May 28, 2022

Mawazo Writing Africa

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Safaricom got $400m loan for Ethiopia licence: bank

Standard Chartered Bank Kenya was one of the major banks that loaned Safaricom a total of $400 million last year to help the telecom operator pay for its Ethiopian license.

A consortium led by Safaricom paid $850 million for profit Entry into the new market, with the telecom company relying heavily on short-term debt to meet its share of the capital commitments.

“We have landmark financing for a telecom customer in the East African region directed. This was the largest loan syndication at $400 million,” says StanChart in its most recent annual report.

“The $400 million facilities consisted of a short-term stand-by loan and a 12-year loan with a term of one month, which enabled the consortium to submit and fund the successful bid for the first full-service wireless license for a private operator in Ethiopia.”

StanChart announced the other banks with which it collaborated, not known to fund Safaricom. Other lenders could include London-based parent Standard Chartered Plc and major local banks.

The telecom company previously disclosed the short-term loans separately without naming the banks, adding that it is negotiating them into long-term loans to free up its cash flow.

“To support payment of the telecoms license fees awarded to the Safaricom-led consortium by the Ethiopian government, we have undertaken a one-year bridge $400 million facility to fund this business,” Safaricom said when it announced its results for the six months ended September to manage our working capital needs in the short term and to minimize currency risk on the dollar loan ing.”

The conversion of the loan into a long-term facility will generate significant interest income for the banks that would otherwise need to look for another borrower to make the loan.

The price of the loan was not disclosed, but dollar facilities typically entail interest rates in the mid-single digits.

For Safaricom, the maturity extension has saved it from major repayment problems at a time when the depreciation of the shilling is affecting the has inflated its dollar-denominated debt.

The telecom company earns most of its revenue in Kenyan shillings and this is the largest loan it has ever taken in hard currency, adding to its overall debt load.

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The shilling has depreciated 6.9 percent over the past 12 months and is trading at 115.7 units per dollar. Safaricom’s total bank debt increased to a record Ksh76.9 billion (US$659.7 million) for the six months ended September, underscoring the impact of the US$400 million syndicated loan.

The company’s debt increased by 5.2 times from 14Ksh. 7 billion (US$126.1 million) a year earlier, making it one of the largest corporate borrowers alongside others such as KenGen, Kenya Airways and Kenya Power.

Safaricom noted that it used cash and held cash equivalents of Ksh26. 4 billion (US$226.4 million) for the period, resulting in net debt of Sh50.5 billion.

In its early days as a public company, the telecom company financed its growth with debt, but it has grown stripped itself of mid- to long-term debt as its cash generation exceeded reinvestment needs.

However, the Ethiopian company requires large investments that will see Safaricom continue to increase its borrowing given its role as the main shareholder in the new ventures accounted for 55.7 percent.

Out of the loan of Sh76.9 billion, a total of Shash 62.2 billion is in the form of short-term debt.

Safaricom said, that it will invest an initial US$600 million in Ethiopia, excluding licensing costs, as part of its contribution to the consortium’s overall investment commitment of US$8 billion over 10 years.

Es ble It remains to be seen whether the telecom company will change its dividend policy due to the huge capital requirements for the Ethiopian company.

Safaricom has distributed at least 80 percent of its net profit to shareholders and the remaining 20 percent for reinvestment in infrastructure and retained earnings remaining, which now totals Ksh 133.7 billion.

The telecom company could tap retained earnings to partially fund its obligations in Ethiopia.

Safaricom says it is investing in Ethiopia through its own funds and loans from local banks and development finance institutions.

“We anticipate a capital expenditure of between US$1.5 billion and US$2 billion over the next five years to meet the license’s utility obligations Safaricom Chief Executive Peter Ndegwa previously said of the consortium’s initial investments ums in Ethiopia.

The telecom company’s need to borrow more money in the long term will benefit the local banks.

The big borrowers give the banks the opportunity to make a few big loans both in local currency as well as dollars, thus diversifying their lending portfolios.

However, most of their lending is expected to come from sovereign wealth funds and development finance institutions, which have much deeper pockets and lending over a period of time of more than a decade.

The consortium had applied for a loan of 500 million dollars from the US-based International Development Finance Corporation (DFC). However, the American government agency has delayed disbursing the funds, citing uncertainty over the ongoing unrest in Ethiopia.

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