Last week we made the first disbursement of a new $11 million syndicated debt facility that we arranged for SunCulture, a Nairobi-headquartered off-grid solar technology company servicing smallholder farmers. The co-investors were Triodos Investment Management, Nordic Development Fund, AlphaMundi and an AfDB fund managed by Lion’s Head.
Jemimah Kwakye-Fosu, who led the transaction, analyst Brian Chege and legal counsel Ivy Muriungi discussed some of the innovative aspects of structured finance for "productive use" solar.
Team, congratulations on completing a fascinating transaction. How significant is it?
Jemimah Kwakye-Fosu: This is a gamechanger for the productive use sector. It shows how working capital can be combined with end user financing, which is essential for making productive use technologies like solar irrigation affordable. That stops the higher upfront cost being a barrier to entry because farmers can pay in installments, over a 3-year period. That’s how we structured the facility, to ensure SunCulture can continue providing these pumps to farmers and have working capital to grow their portfolio.
Great stuff. Before we geek out on the structure, just how impactful is this?
Brian Chege: A large part of Kenya is dependent on rain-fed agriculture, so it’s an exciting transaction for us because it contributes to reduced CO2 emissions and higher productivity for farmers, which ultimately leads to poverty reduction.
SunCulture’s solar irrigation pump is an innovative product, able to pump from deep wells, and also combines battery storage, lighting, a television and other appliances if you choose. We found it has a very significant impact on the productivity of the farms, these farmers can make more money. Historically there has not been a similar product in Kenya. There are diesel pumps but they don’t have the same features.
So how did we structure this for scalable productive use financing?
JKF: It is a 30-month loan facility structured according to the repayment of these farmers back to SunCulture. They purchase the inventory and sell it to the farmers, who are then repaying on a monthly basis. So we are financing the farmer but indirectly.
BC: Their “pay-as-you-grow” model sets the company up for scalability, as the installments allow them to reach more farmers. And since we are doing a borrowing base, lenders can come and participate at scale, because the greater the assets grow the more debt the company can draw.
Waaait timeout from the finance jargon, what is a borrowing base?
JKF: We are lending to SunCulture based on their assets, and if they grow that asset base we can make more available. Traditionally, this borrowing base approach just includes the inventory or receivables assets, but we considered others too. Otherwise the facility amounts would have been way lower, so one innovation is that we included other assets to support them. We also gave them room to expand into other regions. We looked carefully at how we could be flexible, in terms of understanding the client’s needs and tailoring the right structure.
How about the lawyer’s perspective on how innovative this was?
Ivy Muriungi: For me, what’s really unique about the structure is that we’ve tried as much as possible to match the security that is provided for the loan to the receivables and existing assets, so have a kind of revolving security that allows the company to continue operating as normal. This gives lenders a significant overview of the portfolio, while allowing the borrower to continue to grow.
This flexibility is a big benefit for the client. We had to think through our entire approach to the security and how we could get everyone in the room comfortable. In a more traditional context I’m not sure we would have been able to do it but that’s the benefit of working with organisations like ours. We’re willing to look at all the options and work with the borrower to find an optimal structure. Working around that was incredibly innovative on everybody’s part.
JKF: We should also mention the amount of legal work done internally to help limit the client’s external legal costs.
IM: Yes, we did do a lot to manage the legal costs, which is another great thing about how we work. We’re conscious of mitigating the legal costs and expenses, especially on a syndicated deal like this one. There were three sets of external counsel advising and five sets of lenders negotiating a document on one side and the borrower and borrower’s counsel on the other – so if the situation is not properly managed the legal costs could balloon. We did a good job of warehousing the discussion and managing the interface between the parties.
This also points to our strengths as an arranger and facility agent, which is sort of a manager of the interests of both the lender group and the borrower. A lot of work went into listening to both to understand their perspectives and bridge any gaps.
On that note, how was it leading the syndicate of other investors?
JKF: The lender group was really open-minded too. It had started with NDF and SunFunder wanting to do the transaction, then working with SunCulture’s existing lenders Alphamundi and FEI-OGEF. It was about structuring it so that all lenders can have equal benefits in terms of security and the structure. And also to give the clients a uniformity in terms of reporting by bringing all lenders under one umbrella. It was just trying to make it as simple for the client as possible.
Of course, it also helped that SunCulture have a very strong management team. Their CFO has been really hands-on, and was very good at getting to the bottom of potential issues and appreciating the lender group’s position too.
Where does this leave us for the future?
JKF: For them and others to be able to scale. Now that we’ve done this first one it gives us a template to be able to scale this with others using a borrowing base or other structure too.
IM: On the legal side, in Kenya we have really tested how innovative we can be in taking security over paygo receivables, which could really simplify the process for others too. By supporting SunCulture to deploy even more units we are contributing not only to our own goals on solar financing but also general agricultural productivity, which should spur more activity. It’s cheaper, cleaner and more sustainable, which also feeds into better food security.
An abridged version of this Q&A also appears in our 2020 Annual Review.