The GOGLA Forum was held in Nairobi from 18th to 20th February 2020 hosted by GOGLA, Lighting Global and Government of Kenya. Six active lenders to the off-grid solar industry, including SIMA, participated in a panel where they shared the lessons learned from lending to the sector.
Mr. Brian McConnell, Vice President of SIMA for the African Region, sat on the panel.
Lessons Learned From Sector-Wide Lending of $600M
Over the last 4 years about $600m has been borrowed by the sector to reach around 18m households with TIER 1 (or more) level access. This will need to grow more than 5X over the next 4 years in order to refinance much of the outstanding debt plus servicing an addressable market of 100m households. SIMA and 5 other major lending companies highlighted some of the lessons learned:
- Growth Takes More Time: It was noted that initial growth expectations for the sector were too ambitious. Time to reach profitability took much longer and more cash ‘burned’ in the process. This takeaway is highly important for the PAYG companies to manage expectations.
- Structure Matters: In 2019, lenders who had ring-fenced assets have been comparatively in a better position than the lenders to holding companies.
- A renewed focus on asset quality is needed: It was agreed by all the panelists that the sector needs to have a more improved focus on portfolio quality as the ‘credit quality comes before credit quantity’. Brian McConnell – Vice President SIMA-Africa Region said that to achieve a sustainable collection rate there needs to be more “specialization on distribution, customer service and end-customer finance”. Monitoring and reporting on the quality of portfolio was further emphasized.
The key recommendations proposed by the panelists were the following:
- Borrow more in local currency
It is true that emerging market currencies have experienced periodic stability but it is also important for borrowers to remember that this can change quickly. It seems more attractive to a USD or EUR denominated loan at 6-8% of interest than the equivalent load denominated in a local currency at 10-20% interest but if you closely see the revenues and net cash flows denominated in local currency, a devaluation of 5-10% can quickly produce a significant mismatch. It may be worth the cost especially after a long period of stability.
- Coordinate your investors
It is highly important to manage and exceed the interests and expectations of various investors and to plan the necessary legal structures in place in order to tackle the challenges. Make sure to keep intercreditor agreements in place and keep them up to date.
It is important to consider that asset quality, structure and the right scale are required and not optional. The participants in the events acknowledged Gogla’s efforts of bringing the stakeholders together, events like these offer necessary insights from the parties that are actively engaged with the Off-grid solar sector. In addition to this, they provide better understanding to the prospective investors planning to invest in the sector.