24 July 2014 by

Financing cross border deals in Africa – the legal challenges and opportunities

There is little difference in cross border deal structuring in Africa compared to anywhere else in the world, however, in Africa the risk appetite of the lenders, and the track record of borrowers and sponsors must be considered for these types of deals. This is according to Deon Wilken, Director and Head of the Finance and Banking practice at Cliffe Dekker Hofmeyr.

Wilken says that the legal challenges  involved in doing cross border deals in Africa mostly involve scrutiny of the tender and permitting process as well as the structuring of the collateral package for secured deals. Some countries have not dealt with complex collateral packages for a multiplicity of lenders before and there is often no precedent.

“There might also be political risk factors to be considered, and lenders will always look at a country with this in mind before committing capital.  Export credit backed facilities may balance this risk to an extent,” he says.

Wilken explains that lenders are naturally risk averse and their capital must be protected, so they will be attracted to jurisdictions offering a track record of deals and a degree of legal certainty. Jurisdictions where there is a lack of legal certainty, and also a  lack of local investment funds with limited standardised legal documentation, will all provide challenges for the finance and banking sector and lenders might very well be put off investing in deals in such countries.

“In Africa, Nigeria, Kenya, Ghana and to an extent Mozambique, are examples of countries with a high degree of legal certainty offering security for lenders and these countries are therefore doing well in terms of cross border investment. 

South Africa lenders are mostly focusing on Southern and East Africa where the legal systems may be similar to the South African system, and also the SADC countries, where the loans might be rand-based. Further north in Africa, parties still tend to use mostly English law, and on the West Coast of the continent a Francophone legal system is followed. The loans throughout Africa tend to be dollar-based.

“The South African banks are also alive to the opportunities to bank the small to mid-size deals that feed into the larger infrastructure developments deals financed by developmental institutions.   In terms of sectors attracting the most finance activity infrastructure, oil and gas, mining, telecoms, energy and financial sectors are providing the most growth opportunities,” he says.

“Deals where government is involved are more bankable because the government usually stands behind the deal and provides finance and guarantees. However, with government involvement there are generally more regulatory hurdles and therefore things take more time,” he notes.

Alongside Latin America, the Middle East and Eastern Europe, Africa is still a very attractive investment destination.

"I believe Africa is where is story is going to be as GDP growth rates contract around the world. However, despite the opportunities it’s still difficult to do deals in Africa and the volumes are not as high as one would expect. There is a general constraint in lending in Africa and we are close to the bottom of that cycle. There is still a lot of headroom to grow the volume of the deals in Africa. The focus on financial investment is there, but it still takes time to do deals, especially in areas where there is political uncertainty,” he notes.

Chris Ewing, Chairman of DLA Piper Africa, agrees that with Foreign Direct Investment into Africa expected to grow significantly to US$150 billion by 2015, Africa is very much still a focus for big investors.

Ewing says while it is no more difficult in Africa than anywhere else in the world to structure cross border financial transactions, it is essential to work with lawyers who are specialists in the jurisdictions involved in the deal.

“A big difficulty that offshore based multinationals face when doing finance deals in Africa is that they have not built relationships with law firms in Africa. That is why we have spent a lot of time building these relationships to help us help the multinationals across Africa. A good relationship with each member of the team is essential for the smooth and successful completion of a financial transaction, especially when it comes to complex cross border negotiations,” he explains.

“The fact that there are different laws in each country and the different regulatory requirements can also slow down the implementation of cross border financial transactions,” he adds.

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