DEG – Deutsche Investitions- undEntwicklungsgesellschaft mbH

What do foreign DFI’s look at when investing in Nigeria – and how could Nigerian Lawyers get prepared to give them the right answers?

Breakout Session of the SBL Conference – Banking, Finance and Insolvencyin Lagos, Nigeria, June 18th, 2013

Purpose

Raise awareness/guidance for Nigerian lawyers dealing with

international Developments Finance Institutions (DFI)

Explain the growing role of DFIs and to highlight potential areas

of collaboration

Address aspects and legal areas that matter for DFIs

Get common sense between the Nigerian local counsel and its

legal counterpart of a DFI

Content

Some aspects and figures concerning DFIs and their investment

activities

What are characteristic’s of a DFI

What are their products

Key figures about European DFIs

Aspects relevant for DFIs as investor

Some typical covenants/clauses in DFIs legal documents

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DFI’s – Some Aspects

are specialized financial institution and bridge the gap between commercial

investments and State development aid

are mostly unlisted entities

are usually majority owned by national governments and come in two types

(bilateral and multilateral (also known as IFIs)

have a strong credit-worthiness as they source their capital from national or

international development funds or benefit from government guarantees

can thus raise large amounts of funds on the international capital markets

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DFIs

DFI’s – Some Aspects

mobilize private capital (from i.e. commercial banks, investment funds etc.)

and often act in co-operation with governments and other organizations

typically invest in either public or private-sector projects (sometimes both)

[Note: The private sector provides an estimated 90% of jobs in developing

economies]

finance rather high-risk projects

have a long-term approach to investments (less pressure to deliver short term

results, better positioned to invest in countries that have high traditional risk

ratings)

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DFIs

DFI’s – Some Aspects

the need to be additional (going where other investors don‘t)

catalytic (paving the way for other investors to follow) and

sustainable (making sure that investments have long-term viability)

DFIs often catalyze significant amounts of investment from private investors

who may not otherwise have invested in the country or in the project

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DFIs investments are mostly guided by three principles:

DFI’s – Some Aspects

provide funds, either as

equity or quasi equity

loans (including all types of mezzanine loans) or

guarantees

promote responsible corporate governance and uphold social and

environmental standards in their investments

generate both positive development impact and good financial returns in a

majority of their projects

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DFIs

DFI’s - Some Figures

in 2011: €23.7 bln € invested in 4.421 projects

in 2010: €21.7 bln in 4.088 projects

in 2009: €18.5 bln in 3.971 projects

Across low and middle income countries, Africa being the

largest region with approximately 27% of the portfolio (there is

an increasing focus on Africa)

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Combined Investment Portfolio of only the European DFI’s

DFIs - EDFI Association

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● 15 members, office in Brussels

● Total portfolio 2011:

EUR 23.7 billion (4.421 projects)

● New commitments 2011:

EUR 4.8 billion

● Goals:

Joint financing (larger amount

of finance, risk sharing,

efficiency gains)

Harmonization: e.g. measuring

developmental impacts,

environmental and social

standards

Cooperation with the European

Commission and its institutions

Joint venture and marketing

DFI’s – Some Aspects

an initiative among 12 EDFI members and the European Investment Bank (EIB)

a limited liability company organised and existing under the laws of Luxembourg

implemented pursuant to the Framework Agreement for Financial Co-operation

and Exchange of Services in the ACP countries signed by EIB, members of

EDFI, AfD and KfW in January 2003

operation is regulated by a Master Investment Agreement, which delegates full

authority for investment decisions to an Investment Committee (composed of

representatives from the institutions, which have committed funds to EFP)

a Promoting Partner – any one of the EDFI members being shareholders –

present funding proposals for projects located in the ACP states to the

Investment Committee

European Financing Partnership (EFP)

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DFI’s – Some Aspects

Once approved, the Investment Committee delegates authority to Promoting Partner to

undertake due diligence, establish the legal contracts and monitor the project company on

behalf of EFP

Investee company signs a legal contract with the Promoting Partner only and will thus

communicate and report only to the Promoting Partner (which in turn is responsible for the

monitoring and communication to EFP and the underlying partners funding the operations

authorized Financial instruments are:

Senior and mezzanine loans with a maximum maturity (interest rate, disbursement,

repayment period, duration of grace period, type of currency, etc. will be structured

according to project characteristics)

Equity, Quasi-Equity and

Medium to long-term guarantees with a maximum maturity and with an option and

right to accelerate (guarantee fee, call and disbursement mechanisms, etc.) are

structured according to project characteristics.

European Financing Partnership (EFP)

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DFI’s – Some Aspects

a collaborative, co-financing platform amongst 8 key DFI’s (AfDB, DBSA,

DEG, EIB, FMO, IDC, IFC and Proparco)

focused on private sector financing in Africa

intended is the harmonization between these DFI financing projects

in 2009 they collaboratively financed projects such as Main One Cable in

Nigeria; Helios Towers in Nigeria and various private equity funds

Projects to be submitted for co-financing through the AFP are expected to

comply with each co-financing partner’s legal and policy requirements

African Financing Partnership (AFP) for private sector projects in Africa

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Aspects relevant for DFIs as investor

Retention of local legal counsel

to understand the legal and regulatory environmentto act as a guide and advisor throughout the due diligence / investment processimportant is experience in working with DFIs and “speaking the same language”

Reputation and risk (Key area for DFIs, not only of the target company, but also of key officers, directors and owners)

prior to formal due diligence conducted locally, by someone with access to local sources and the cultural ability to

interpret data found (in media reports, public records, through business associates) avoidance of corruption and unethical business practice is on DFIs top priority list for

due diligencetransparency is key! is the country's’ government taken the fight against corruption seriously, and

enforcement against such crimes as tax evasion and money laundering? corruption as an “very important” obstacle to private sector development

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Aspects relevant for DFI’s as investor Avoidance of corrupt practices

Aspects relevant for DFI’s as investor

Political risks

not only politically unstable countries, but also where normal democratic procedures may bring about a change of government and thus a possible negative change in policy, for example, on tax, regulatory constraints and tariffs, etc.

recent political and civil unrest in the Middle East highlights the political riskunquestionable nexus between business and politics (What is the

probability of a disruption of operations due to political forces or events? What position has the ruling party taken with regard to foreign ownership or investment?)

Investment Protection

Bilateral Investment Protection Treaty between the country of the investor and Nigeria?

If not: Protection guaranteed by other means? By constitution?

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Due Diligence Matters

Aspects relevant for DFI’s as investor

Legal and regulatory environment

impact by regulatory trends, anticipated changes in the law or enforcement of existing laws on a target’s business

target in compliance with lawsHow well can the target weather the storm of evolving regulations? Are local laws pro-business or pro-labor? How are disputes commonly resolved?

Recognition and enforcement of foreign judgments

Is it possible to submit a loan agreement to foreign law? Will rulings by a foreign court be recognized and enforced in Nigeria? How does the investor enforce his “executive title”?Time of court proceedings, costs Recommendations with regard to local/foreign jurisdiction versus arbitration

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Due Diligence Matters

Aspects relevant for DFI’s as investor

Tax Matters

Taxes (income tax, import or export duties) which effect foreign investmentsDoes the host government require to withhold taxes on interest payments

to lenders? If so, what is the tax rate?What exemptions from taxation are available?

Section 11 of the Nigerian Companies Income Tax Act allows an tax exemption for foreign loans depending on the respective repayment and grace periods

Are there restrictions or limitations on provisions to “gross-up” loan repayments to offset the effects of taxes or on provisions otherwise designed to neutralize the effects of such taxes?

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Due Diligence Matters

Aspects relevant for DFI’s as investor

Environmental laws and regulations, Social Laws

key for DFIs (identification of material environmental conditions, risks and constraints)

target companies may not always be aware of the full potential for liabilitysometimes lengthy bureaucratic process for environmental approvals

Labor/Employment matters (identification of key employees and retention risks)

frequently unique to each countryoften review of any and all employment contracts or severance agreementsunion status and agreementspending or anticipated labor or employment litigationdocuments regarding employee benefits, work rules, compensation, and

related terms and conditions of employment.

Due Diligence Matters

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Aspects relevant for DFI’s as investor

Financial Matters – Status of books and records (accounting and tax; if countries lack sound accounting and bookkeeping standards, efforts must be made to convert local records into GAAP or IFRS and how about “creative accounting”?)

Intellectual Property (What does the target have rights to?)

some legal and economic environment offers little or no protectionsometime the local laws provide that innovations are automatically

owned by a licensee, not the licensor as is more typically the contractual norm

Due Diligence Matters

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Aspects relevant for DFI’s as investor

Real Estate (locate the deeds and analyze them closely)

deed and title statuspreexisting liens/other encumbrances depend on the complexity of the

property lawtitle search vary from country to countryin some countries, direct ownership of land is not permitted, so it is

essential to understand exactly what rights the target hasLease may include change of control or other restrictive languageBuildings also may not meet certain building codes, may fall outside of the

boundaries of owned or leased property, or may otherwise pose a risk

Due Diligence Matters

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Aspects relevant for DFI’s as investor

Conclusion

Find the “skeletons in the closet” (also senior management of the target entity might be unaware of their existence)

reputation and transparency is keycorrupt practicespoor accounting [“creative”] and controlsenvironmental and social noncompliancecurrent or potential litigationsafety problemsdisgruntled employees or customerspoor maintenance and aging equipmentproduct quality issuesproblems with technology and intellectual property

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Due Diligence Matters

Some typical covenants/clauses

information and investigation covenants [i.e. the right of the investor to visit a target company and the sites, installations and works comprising the projects and to conduct such checks as it may wish]

covenants and representations as to environmental & social requirements’

covenants to provide appropriate environmental and social reports

anti-money laundering and anti-corruption covenants and representations

covenants that the target company establishes and/or implements fair and transparent procurement procedures in order to ensure an appropriate selection of works, goods and services of an appropriate quality, at competitive prices, on terms negotiated on an arms length basis and in a timely manner

covenants to establish and maintain Corporate Governance Principles

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DFI Finance Agreements often address the following issues

Some typical covenants/clauses

Exclusion of certain activities (such as production or trade in any product or activity deemed illegal under Nigerian laws or regulations or international conventions and agreements, or subject to international phase outs bans, such as hazardous pharmaceuticals, pesticides/herbicides, chemicals or production or trade in weapons and munitions etc.)

Change of control clauses

Legal and beneficial ownership clauses

Compliance with laws and no improper illegal payments

Termination events

such other clauses that a customarily for international finance transactions

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DFI Finance Agreements often address the following issues

Finally: Corporate Governance matters

Because it improves investee companies’ performance and helps develop capital markets

Because sound Corporate Governance reduces risk, adds value to investments, and avoids reputational risks for investors

Strong links between Good Corporate Governance and sustainable economic development

Improving Corporate Governance practices has become an important element of the development mission of DFIs

31 Financial Institutions signed in 2007 the “Approach Statement on Corporate Governance” and created a Working Group

The Working Group has since developed the Corporate Governance Development Framework (“Framework”), a common methodology for assessing corporate governance in investee companies

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Get in touch!Markus Gabbert

General Counsel / Senior Director

Legal / Compliance

DEG – Deutsche Investitions- und

Entwicklungsgesellschaft mbH

Kämmergasse 22

50676 Köln

Germany

Phone: +49 (0) 2 21 / 49 86 – 0

Telefax: +49 (0) 2 21 / 49 86 – 13 61

Internet: www.deginvest.de

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