt on a single project , such as a junior or mezzanine tranche within a project financing that is a party to the relevant intercreditor agreement , because the risk of a default at the holdco level is lower than at any one single project for a mezzanine lender .
Innovation in Africa As is often the case , different markets have their own unique challenges and benefits . A flavour of some of the additional nuances to holdco financings of portfolios in the African context include :
• Capital repatriation considerations – African portfolio financings often include an “ offshore ” holdco jurisdiction such as the Netherlands or Mauritius . When running the sensitivity analysis on the distributions and dividend streams from the underlying projects to the holdco , it is often necessary to consider how difficult it might be to get those dividends out of the country in a reserve currency such as US dollars .
Coupled with this is provision for adequate mechanisms to protect the project revenues against depreciation of the local currency and inflation . Nigeria is a recent example of the difficulties of getting hard currency to pay distributions offshore .
• Participation of multilateral and development finance institutions – The participation of DFIs or multilaterals in the project level PF debt can often be treated as accretive to the credit risk by reducing the likelihood of certain risks at the project level from materialising .
Other stakeholders in the project such as the sponsor and commercial lenders ( if any ) can benefit from the “ halo-effect ” of the DFIs / multilaterals . This positive feature should be considered alongside the desired security structure and lock-in provisions required under the PF debt .
• Adequate termination payout – The debt service of a holdco portfolio financing is reliant on the cashflow up-streamed from the project level
SPVs as distributions . At the project level , any capital injected into the project SPV from the holding companies above will be treated as equity for the purposes of the project documentation ( regardless of whether it is true equity or the proceeds of the holdco financing pushed down ).
A key point for diligence of the underlying project documents is therefore to what extent payouts under the various termination scenarios ( other than under a project sponsor default ) in any government or offtaker support arrangements also cover repayment of the “ equity ” injected into the project . This provides additional comfort that the value of the security interest ( ie , shares in the holdco ) is preserved in the event of an early termination of a project ’ s PPA .
• Credit enhancements and PRI – Noting the reliance on distributions from the projects that the holdco lenders are taking , one possible credit enhancement for the holdco lenders is security over any equity risk mitigation products in place . These include the MIGA equity PRI cover policies .
Post Covid-19 , many African economies have seen their currencies depreciating , and have experienced a shortage ( sometimes acute ) of US dollars in their currency market . In addition to the obvious political risk such as expropriation , PRI cover is also especially useful for currency risks ( convertibility and transferability ) and , where possible , breach of contract .
A PRI policy for currency risks has now become more important for sponsors and holdco lenders to mitigate against currency convertibility and transferability , especially when a debt sizing is being performed on a set of projected cashflows running beyond the loan tenor , which is typically much shorter than the assumed amortisation profile introducing refinancing risk .
Conclusion The reason these structures are timely is because they provide greater flexibility in capital structuring for portfolios that contain multiple smaller individual assets , particularly in the renewables sector as the energy transition continues apace .
With the retreat of state utilities as the sole suppliers of power in their countries , and the increased focus on the private sector to deliver more of the capital to fund a just energy transition , these holdco structures are ideal for the new types of projects being pursued , including the often equity-driven C & I space and the larger pan-African portfolios .
In balancing the credit risk of subordinated debt against diversification of risk , the structure unlocks additional pools of liquidity to be tapped , thereby increasing the development funding for critical infrastructure in Africa .
In many cases , allowing the release of equity through portfolio financing , capital can be redeployed to other projects more quickly , and with it increasing the speed of much-needed development on the continent . •
68 Project Finance International September 6 2023