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Debt Instruments

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Debt Instruments

They are used to raise working capital or investment capital by the businesses. The different types of debt instruments especially for off-grid solar are:

  • Term loan
  • Lines of credit
  • Venture debt and bridge round
  • Accounts receivable financing
  • Securitization
  • Convertible notes
  • Revenue-based mezzanine debt
  • Development impact bonds
  • Peer to peer business lending
  • online debt-based securities
  • Data-enabled short term loans
  • Government-issued mobile bonds


This article discusses some of the instruments and is based on the publication: Funding the Sun : New Paradigms for Financing Off-Grid Solar Companies (2020).

Term Loan

Term load in provided to fund the acquisition of assets and the payback period is tied to the lifetime of the assets. For off-grid solar companies, it is usually provided for a period of 1-25 years. Interest is charge over the lifetime of the loan and can be fixed or floating interest.

They are usually designed to finance one-time purchase such as buying land, equipment etc.

Benefits

  • One of the widely employed debt instrument
  • Funds can closely match the needs of the borrower
  • Reduce the need and reliance on smaller and less predictable sources of capital (eg grants)

Challenges

  • Negotiating and securing a loan can be a lengthy process
  • Many financial lenders that provide term loan might not be familiar with the off-grid sector
  • Many off-grid companies are startups and do not have the credit history
  • Small off-grid assests such as SHS are difficult or time consuming to repossess or sell on the secondary market thus, less willingness to take them as collateral.
  • The off-grid sector is continuously developing so the old SHS systems might suffer devaluation, thus less inclination of using them as collateral
  • Hard currency could be scarce and financing in local currency can be expensive.


Case Studies

BBOXX (Rwanda)

In February 2017, BBOXX announced a $2 million loan from commercial bank Banque Populaire du Rwanda. The loan was unique in that it set aside a fixed portion of BBOXX receivables in an account to which BBOXX customers pay off their SHSs in regular installments. The receivables act as collateral to secure the loan—a first in the OGS sector in Sub-Saharan Africa.

The facility was in local currency, allowing BBOXX to minimize exposure to currency fluctuations by matching the currency of their receivables with the loan. Typically, companies operating in the OGS sector are forced to borrow in hard currencies, because of limited local bank appetite for lending to the sector (as a result of irregular collateral and unfamiliar business models).

This first of its kind loan for a SHS distributor could signal greater participation of local banks in cashflow–based lending to OGS companies.

BBOXX secured another local currency loan in February 2018, a $4 million facility from Union Togolaise de Banque (UTB). In 2019 it secured an $8 million local currency financing facility denominated in Rwanda francs, through the Africa Development Bank (ADB)–backed Facility for Energy Inclusion OffGrid Energy Access Fund (FEI OGEF). BBOXX also announced a $31 million investment from the Africa Infrastructure Investment Managers (AIIM) fund, Africa’s largest project-based investment vehicle[1].



Lines of Credit

They are revolving loans that can be drawn/redrawn whenever requried and are flexible. The borrower can only pay interest on the borrowed amount and the lender charges a maintainence fee on the undrawn amount.

They are usually drawn to fund variable expenses of the businesses and are usually unsecured.


Further Information

References

  1. The World Bank, 2020. Funding the Sun : New Paradigms for Financing Off-Grid Solar Companies- https://energypedia.info/wiki/Publication_-_Funding_the_Sun_:_New_Paradigms_for_Financing_Off-Grid_Solar_Companies