In this blog, we review the concept of loan refinancing, using a real-world example of a public corporate action by Centum, which restructured a Sh3.1 billion dual-currency loan to mitigate exchange rate risks. This move, announced on September 27, 2024, is a good example of how companies can strategically refinance their loans to improve financial stability. You can read more about Centum’s refinancing action here.

Refinancing a loan is replacing an existing loan with a new one, usually with better terms. This financial maneuver is common for individuals and businesses as they seek to adjust loan conditions, often to secure lower interest rates, reduce currency risk, or improve cash flow. When done correctly, refinancing can provide significant financial relief and offer more control over debt management.

One notable case of refinancing is Centum’s recent move to restructure a Sh3.1 billion dual-currency loan, converting it into a shilling-denominated facility to mitigate exchange rate risks. This serves as a practical example of why and when a company might consider refinancing as a valuable financial tool.

Why Refinancing is Done

The primary reason for refinancing is to secure better loan terms. This could involve reducing interest rates, extending the loan term to lower monthly repayments, or switching from variable to fixed interest rates for predictability. In Centum’s case, the company sought to protect itself from exchange rate volatility by converting a loan that was subject to fluctuating foreign exchange rates into a more stable, shilling-based loan.

For businesses with international exposure, currency risks can eat into profits, especially when foreign-denominated debt becomes more expensive due to unfavourable exchange rates. By refinancing into local currency, Centum took a strategic step to safeguard its financial position.

When Should a Company Consider Refinancing?

A company should consider refinancing when current market conditions present an opportunity for better loan terms. For example, when interest rates drop significantly, companies with older, high-interest loans can refinance at a lower rate to reduce costs. Additionally, when a firm’s debt is denominated in a foreign currency that poses a substantial exchange rate risk—as was the case with Centum—it makes sense to convert the loan to a local currency.

Another opportune moment for refinancing is when a company’s credit rating improves. A stronger credit profile can open doors to more favourable terms that weren’t available when the original loan was taken out.

How is Refinancing Done?

The process of refinancing involves several steps. First, the company assesses the existing loan terms and compares them with potential new options. After identifying the new loan terms that meet the company’s objectives, it negotiates with lenders to either modify the current loan or take on a new loan to pay off the old one.

Centum’s approach in this regard involved restructuring its loan, which likely required negotiating with the lender to change the currency denomination from foreign to local. This type of refinancing not only protects against currency risk but may also involve reviewing other loan terms such as the interest rate and repayment period.

What Makes for a Successful Refinancing Deal?

A successful refinancing deal typically hinges on timing and a clear understanding of the company’s financial goals. It’s crucial to seize refinancing opportunities when market conditions favour the borrower—whether through lower interest rates or advantageous currency positions. Additionally, thorough due diligence is essential. Companies need to analyze how the new loan structure will impact their cash flow, balance sheet, and overall financial health.

In Centum’s case, success was measured by reducing exposure to currency fluctuations that could have a direct impact on its financial performance. By shifting to a shilling-denominated loan, Centum locked in predictability, which is a key success factor for businesses operating in volatile economic environments.

Pitfalls to Watch Out for When Refinancing

Refinancing, while beneficial, is not without its risks. One major pitfall is the cost associated with the process, which can include penalties for early loan repayment, processing fees, and legal costs. If these costs outweigh the savings from better loan terms, refinancing could prove counterproductive.

Additionally, companies must carefully assess market conditions before making any moves. Refinancing into a different currency, for example, may not always shield a business from risk. If interest rates rise, the company could find itself in a less favourable financial position than before. Companies should also ensure that new loan terms don’t create unmanageable long-term obligations, such as balloon payments or restrictive covenants.

Centum’s restructuring of its loan demonstrates careful consideration of these factors. The firm mitigated the exchange rate risk, but likely also weighed the associated costs of switching loans and decided that the long-term benefits outweighed the short-term costs.

Conclusion

Loan refinancing is a powerful financial tool that can help companies optimize their debt, manage risk, and improve financial stability. Centum’s strategic decision to switch from a dual-currency loan to a shilling-based loan is a textbook example of using refinancing to reduce exposure to external risks, in this case, volatile exchange rates. For any business considering refinancing, the key is to thoroughly assess the current loan structure, potential market conditions, and the broader financial implications to ensure that refinancing brings the desired benefits.

 

 

As the world grapples with the urgent need to address climate change and reduce carbon emissions, the quest for sustainable and clean energy solutions has become more critical than ever. Countries and companies alike are investing heavily in renewable energy sources to transition away from fossil fuels in light of the increasing urgency to limit global warming to no more than 1.5°C, compared to pre-industrial levels—in line with the Paris Agreement. Green hydrogen has emerged as a groundbreaking option with the potential to revolutionize how we produce and use energy. But what exactly is green hydrogen, and why is it generating so much excitement? Let’s dive into the basics, the recent developments, and explore their potential impact in Africa.

What is Green Hydrogen?

Hydrogen is the simplest and most abundant element in the universe. Here’s a breakdown of its key features:

• Basic building block: It has the atomic number 1, meaning it has just one proton in its nucleus.
• Lightweight: As the lightest element, it exists as a gas under normal conditions.
• Colourless and odorless: You wouldn’t be able to see or smell it.
• Highly flammable: Though it’s not toxic, it can easily burn.
• Found in water: Most hydrogen on Earth is bonded with oxygen in water molecules (H2O).

Hydrogen is a clean and versatile energy source that can be used to power almost everything, earning the title ‘fuel of the future’.  However, not all hydrogen is created equal. Hydrogen can be categorized based on how it is produced, primarily into grey, blue, and green hydrogen:

• Grey Hydrogen: This is the most common form of hydrogen production today. It is produced from natural gas through a process called steam methane reforming (SMR). Unfortunately, this method releases significant amounts of carbon dioxide into the atmosphere, contributing to climate change.
• Blue Hydrogen: Similar to grey hydrogen, blue hydrogen is also produced from natural gas using SMR. However, the key difference is that blue hydrogen includes carbon capture and storage (CCS) technologies to trap and store the carbon emissions, preventing them from entering the atmosphere. While this reduces the carbon footprint, the process is still reliant on fossil fuels.
• Green Hydrogen: Produced through electrolysis using renewable energy sources, green hydrogen is the most sustainable option. It involves splitting water into hydrogen and oxygen using electric power generated from wind, solar, or hydro power. This method produces no carbon emissions, making green hydrogen the cleanest and most environmentally friendly type of hydrogen.

 

How Green Hydrogen compares to other energy sources

According to the Global Energy Perspective 2023: Hydrogen outlook by McKinsey institute, Clean hydrogen demand is projected to increase to between 125 and 585 Mtpa by 2050. Nearly all hydrogen consumed today is grey hydrogen (approximately 90 million tons per annum). However, demand for grey hydrogen is projected to decline as demand for clean hydrogen rises. By 2050, clean hydrogen demand could account for up to 73 to 100 percent (125 to 585 Mtpa) of total hydrogen demand, with only between less than 1 and 50 Mtpa of demand being met by grey hydrogen.

Green Hydrogen in Africa

The global supply and demand dynamics for Green Hydrogen are uneven. The demand centres are in Europe, Japan, and South Korea, areas that face limited renewable energy potential and may need to import hydrogen. Countries worldwide are strategically positioning themselves to capitalize on export opportunities and domestic benefits associated with green hydrogen. Several African countries—especially those in the northern and southern regions of the continent—are well positioned to play significant roles in the green hydrogen sector due to their abundant potential for renewable energy generation, particularly from solar and wind sources.

The African Union  estimates that by 2035, more than 50Mt / year of cost-competitive green hydrogen can be produced to meet local demand, grow the domestic economy, support local communities, and export to major international off-takers.

To capitalise on the opportunity brought about by the Green Hydrogen economy, six African countries (Egypt, Kenya, Mauritania, Morocco, Namibia and South Africa) came together and formed the Africa Green Hydrogen Alliance (AGHA) in a bid to intensify collaboration and enhance the development of green hydrogen projects on the African continent.

Potential uses of Green Hydrogen in Africa

African countries are confronted with several interlinked challenges, including climate change, low economic growth rates, and poverty, which the green hydrogen industry could help address and drive sustainable development across Africa. These include:

In the transportation sector, hydrogen fuel cells present an opportunity to leapfrog traditional fossil fuel dependence. Given Africa’s vast distances and limited infrastructure, hydrogen-powered vehicles can offer a reliable and environmentally friendly alternative. This includes hydrogen buses for urban areas grappling with air pollution and hydrogen-powered trucks for long-distance transportation, addressing both environmental and logistical concerns.

In Industry, African nations heavily reliant on industries like steel production, oil refining and mining can leverage hydrogen as a cleaner substitute for coal and natural gas. This will help the countries decarbonize their industrial processes and reduce their carbon footprint, aligning with their sustainability goals.

Storing electric power, access to reliable electricity remains a challenge in many regions. Excess renewable energy, abundant in areas with high solar or wind potential, can be converted into hydrogen through electrolysis and stored for later use. This stored hydrogen can then be utilized to generate electricity, providing a stable power supply even in remote or off-grid areas, thus accelerating electrification efforts and fostering economic development, deploying hydrogen fuel cells for backup power in hospitals, telecommunications systems, and off-grid areas can also enhance resilience and foster socio-economic development.

Access to clean cooking and heating, hydrogen offers a cleaner alternative for residential and commercial heating, which is crucial in regions where access to clean cooking fuels is limited. Hydrogen boilers and combined heat and power (CHP) plants can provide sustainable heating solutions, improving living conditions and reducing reliance on polluting fuels like charcoal or biomass.

In the aviation and maritime sectors, where carbon emissions are significant, hydrogen presents a pathway towards greener transportation. African countries with coastal regions can explore hydrogen fuel cells for maritime vessels, reducing emissions from shipping activities and safeguarding marine ecosystems.  The development of hydrogen-powered aircraft could revolutionize air travel, making it more sustainable and accessible across the continent.

Agriculture industry– Green hydrogen offers a sustainable solution for producing ammonia, a key ingredient in fertilizers. Utilizing green hydrogen to produce ammonia can revolutionize Africa’s agricultural sector in Africa. Local production of green ammonia can reduce fertilizer import costs, enhance food security, and drive economic growth in rural areas. African nations rich in renewable energy resources, such as solar and wind, are particularly well-positioned to harness this technology, creating a robust and sustainable agricultural infrastructure.

Foreign Exchange and Tax Revenue, exporting hydrogen and related technologies can generate foreign exchange, while the development and deployment of hydrogen infrastructure can contribute to tax revenues, supporting government budgets and public services. AGHA estimates that the production of Green Hydrogen could add $66 billion to $126 billion to the GDP of AGHA member countries in 2050. This is equivalent to 6 percent to 12 percent of the current GDP of these countries. This could also create 2 million to 4 million jobs by 2050 in AGHA member countries.

Challenges and the Path Forward

While the potential of green hydrogen in Africa is immense, there are challenges to overcome:

• Cost: Currently, green hydrogen production is more expensive than conventional methods. Green hydrogen is currently more expensive than conventional energy sources, with costs around $3 to $6 per kilogram. For instance, the capital cost of a green hydrogen project is significantly higher than that of a natural gas power plant. Efforts to lower the cost include technological advancements, reducing renewable energy costs, government incentives, infrastructure development, and international collaborations. These measures aim to make green hydrogen a more viable and competitive energy source in the future.
• Infrastructure: Developing the infrastructure needed to produce, store, transport, and use green hydrogen on a large scale requires significant investment. African governments and private sector players need to collaborate to build this infrastructure.
• Policy Support: Strong policies and incentives are crucial to promote the adoption of green hydrogen. This includes subsidies for research and development, tax incentives for green hydrogen projects, and regulations that encourage the use of clean energy.

Conclusion

Green hydrogen represents a transformative opportunity to create a cleaner, more sustainable energy future. Its ability to provide zero-emission energy for transportation, industry, and electricity generation makes it a key player in the fight against climate change. By investing in green hydrogen technology and infrastructure, and with the support of strong policies, we can unlock its full potential and pave the way for a greener, more sustainable Africa.

At Invhestia Africa, we are committed to supporting this green revolution. We are honoured to have collaborated with the Green Hydrogen Organisation (GH2) to develop a guidance and fiscal modelling tool for the Africa Green Hydrogen Alliance (AGHA) member countries. This tool enables member countries to understand, analyse and model the implications of different fiscal terms, adapting them to their specific contexts while formulating policies related to green hydrogen and its derivatives. This assignment exemplifies how financial modelling can be leveraged to shape a more sustainable future.

To learn more about our work with AGHA click here AGHA’s LinkedIn post.

 

By Kelvin Mbugua