As InfraCredit Joins League of Harvard Business School Cases

Obiora Tabansi Onyeaso

Infrastructure Credit Guarantee Company (InfraCredit) has joined an elite circle of African companies by having a case study about its mission and operations published by the Harvard Business School. It would now form part of the curriculum at the renowned business school. The case which is titled, ‘Infrastructure in Nigeria: Unlocking Pension Fund Investments,’ was co-authored by John D. Macomber, a senior lecturer in finance, and Pippa Tubman Armerding, director at Africa Research Office. Both are senior faculty at HBS. Each year, HBS publishes about 350 cases.
Only a tiny fraction is devoted to organisations outside North America, Europe and Asia.

Often characterised as the defining pedagogical experience of an HBS education, the case method has been described as ‘a profound educational innovation that presents the greatest challenges confronting leading companies, non-profits, and government organisations and places the student in the role of the decision-maker.’

On an average, HBS sells 10 million cases per year. Its dominance in the field is evidenced by the fact that 80 per cent of the case studies used by business schools around the world are written by its faculty. Macomber and Armerding identify the scale of financing required to close the infrastructure finance gap in Nigeria, as well as the challenges facing developers of projects with long-term profitability recovery.

It is estimated that Nigeria would need to spend up to $3 trillion over the next 30 years to shore up its gaping infrastructure deficit. In the short-term, the National Integrated Infrastructure Master Plan projects that Nigeria would need to make infrastructure investments of over $127 billion in the next five years.

The case investigates two central issues that would determine InfraCredit’s capacity to meet its ambitious goals: the funding options available to the company to support its growth, and the obstacles that must be overcome if the appetite of the country’s pension funds for infrastructure debt securities is to grow.

Established last year, InfraCredit was conceived as a quasi-private credit enhancement provider by the Nigeria Sovereign Investment Authority (NSIA) in collaboration with GuarantCo, a member of the Private Infrastructure Development Group. Essentially, its mission is to catalyze long-term local currency debt capital formation for investment in infrastructure projects by providing guarantees of timely payment for holders of debt securities issued by eligible infrastructure entities.

At its launch, Managing Director and CEO of NSIA, Uche Orji, spelled out its mandate, “InfraCredit will enhance Nigeria’s capacity to attract and unlock pools of capital from pensions and insurance for infrastructure investment in key sectors of the economy.” The vision was that by providing credit guarantees to developers/operators of eligible infrastructure assets, it could reduce their cost of local currency debt capital, and significantly extend the tenor of their debt, thereby quickening the country’s infrastructure deficit catch-up rate. InfraCredit enjoys an AAA credit rating from Agusto & Co and GCR, a first for a domestic local currency guarantor in SubSaharan Africa. This constitutes its key credit strength, which it deploys in lending its balance sheet by guaranteeing transactions.

Under its mandate, eligible projects will broadly fall under any of ten activities: agricultural, energy, gas distribution, ICT/Telecoms, infrastructure, inputs to infrastructure, social infrastructure, transportation, waste management, and water distribution & treatment.

From a low base of 25 per cent of GDP today, InfraCredit’s goal is to pump up the country’s infrastructure stock to 70 per cent in line with international benchmarks within 30 years. The first transaction successfully completed by InfraCredit within its first year of operations was for Viathan Funding, a special purpose vehicle of Viathan Engineering, a provider of captive and embedded power solutions based in Lagos.

Viathan needed funds to expand its generation capacity, build a compressed natural gas plant, and pay off short-term expensive loans. At the time, bank loan rates went as high as the mid-twenties.

InfraCredit guaranteed Viathan Funding’s N10 billion issue, which paid a coupon of 16 per cent over a ten-year period.

Until then, a tenor that long for a corporate infrastructure entity was unheard of. This transaction exposed the main benefit that InfraCredit brings to mobilising private capital for infrastructure debt issuers; InfraCredit enhanced Viathan’s credit from a BBB- credit rating by Agusto & Co. and Global Credit Rating (GCR) to an ‘AAA’ rating, and crowded in sixteen institutional investors including twelve pension fund administrators.
To finance infrastructure development, the local debt capital markets needs to be relatively developed.

In today’s environment, accelerating the development of domestic capital markets in emerging markets, particularly for local currency debt, is more crucial than ever as global financial reforms have transformed banks’ willingness and ability to lend, and recent events have highlighted the potential
repercussions of borrowing significantly in foreign currencies, at least for businesses that are not export-focused.

In its corporate presentation, the company hinted at the size of its ambition. It plans to grow its aggregate guarantee portfolio of corporate infrastructure bonds from the current N10 billion up to N510 billion by 2021. A quantum leap of that proportion implies the assumption that with the successful operations of InfraCredit, new local bonds issuance will undergo a faster annual growth rate in the future than has historically been the case.

Data from FMDQ indicates that from 2013 to date, corporate bond issuances, which today stand at N327 billion, have grown by a sluggish c.23% compounded annual growth rate which is significantly low given the huge deficit in funding required to plug the infrastructure gap.

In his comments on the HBS case, the CEO of InfraCredit, Chinua Azubike said, “We are very honoured that Harvard Business School has chosen InfraCredit as a model for its MBA students.

“It is a great privilege that in such a short space of time since we began commercial operations, our mission and activities have been judged worthy of attention by the world’s leading business school.

“We are committed to fulfilling our mission and its long-term sustainable impact. In the end, we hope that the case will attract more global capital inflows into Nigeria’s infrastructure investment, which is profoundly needed.”