When it came to selecting the best option to raise money needed to support its expansion plans across the African continent, Mohammed Enterprises (Tanzania) Limited (METL) opted for a $200 million syndicated loan to grow its East African and overseas commodities-trading business and existing manufacturing operations.
The syndicated loan – a credit facility that’s provided not by one lender, but a group of lending institutions (also called a “syndicate”), to a single borrower – was, according to some press reports, anticipated to help create at least 100,000 direct jobs and build a $5 billion revenue business by the just ended year, 2018.
The company’s CEO, Mohammed Dewji, is quoted to have said, “This is the kind of money the company needs to realize its dream”. Launched into syndication in 2014, the credit facility involved six banks, namely Citibank Tanzania, FirstRand, Rabobank International, Mauritius Commercial Bank, Nedbank, and Rand Merchant Bank–as the “mandated lead arranger”.
The basis of deciding on this option was that no single bank in Tanzania could independently raise the over $200 million that the company needed for its expansion plans at a lower interest rate. Apart from that, a single bank or financial institution is restricted from lending, directly or indirectly, to any single borrower an amount in excess of 5 per cent, 10 per cent or 25 per cent of its core capital – depending on the collateral position. This is in accordance with the Banking and Financial Institutions (Credit Concentration and Other Exposure Limits) Regulations 2014.
METL’s energy distribution subsidiary, Star Oils Limited, which also received a $60 million syndicated loan from Tanzania’s National Bank of Commerce (NBC), Barclays Bank of Mauritius, and ABSA Bank (now a subsidiary of the Barclays Africa Group), sought the loan to build its production and distribution capacity to fulfill demand in the East and Southern African market.
METL is, however, not the only company to raise money in the syndicated loan market. Tanzania Breweries Limited (TBL), Helios Towers (Tanzania) Limited (HTT) – a subsidiary of Helios Towers Africa – and Tanzania Electric Supply Company Limited (TANESCO) have also raised syndicated loans from domestic and international banks. HTT, for instance, raised $85 million in a senior secured syndicated deal to finance the expansion of its network of telecom towers across Tanzania.
Even the Dar es Salaam Stock Exchange (DSE)-listed National Microfinance Bank Plc (NMB) signed a six-year $35 million syndicated loan facility in 2015. The facility, arranged by the Netherlands Development Finance Company (FMO) and in syndication with Proparco, a subsidiary of the Agence Francaise de Developement (AFD), and Swedfund, is helping strengthen NMB’s capacity to boost investment and economic growth by releasing more credit to agribusiness-focused SMEs and corporate businesses.
Other banks in Tanzania that have participated in offering syndicated loans include Stanbic Bank (Tanzania) Limited, Bank of Africa (Tanzania) Limited and International Commercial Bank (Tanzania) Limited. In view of their being part of global networks, international banks operating in Tanzania are keen to lead in efforts to raise funding for large projects or capital requirements by leveraging their global presence and distribution capability should the local market come short in raising amounts required.
Syndicated loans have also been offered by treaty-based, multilateral financial institutions with interests in development projects in Africa. For example, in 2014, the Eastern and Southern African Trade and Development Bank (PTA Bank) approved $138 million, part of which was for three syndicated loans in Tanzania.
The basics of loan syndicates
Syndicates, the initial stage of which is 'originating a deal', have numerous variations, but the elementary structure involves a lead bank or underwriter of the loan, known as the “lead arranger”, “mandated lead arranger”, “agent bank”, “lead lender” or “book runner” that will coordinate the syndicate – a group of lenders i.e. the participating institutions.
While there’s no limit on the amount, syndicated loans are of at least $35 million, with maturity of 1-7 years; although a longer term of 20-30 years is also possible. Syndicated loans are mostly priced as an interest rate spread above a floating reference rate. The floating rate, also referred to as a variable interest rate, is varied over the duration of the loan obligation.
The lead bank that wins the “mandate” from the borrower arranges and manages the syndicate, whose structure will depend on the number of participating institutions, the circumstances of the specific transaction, and the share of the loan endorsed to the various institutions. Normally, but not always, the lead bank gets the biggest slice of the loan. In some instances, the whole loan will be sold to the participating institutions.
Once the mandate is awarded on either a “best-efforts” or “firm-commitment” basis, the lead bank prepares an Information Memorandum (IM) which contains comprehensive information about the borrower and the proposed loan. The lead bank and the borrower then meet with potential participating institutions to persuade them to take a share of the loan, ultimately leading to the creation of the syndicate.
From a legal perspective, each participating institution lends directly to the borrower; with each institution’s claim on the borrower addressed by a separate security note to create a security interest. There’s only one loan agreement for the syndicate that addresses the arrangements agreed to between the borrower and the group of lenders. It suffices to say that a good legal and regulatory framework helps to slacken the chances of litigation in complex corporate financing deals like syndication.
The Tanzanian syndicated loan market: Brief historical development
Syndicated lending seems to have had its roots in the growth of the cross-border interbank market, which led to multinational lenders teaming up as syndicates to participate in big loans to government and global corporate borrowers.
Goings-on in the syndicated loan market developed to finance new infrastructure projects carried out by the government of Tanzania. To handle this, local subsidiaries of international banks led the way in loan syndication. And, because the loans needed to support these projects were huge and risky, the syndicated loan market started to develop to efficiently manage these exposures.
It also seems to be the case that periods of decline in economic activity made corporate borrowers in Tanzania to take cognizance of the developing syndication market, which appeared to present the opportunity of raising bigger loans at attractively affordable interest rates. This was expedient for facilitating the financing of strategic corporate transactions e.g. mergers and acquisitions.
The growth of syndicated loans as an asset class has been a significant step towards the development of the Tanzanian syndicated loan market. Not being direct-lenders, institutional investors like pension funds have started to seriously consider syndicated loans as an alternative investment to the bonds market. According to recent press reports, of the $140 million syndicated loan that TANESCO needs to construct a 400-kV high voltage transmission line from Somanga to Kinyerezi, pension funds in Tanzania and other foreign banks are contributing $100 million.
In a nutshell, it is these developments that have laid the foundation for the syndicated loan market in Tanzania.
The benefits of loan syndication
The Bank of Tanzania (BoT), as regulator of the banking and financial industry, appreciates syndication financing as it plays an important role in attracting supplementary investments to priority economic sectors and reduces banks’ credit risks on a project. The BoT has been working with the World Bank Group to development infrastructural projects, including the ongoing Dar es Salaam Bus Rapid Transit (BRT) Infrastructure Project. The funding for these projects is mostly operated through a syndicate. The Group’s Investment Promotion and Financing Facility (IPFF) fund is also assisting with increasing the capacity of domestic lenders.
From the perspective of banks, loan syndication helps lessen the burden to undertake Public Private Partnerships (PPP) projects that are recommended by the Finance Unit within the Ministry of Finance for approval by the Finance Minister.
Syndication also allows lead banks to compete more effectively with the bonds market for corporate financing business in Tanzania. Liquidity constrained lead banks can continue fulfilling the financing needs of a key customer without undertaking the whole loan. As well, a bank near its regulatory limit with respect to the amount of money it advance to a single borrower can still originate the loan and distribute a relatively big share of it to the syndicate members.
With loan syndication, even relatively small Tanzanian banks can lend to a large borrower that they normally would not onboard as a customer by taking a share of the loan. Hence, loan syndication is a cost-effective way by which banks and financial institutions can diversify their credit portfolios.
A major benefit of syndicated loans to private sector companies is the ability to make the most of obtainable funds from different lenders at low cost to set up large sized projects. This financing model builds reputation for the borrower as many lenders come together to harmonize the terms of lending as opposed to negotiating with each individual bank or financial institution.
As noted earlier, a notable development in the Tanzanian syndicated loan market is the interest of the institutional investors such as pension funds. These investors are viewing syndicated loans as an attractive asset class with low volatility of returns and an attractive risk/return profile. This is expected to help sustain appetite for originating deals.
Risks, Limitations and challenges in loan syndication
Despite the above benefits, loan syndication is without risks, limitations and challenges.
In general, one of the biggest challenges is tied to the size of the debt capital market in Tanzania. This limits the amount of funds that can be raised onshore especially immediately after another syndication; hence, creating a necessity to look for interested institutions offshore to bridge the shortfall.
He adds that this challenge is followed closely by the ability to raise the amount required in the currency desired by the borrower. Indeed, this is why recent syndications in Tanzania have seen a mix of local and foreign currency options to ensure a wider participation.
From the angle of the lead bank, if a commitment to underwrite the whole amount of the loan is made, the bank assumes the funding and credit risk in that other banks and financial institutions may not participate as lenders because they lack appetite for the sector or have reservations about the company.
Participating institutions may not be familiar with the company seeking the loan, and may not be in a position to speedily spot adverse developments with respect to the company. As well, under a syndicated loan, participating institutions don’t have enough room to effect any amendments to, or add to the terms and conditions of, the syndication deal once an IM has been presented. Therefore, these institutions to take part in the deal within the boundary set out in the IM that’s created by the lead bank and the borrower.
Private sector companies in Tanzania seeking to qualify for a syndicated loan must be transparent and reputable, and this type of financing is normally restricted to large-scale businesses or projects, which need important financial allocations. Issues of corporate governance have been an inherent weakness in most companies, however, interventions by a range of service providers in the sector, including the Institute of Directors, Tanzania (IoDT) and the Institute of Chartered Secretaries and Administrators (ICSA) are expected to help reverse the trend. Good governance ensures high levels of accountability and transparency, which is good for attracting more lending capital to companies.
Syndication faces the challenge of finding the right skilled manpower that can help the company opting for the loan and the lead bank to persuade potential participant lenders that the company is a feasible and attractive business. In particular, a strong, diligent, responsive and commercially-minded bench is critical for a successful syndication deal.
Besides, it is true that syndicated loans alone cannot address all of Tanzania’s funding needs. This is because every company has its own unique funding needs at different phases of its growth, which is why companies could do well to educate themselves about alternative capital-raising options e.g. private equity that should be utilized depending on a company’s needs and provided that corporate governance issues are well addressed.
President Dr. John Magufuli, while addressing the Tanzania Private Sector Foundation in 2016, recognized the role of the private sector as a catalyst for economic growth. To achieve this growth, raising capital to finance private sector investments is indispensably critical. Loan syndication is enhancing availability of capital for large-scale investments, and the result is that risk sharing has become possible thereby contributing to financial stability.
There are strong indications that the use of syndicated loans is likely to intensify in Tanzania within the five to ten years, given an increase in foreign direct investment (FDI) inflows. PPPs in power, energy, oil and gas are also expected to step up the appetite for big financing requirements through loan syndicates.
However, Tanzania will need to adopt practices of international syndication in the local syndication deals. Moreover, banks and financial institutions in Tanzania will have to rely on an intricate network of global alliances in order to support the risks associated with syndicated loans and to sustain the syndication loan market. Finally, discussion and experience sharing through the common platform provided by the Tanzania Bankers Association (TBA) on syndicating loans will help banks and financial institutions manage syndication deals successfully.