TAHAL, the Israeli water planning company, has been searching for capital to expand in the global water infrastructure market. Today it was announced that investment fund FIMI will lend Tahal $50 million. The loan is to be repaid in four years and bears an interest of six month Libor plus 3%. On the basis of the letter of intent, Tahal will issue warrants to FIMI, which allow FIMI to purchase shares in Tahal.
Is that an investment or a LIBOR + 3% loan? It seems expensive. I take it as a sign that the water business in the Third World is not such an attractive business. The fact is that TAHAL is unprofitable.
7 comments:
This is what I do for a living (the legal aspects of transactions like this). In the case of risky loans (risky because they are not the most senior layer which is secured by pledged assets) it is very common for investors to get BOTH interest and warrants to purchase shares as compensation for the risk. The idea is that you also want to have some upside. Say your fund does 10 deals - maybe in 4 of them the warrants will have no value but there will be enough funds to repay the loan with interest. In 3 deals the loan will not be repaid in full (or maybe at all). And in 3 deals, the warrants will have value ranging from a little to a lot (if the warrants were for stock in the Next Big Thing). So overall (you hope) you can raise the return on your portfolio to say 10 or 15% rather than the less than 4% that the libor only loan would get you. The borrower is willing to give warrants if this is the only way it can get money in the market.
In short, this is very common.
K
It does show some weakness on the borrower's side, does it?
The stronger you are as a borrower the less you will have to give in the way of concessions. I would not say "weakness" - not every borrower is Goldman Sachs. As I said before, for this level of company and this type of borrowing, giving warrants is fairly normal. Of course there is also the question of how many warrants? For 1% of the company, 10% , etc? The devil is in the details.
K
No further details were published. TAHAL has a contract to build up Ghana's water infrastructure and needs financing. That specific contract may be very profitable. We always lived off Ghana and Nigeria.
Sadly, very few things in the third world that provide public goods are profitable.
It is not surprising. Our moral superiors stride around the "underdeveloped countries" telling anyone and everyone they are "oppressed" and "underprivileged", and "entitled" to their "full human rights", etc.
After decades of this propaganda, why would third world people actually feel any obligation to pay their rates? They just "demand" their "entitlements"; a Cargo Cult mentality, implanted there by graduates of the London School of Economics.
And Greece too is affected.
Anon.
Depends what you mean by "profitable" - such projects are VERY profitable to those involved - the contractors such as TAHAL, the government officials who receive kickbacks in return for the contracts, etc. Then when they are complete they usually fall quickly into ruin because the locals are not capable of operating and maintaining them properly.
The alternative "bottom up" type development doesn't work either. God did not distribute brains and ambition equally - Ghanaians and Ecuadorians will never be Swiss or Japanese.
K
The Ghanaians are not the worst; and the Swiss are not the best.
Anon.
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