Loanable Funds – Future Komp Sun, 19 Jun 2022 16:47:43 +0000 en-US hourly 1 Loanable Funds – Future Komp 32 32 As the high cost of funds hampers business growth Sun, 19 Jun 2022 16:47:43 +0000

The high cost of loans offered by depository banks, which is in double digits, has continued to hamper business growth in the country.

Recently, the Central Bank of Nigeria (CBN) and the Monetary Policy Committee (MPC) at its 285th meeting, with the Chairman announcing the committee’s unanimous decision to amend its convention. The MPC, for the first time in two and a half years, raised the monetary policy rate (MPR) by 150 basis points to 13.0% from 11.5%, while maintaining the reserve ratio ratio (CRR) at 27.5%, the asymmetric corridor at +100/-700 basis points around the MPR while the liquidity ratio was maintained at 30.0%.

With this, he showed that the interest rate of banks will increase. Stakeholders believe that the interest rate regime in Nigeria has not been very encouraging. According to them, the cost of funds in Nigeria, usually in the double digits, has always been one of the main challenges in the manufacturing sector, with a direct impact on the cost of production and the competitiveness of the sector.

In its semi-annual review of the economy, July-December 2021, the Manufacturers Association of Nigeria (MAN) said: “However, despite the expansionary monetary scenario, inadequate and high-cost loanable funds continued to be a major challenge for manufacturing in the country.

“The situation has had diminishing consequences on investment, capacity utilization, manufacturing output and employment. As a result, in the second half of 2021, the interest rate charged to manufacturers increased to 24%, compared to 22% recorded in the same half of 2020; thus indicating an increase of 2 percentage points over the period. It also increased by 5 percentage points compared to the 19% recorded in the previous half.

“The sector lending rate averaged 21.5% in 2021 compared to 20.75% in 2020. It is therefore important that the monetary authority considers improving accessibility to the various financing windows of the CBN and to anchor a buoyant monetary policy that would moderate current lending rates to encourage investment and productivity in the manufacturing sector.

The Founder and Managing Director of the Center for Promoting Private Enterprise (CPPE), Dr. Muda Yusuf, said that given the many headwinds that had posed significant risks to the national economy, the rising MPR from 150 basis points to 13% by the MPC was not a surprise.

He listed those challenges to include soaring commodity prices and the impact on energy costs, a surge in domestic liquidity due to campaign-related expenses, and global supply chain disruptions.

He noted that already, bank lending has been constrained by the high CRR as claimed by many in the sector, the discretionary debts of the apex bank, the loan to deposit ratio (LDR) of 65% and the liquidity ratio. by 30%. The lending situation in the economy is already very tight.

He explained that the transmission effects of monetary policy on the economy are still very weak, saying that in the Nigerian context, price levels are not sensitive to interest rates. Supply-side issues are much deeper drivers of inflation.

The Managing Director of Lancelot Ventures Limited, Mr. Adebayo Adeleke pointed out that apart from the scarcity of the dollar, the cost of funds in Nigeria is high in Nigeria compared to many countries in Sub-Saharan Africa (SSA).

He noted that the high cost of borrowing remained a major challenge for the country’s manufacturing sector, seeking low interest rates in Nigeria to boost manufacturing and other sectors of the economy.

“A low interest rate regime will encourage blue-chip companies to undertake new investments, thereby boosting aggregate demand and economic growth,” Adeleke said.

Reacting to the increase in MPR, the Chief Executive of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona, said that “rising interest rates will normally mean less credit to the private sector and this can result in reduced investment and limited output in the economy, at least in the short term.

“This action also has implications for economic growth, job creation and revenue generation for the government. When the MPR was 11.5%, some lenders charged a maximum rate of 25% to small businesses. With the benchmark interest rate at 13%, we could probably see rates climb beyond 30% for SMEs.

According to Almona, while we agree with the proposition that a lower interest rate in Nigeria compared to higher rates in developed economies would lead to capital flight, we must reaffirm our recommendation that Interest rate hikes will not curb inflationary pressures.

“Supply-side challenges such as insecurity, currency scarcity and uncertainties related to the inconsistent political environment must be addressed to curb rising inflation. This is the most sustainable solution to rising inflation in Nigeria.

While stakeholders noted that the lower the price of funds, the better the country’s prospects for generating production, job creation and greatly improved government revenue conditions.

Policy makers should rethink entrepreneurship | The Manila Times Sun, 19 Jun 2022 15:34:51 +0000

MEETING OF MINDS President-elect Ferdinand ‘Bongbong’ Marcos Jr. and Presidential Advisor for Entrepreneurship Joey Concepcion. CONTRIBUTED PHOTO

THE next government is on the right track in recognizing the value of micro, small and medium-sized enterprises (MSMEs), whose collective well-being is vital for growth and development. But more than helping them recover from the pandemic, policymakers should rethink or reimagine entrepreneurship in order to realize the full potential of MSMEs.

Last week, President-elect Ferdinand “Bongbong” Marcos Jr. met with Jose Maria “Joey” Concepcion 3rd, who is the presidential adviser on entrepreneurship in the outgoing government. They apparently hit it off. Both recognize the value of MSMEs in job creation and contributions to the national economy.

Concepcion told the media, “We both agree that MSMEs must be supported if we are to achieve inclusive growth for the Philippines.” He also said they needed access to capital and mentoring opportunities.

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For starters, these businesses will benefit greatly from improved implementation of Republic Act 9501 or the “Magna Carta for MSMEs” of 2008. It requires banks to lend to micro and small businesses at least 8 % of their total loanable funds, 2% to medium-sized companies. businesses.

To date, however, the banks have not complied, opting instead to pay penalties. The paperwork and guarantees required can be obstacles to complying with the magna carta, but this must be studied. Also, the lending provision is supposed to last only 10 years from the date of enactment or until 2017. This provision should be extended and the bank lending process should be simplified.

Added to this is the problem of financial inclusion. Most Filipinos are unbanked. Seven out of 10 Filipinos do not have a transaction account even though 53% of the population have savings.

Going back to the magna carta, it also stipulates that MSMEs are entitled to at least 10% of the total value of purchases of goods and services provided to the government each year. The problem is that most MSMEs lack the scale and capacity to respond to large orders.

Worse, this magna carta provision also conflicts with existing government procurement laws that require bulk ordering to achieve economies of scale. The lower unit cost favors the government as a buyer.

Thus, the policy objective should be to help MSMEs become big businesses. And existing procurement laws and policies need to be aligned with the interests of MSMEs.

different mindset

Second, Filipinos should think about entrepreneurship differently. For the most part, the focus is on cottage industries and self-employment. There’s nothing wrong with that, but maximizing entrepreneurship means equating it with innovation and disruption.

In other words, policies should encourage Filipinos to become inventors. There should be more programs, not to mention an ecosystem of venture capitalists, to help entrepreneurs incubate their new products or services and later bring them to market.

For this, policymakers should study Israel, which is known as the “start-up nation” due to the success of its MSMEs. Israel ranks first in the world for start-ups per capita and third for venture capital investment. This small country has more than 50 unicorns or MSMEs with valuations of at least $1 billion.

Closer to home, Singapore also calls itself a “start-up nation”. In 2017, the Global Innovation Index named it the most innovative country in Asia. And in 2019, the World Bank ranked this island state as the second-easiest place to do business.

To be an Israel or a Singapore, the Philippines must also resist populist measures that stifle innovation. Specifically, the disruption is the result of entrepreneurship, which means job losses in outdated or inefficient sectors. Job displacement may seem unattractive, even counter-intuitive. People favor entrepreneurship because it creates jobs.

Of course, successful innovations generate a net gain in jobs, as resources are reallocated from disrupted sectors to emerging industries. For example, fewer jobs were available in typewriter manufacturing when computers became common. Incidentally, few, if any, mentors from older industries can competently mentor those from fledgling companies.

Improving efficiency not only creates more jobs, but also increases wealth. However, workers in declining industries need safety nets.

Clearly, Filipinos should develop a more sophisticated approach to entrepreneurship and MSMEs. Policy makers also need to think big.

Nepal’s debt rises over 7% in third quarter Thu, 16 Jun 2022 02:30:50 +0000

Nepal’s debt stock rose by 7.33% in the third quarter of the current fiscal year in the wake of the continued devaluation of the rupee against the dollar and costly domestic debt amid growing borrowing from the government.

Although the country received external debt in only limited amounts during the first three quarters of the current fiscal year, the domestic currency debt liability surged due to the depreciation of the Nepalese rupee.

Since the end of the second quarter, the value of external debts has increased by 2.89% to reach 976.45 billion rupees while domestic debt has increased by 12.72% to reach 879.15 billion rupees, according to the report. latest third quarterly public debt report published by Public Debt. Management office.

The country’s overall debt stock reached 1.85 trillion rupees, or 38.25 percent of GDP, as of mid-April, according to the report.

“Although the debt size has increased in recent years, Nepal’s debt-to-GDP ratio is still sustainable,” said Prakash Kumar Shrestha, head of economic research department at Nepal Rastra Bank. “We can still absorb more debt. But in order to be able to repay the long-term loans, we have to invest the debt money in the productive sectors.

According to the International Monetary Fund, Nepal has seen a gradual decline in the debt-to-GDP ratio from 35% in FY 2011-12 to 25% in FY 2016-17, a sign of improving debt economic health. But after the country’s transition to fiscal federalism, Nepal’s public debt has increased over the past few years, with the ratio reaching 42.2% in the 2019-20 financial year.

The substantial increase in debt in the 2019-20 financial year is due to the impact of the Covid pandemic and the responses to it, according to the IMF.

“But, the country’s debt (principal and interest) is on the rise due to the devaluation of the national currency against the US dollar as well as rising interest rates on domestic debts,” Shrestha said.

In fact, if Nepal decides to write off all external debts now, it will have to pay an additional Rs 19.37 billion in local currency compared to the end of the second quarter of the current financial year due to the depreciation of the rupee, according to the Public Debt Management Office.

This exchange rate loss was calculated based on the exchange rate differences of the Nepalese currency against the US dollar on January 15 and April 13. On January 15, the exchange rate was 118.95 rupees per US dollar and it had risen to 122.12 rupees per US dollar. dollars on April 13.

Hira Neupane, information officer at the Office of Public Debt Management, said the country had to pay more for loan repayments due to the devaluation of the rupee.

“And Nepal will have to pay even more in the fourth quarter as the currency depreciation continues.”

The Nepalese rupee plunged to an all-time low of 125.16 rupees against the dollar on Tuesday, according to the Nepal Rastra Bank. Neupane, however, said that despite the rapid depreciation, the situation is still below dangerous levels.

“We are still in a comfortable position in terms of debt-to-GDP ratio, and the interest rates on our external borrowings, which are long-term, are also minimal,” he added. Experts say it would not be dangerous for a country like Nepal to increase the debt to GDP ratio up to 60%.

While the depreciation of the national currency has become a major concern for foreign debt, domestic debt is also on the rise as the country borrows more at home than from abroad.

Nepal borrowed a total of Rs 111.68 billion in debt between the start of the current fiscal year and the third quarter. Of this amount, only Rs 12.21 billion comes from external sources and the remaining Rs 99.47 billion comes from internal sources.

Between the end of the 2014-15 financial year and the last 2020-21 financial year, the domestic debt quadrupled to reach 802.94 billion rupees, according to the Office of Public Debt Management.

“External loans are relatively cheaper than domestic loans although there is always the risk of exchange rate fluctuations associated with foreign loans. But the interest liability to domestic debts is higher than to external debts due to higher interest rates,” Shrestha said.

For example, Nepal paid 1.39 billion rupees in interest to external creditors in the third quarter, while 6.14 billion rupees was paid to internal creditors, although the total value of domestic loans was lower than that external loans.

Interest rates on domestic loans have increased due to the shortage of loanable funds in banks and financial institutions, which are the main creditors of the government. Banks and financial institutions buy government securities in the form of treasury bills and bonds. In fact, Finance Minister Janaran Acharya himself has admitted that the government needs to increase the operating budget for the next fiscal year due to the need to repay more to domestic creditors in the next fiscal year.

For example, the government has allocated 59.79 billion rupees for principal repayment of development bonds maturing in the next fiscal year, up from the revised scheduled principal repayment of 17.1 billion rupees, according to the Ministry of Finance. According to the ministry, the government alone has allocated Rs 54.14 billion for loan interest payments for the next financial year.

The government has allocated 43.73 billion rupees and 10.41 billion rupees to pay interest on domestic and foreign loans respectively.

Responding to questions raised by lawmakers in parliament in early June, Minister Sharma said: “Compared to the current financial year, more funds will be required for the repayment of the principal of internal loans in the next financial year. Internal debts are due in the next fiscal year and the government is to pay up to Rs 50 billion in principal repayment.

Subscription funding: rated note feeder funds and debt capital commitments Mon, 13 Jun 2022 15:00:00 +0000

Insurance company investors are increasingly seeking to invest in private equity and similar private equity funds through debt capital commitments (as opposed to traditional equity capital commitments) in order to take advantage of better treatment of regulatory capital, including under the risk-based capital system established by the United States. National Association of Insurance Commissioners (the “NAIC”). Fund sponsors have responded to this demand by using a rated note feed structure, in which a feeder fund issues notes under a note purchase agreement to an investor (rather than requiring a commitment traditional equity) and obtains a high credit rating on these notes which results in a much more favorable risk-based capital treatment from the NAIC.

As discussed in our previous legal updates, debt capital commitments have always been classified as ineligible for inclusion of the debt base in underwriting facilities. This is due to the uncertainty as to whether these loan capital commitments would be enforceable under Section 365(c)(2) of the United States Bankruptcy Code if the relevant fund were subject to legal proceedings. of bankruptcy.1 The concern is whether the commitment of debt capital would be considered an “enforceable contract” to “make a loan, or grant other debt financing or financial arrangements to the debtor or for the benefit of the debtor “. If so, the obligation could be rendered unenforceable by the fund or its trustee in bankruptcy (and therefore unenforceable by the fund, its trustee in bankruptcy or the fund’s lenders).

In an attempt to address this concern while meeting the market need for debt commitments presented by insurance companies, some sponsors have begun to use hybrid debt/equity commitments which begin as an equity commitment of borrowing but “switch” to a commitment of equity upon the occurrence of an event of default or similar triggering event under the underwriting facility (such as bankruptcy or insolvency of the fund). Although this type of conversion feature has not been tested in litigation, there are concerns that a bankruptcy court may find it unenforceable under Section 365(e) of the US Bankruptcy Code. United States, which provides for a contractual agreement that terminates or modifies an enforceable contract conditioned on or triggered by the occurrence of insolvency, the opening of a bankruptcy case, or a similar event is not enforceable in bankruptcy proceedings (this concept is often referred to as “ipso facto prohibition”). As a result, many underwriting lenders have resisted the “conversion approach” for a hybrid debt/equity commitment. There are, however, two approaches that are gaining traction in the market that do not raise the same ipso facto prohibition issues: first, a “day one” equity commitment approach and, second, a feeder fund approach. remotely in the event of bankruptcy. We explore both of these approaches below.

“Day-One” equity commitment

At a high level, the day one equity commitment approach provides for the investor to subscribe to a shared equity/debt capital commitment on “day one”. This shared capital commitment can be called as debt through a note purchase agreement or as equity through a traditional capital call at the option of the underwriting fund or lender, and any debt or equity financing will reduce the shared capital commitment on a dollar-for-dollar basis. Because the capital commitment includes a “day one” equity component – ​​and does not convert from one form of capital commitment to another form of capital commitment in the event of a bankruptcy-type event – this day one equity commitment approach is not likely to raise the same level of potential Ipso Facto ban issues as the conversion approach described above.

The day one capital commitment approach works for insurance company investors because the NAIC’s risk-based capital treatment is determined by the actual investments financed. Thus, the mere possibility that the capital commitment is financed by equity would not adversely affect the treatment of the regulatory equity of the investor, unless the investor actually contributes equity. To assure the investor that, in the normal course of business, the preferential treatment of regulatory capital will be achieved by calling debt, the organizational documents of the rated feeder fund may even be structured with conditions precedent to make a capital call. clean. For example, an equity call could be conditional on (1) the occurrence of an event of default under the underwriting facility, (2) an investor’s inability to effectively fund the loan capital and/or the fund’s inability to call the capital commitment debt, or (3) the fund is insolvent and/or subject to bankruptcy proceedings.

Remote rated debt feeder funds in the event of bankruptcy

While the day one capital commitment approach focuses on structuring the capital commitment to be enforceable in bankruptcy proceedings, the second approach focuses on minimizing the risk that the fund feeder fund is subject to bankruptcy in the first place by structuring the feeder fund as a non-bankruptcy special purpose vehicle (an “SPV”). In other words, an SPV structure does not seek to address the bankruptcy legal risks associated with debt capital commitments, but rather aims to reduce the likelihood of a feeder fund bankruptcy proceeding occurring having a impact on investors’ debt capital commitment. . Important features of an SPV include, among others, provisions in its organizational documents which (1) require an independent director or independent manager of the feeder fund to explicitly approve any bankruptcy filing by the feeder fund or other significant actions that could give rise to insolvency proceedings, (2) limit the securities transactions of the feeder fund (including indebtedness other than obligations to the lender) and require it to maintain social separation relative to the underlying master fund, and (3) prohibit changes to the organization documents without the consent of the independent administrator/manager and the consent of the underwriting lenders while the obligations of the underwriting facility are outstanding . Subscription lenders will also seek express acknowledgment that feeder fund investors and other lenders (if any) will not seek to initiate or support any bankruptcy or insolvency proceedings of the feeder fund. While these types of customary SPV arrangements may add additional costs to the creation of the SPV (including legal structuring costs and the expense of notices that must be rendered in connection with the closing of the advisor’s underwriting facility formation of funds to the feeder fund) and maintaining the structure at a distance from bankruptcy (including the annual fees of the independent director/manager), such SPV protections are well established in the field of structured finance and are frequently invoked in structured finance transactions. To the extent that it is able to obtain these protections, an underwriting lender may be willing to include debt capital commitments in the borrowing base due to the reduced likelihood of feeder fund failure.2


As more investors seek to invest through debt capital commitments, we expect the market to adopt the “day one” capital commitment approach as the preferred approach for inclusion. of the borrowing base. Similarly, given that many subscription lenders are familiar with bankruptcy remote vehicles given their familiarity with structured finance transactions, we expect more subscription lenders to start giving loanable value to pledges. of loan capital as long as the feeder fund is structured as a remote bankruptcy vehicle. Accordingly, sponsors should seriously consider employing one or, ideally, both techniques in order to unlock more loanable value on their subscription facilities.

Budget in times of rising inflation Sat, 11 Jun 2022 15:51:51 +0000