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Invoice Financing for health sector in Kenya

Invoice Financing for health sector in Kenya. Contents. 1. Transaction Overview. 2. Transaction Structure. 3. Roles of the Parties. +. +. +. +. +. 4 . Rating/Fundraising Process. 5 . Regulatory/Tax/Legal Issues. 6 . CASE STUDY : Use of Data to Reduce Default Risk.

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Invoice Financing for health sector in Kenya

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  1. Invoice Financing for health sector in Kenya

  2. Contents 1. Transaction Overview 2. Transaction Structure 3. Roles of the Parties + + + + + 4. Rating/Fundraising Process 5. Regulatory/Tax/Legal Issues 6. CASE STUDY: Use of Data to Reduce Default Risk

  3. Improving SME access to finance • Access to finance is a pressing need for small and medium enterprises (SMEs) in Kenya. Access is however severely limited due to the high risks and operational costs related to lending to an SME portfolio. • For many SMEs, the only financing available is the credit terms provided by suppliers; such credit is particularly important for retail businesses like pharmacies that need to finance inventory to stock their shelves. • Capital Tool Company and the World Bank implemented an invoice finance scheme to help solve this problem in Peru using TREFI software platform and have been invited by Government of Kenya to introduce invoice financing to Kenya • CTC/World Bank partnered with Medical Credit Fund to introduce the program to the Kenyan medical sector

  4. How does it work Financiers buy securities issued by an SPV and backed by receivables. The SPV purchases these receivables at a discounted price from Medical Suppliers, which use the upfront cash to extend credit terms to Pharmacies and other buyers. When the buyers pay for their purchases, the money first flows to the SPV to pay interest and principal to the Financiers, before the excess is passed back the Medical Suppliers minus a spread for the SPV managers Receivables (overcollateralized) Payment Medical Suppliers TRFI Limited (SPV) Financiers Receivables Surplus less spread Interest Principal Purchase Price(discounted) Goods Payment on invoices Pharmacies/ Other Buyers

  5. Security To achieve the targeted credit rating – e.g AAA on the local Kenya scale for the Senior Securities - the amount of collateral in terms of assigned receivables must be sufficiently in excess of the financed amount to meet the rating agency standards. In the example below, a USD 10 million equivalent financing (in KES) is backed by USD 14 .3 million in receivables with the MCF providing USD 1.25 million of mezzanine financing below the senior financiers, resulting in a Loan-to-Value (LTV) for the senior debt of only 61%. Financing by Partners Financing to MedicalSupplier Security USD 10 million eq. = 70% of value receivables Senior Financiers USD 8.75 million eq. = 61% LTV Receivables 143% = USD 14.3 millioneq. 70% LTV MCF USD 1.25 million eq.

  6. Quality of the Security TREFI Platform collects information from multiple sources, including several different wholesalers and distributors, so the quality of the receivables securing the financing is transparent. PD = probability of default, PS = Payment Score

  7. Information fromsuppliersreduces risk TREFI has shown that incorporating information from suppliers into its database can reduce the default rate of SME credit. The World Bank and Capital Tool company introduced invoice finance platform with suppliers and local banks in Peru. The default rate of credit toSMEsdecreasedby 36%. Even a default rate 3x higher in Kenya, which is highlyimprobable, wouldstillmeanthe SPV is comfortably over-collateralized. * Source: World Bank study in Peru

  8. Key Features andAdvantages • Key Features • Accounts receivable portfolios (of invoices) of suppliers to their SME customers are purchased by a Special Purpose Vehicle (SPV) • Portfolio risk is assessed and managed on a daily basis using the TREFI platform • Suppliers continue to collect theamountduefromthecustomers, but collections are routedthroughthe SPV • Advantages • Banks canfinanceSMEs at lower risk andcost as credit data is developed • Suppliers can provide more credit to their customers as their own liquidity eases and less is tied up in accounts receivable • SMEs have increased access tofinancing or longer tenors as credit historyindustry-wide is collated.

  9. Contents 1. Transaction Rationale 2. Transaction Structure 3. Role of the Parties + + + + + 4. Rating/Fundraising Process 5. Regulatory/Tax/Legal Issues 6. CASE STUDY: Use of Data to Reduce Default Risk

  10. Transaction Structure

  11. Transaction Structure Theseelements are brought together on the TREFI Platform, which ensures the quality of the underlying pool(s) ofinvoices being financed. Financial/asset flows on the SHIFT program Sponsor TOTAL TREFI platform TRFI Kenya “Business Clearing House” Medical Suppliers SHIFT I Kenya (SPV) MCF Subordinatedfinance Mezz bonds ReceivablesCollateral Receivable Sale Funding Vehicle SHIFT I Ware house Purchase price Banks/ Investors Funding Interest+principle Senior bonds Goods & Services SME Customers Settlement of invoice amount at maturity date

  12. Transaction Structure Supporting the TREFI Platform are several service providers to make sure the funds flow through the system as envisioned.

  13. Contents 1. Transaction Rationale 2. Transaction Structure 3. Role of the Parties + + + + + 4. Rating/Fundraising Process 5. Regulatory/Tax/Legal Issues 6. CASE STUDY: Use of Data to Reduce Default Risk

  14. Key Parties in Transaction

  15. Key Parties in Transaction

  16. Contents 1. Transaction Rationale 2. Transaction Structure 3. Role of the Parties + + + + + 4. Rating/Fundraising Process 5. Regulatory/Tax/Legal Issues 6. CASE STUDY: Use of Data to Reduce Default Risk

  17. Rating Process The Capital Markets transaction will require a rating from a reputable agency prior to going to market, such as Global Credit Ratings (GCR). As part of the process, the Sponsor and CTC will finalize the structure, engage the key players (including the Service Providers and Anchor Investors), and complete the documentation (including obtaining relevant legal opinions). The Rating Agency will: • Confirm the assets are existent and valid • Produce a financial model of the transaction with multiple stress cases • Verify the TREFI platform is functioning correctly and the data is sound, including back-testing data on the platform to compare is predictive power with actual experience The Rating Process will take 60-90 days, during which the Rating Agency and the Sponsor will finalize the minimum capital constraints required to achieve the desired rating.

  18. Fundraising Process With the structure rated, the Sponsor can begin the fundraising process, which includes: • Identifying the most likely investors for the senior tranche • Preparing pitch materials and a virtual data room with all the relevant information • Organizing a market testing and later a road show to present to investors – mostly within Nairobi • Responding to due diligence questions • Closing the Transaction Given that the basic terms of the transaction will have been agreed with the Rating Agency, there will not be any latitude to negotiate terms with investors. Given this and the fact that the investors are largely Kenyan institutions, aside from the anchor, the expectation is the closing can occur fairly quickly after the fundraising effort begins.

  19. Contents 1. Transaction Rationale 2. Transaction Structure 3. Role of the Parties + + + + + 4. Rating/Fundraising Process 5. Regulatory/Tax/Legal Issues 6. CASE STUDY: Use of Data to Reduce Default Risk

  20. Outstanding Regulatory/Accounting Issues The Structure will require approval from the Capital Markets Authority (CMA), which is in process. In addition, the following regulatory issues will be addressed: • Approval of any modifications to the structure presented to the CMA • Confirmation financing will be off-balance sheet from the perspective of the Medical Suppliers • Banks, pension funds that participate will need clearance from their regulators (CBA/RBA/CoI) around capital or liquidity charges related to the financing • Comfort from the Tax Advisory around any and all taxes applicable to all parties in the structure, such that the financial model can be optimized

  21. Legal/Tax Issues Several tax/legal issues will be addressed through legal opinions: • Opinion of the validity of the various legal agreements • Opinion that Stamp Tax would not apply to the sale of invoices for the purpose of supporting a Capital Markets Transaction • Opinion that the collection processes, clawbacks and give-backs contemplated in the transaction are valid • Documentation around discount rates, liabilities, ratings transitions and costs • Opinion around Withholding Tax Exemptions for different investor classes, if needed.

  22. Contents 1. Transaction Rationale 2. Transaction Structure 3. Role of the Parties + + + + + 4. Rating/Fundraising Process 5. Regulatory/Tax/Legal Issues 6. CASE STUDY: Use of Data to Reduce Default Risk

  23. EXAMPLE: Large Kenyan Pharmaceutical Supplier Following is data drawn from a Medical Supplier that illustrates the power of the TREFI Platform. The portfolio of this company has been growing steadily over the last two years and reached KES 2.2 billion recently.

  24. EXAMPLE The portfolio has more than 40,000 invoices open with 500 customers. It has been selected at a point in time, drawing invoices from only private customers.

  25. EXAMPLE The customers are granted an average payment term of 70 days, however invoices are typically paid after 95 days.

  26. EXAMPLE The ageing of the portfolio is stable.

  27. EXAMPLE The default ratio (90 days after due) is high at 14%, however after 364 days 1% of invoices remain unpaid.

  28. EXAMPLE Concentrations is stable at around 14% of the portfolio, delivering a significant extra buffer under rating agency methodology.

  29. EXAMPLE The large customers in the portfolio are the strongest credits in the medical sector in the country.

  30. EXAMPLE Dilution risk is at around 8%, trending down.

  31. EXAMPLE Under Rating Agency methodology achieving AA risk level would allow finance of KES 1.2 bn. The requested finance is KES 1 bn.

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