Lending from development finance institutions such as the International Finance Corporation, African Development Bank, Proparco, and German Development Finance Institution, DEG, and other multilateral and bilateral development finance institutions is becoming more accessible to Nigerian businesses across sectors. There may be longer tenors, attractive pricing, or even a strategic partnership that adds credibility and capital.
However, borrowers should be aware that DFI loans are not commercial bank loans. They come with conditions, obligations and consequences that many Nigerian borrowers are not prepared for when they enter the facility agreement.
In this article, we identify the five most critical areas where DFI lending most often cause problems for Nigerian borrowers and what every borrower should know before signing.
- ENVIRONMENTAL AND SOCIAL COMPLIANCE
Every major development finance institution lends under an Environmental and Social (E &S) framework – IFC Performance standards are the most common and most widely used directly (for IFC loans) or by reference (for many bilateral DFIs and funds that use IFC Standards as their benchmark). Respecting the applicable E & S framework is an obligation that goes beyond drawdown alone – it is an ongoing obligation throughout the life of the facility.
Specific E & S obligations that Nigerian borrowers most commonly fail to meet are: preparation and maintenance of an Environmental and Social Management System (ESMS) meeting the relevant performance standard; community and stakeholder engagement in accordance with DFI requirements; and reporting of adverse E1and1S incidents to the lender within specified timeframes.
Breach of E & S covenants is a default under most DFI facility agreements and DFI lenders have accelerated loans on E & S grounds. This is not a theoretical risk. By signing DFI facility agreements without understanding the E & S obligations, they are taking on a material default risk that is unrelated to their financial performance.
- REPORTING OBLIGATIONS
Many times, DFI facility agreements place reporting obligations that are far more stringent than equivalent provisions in Nigerian commercial bank facilities. The typical requirements for borrowers are: an annual audited financial statement prepared under specific accounting standards (usually IFRS); quarterly management accounts are included within specified periods of each quarter; annual E & S compliance reports based on the applicable performance standard, verified by an independent E & S consultant; annual conformity certificates from the directors of the borrower show compliance with all financial and non-financial covenants. Events of default, material adverse change, or material litigation shall be made promptly known.
This creates a significant management burden that is often not realised until the first annual report cycle when the borrower is already in breach of its reporting obligations. More management time, external audit costs, and consultant costs related to DFI reporting should be budgeted by Nigerian businesses using the facility for the first time.
- RESTRICTIONS ON DIVIDENDS AND RELATED-PARTY TRANSACTIONS
Restrictions on dividends and related-party transactions are typically contained in financial covenants in the loan facility agreements. Those restrictions protect the lender and they prevent value being stripped from the borrower in ways that impair its ability to service its debt obligations but they also have big commercial implications for borrowers and their shareholders.
These are some of the restrictions that Nigerian borrowers should pay attention to: dividend lock-up provisions – which may stop dividend payments entirely or limit them to a percentage of distributable profits; related-party transaction restrictions – typically, DFI approval is required for all transactions between the borrower and its affiliates that exceed a certain threshold; restrictive capital expenditure rules that may prevent the borrower from making new investments without lender consent; and they place restrictions on debt incurrence that prevent the borrower from taking on additional financial indebtedness above some level.
