| NEWCO Ltd. is a greenfield salt mining company that has acquired a concession to mine salt for sale to an Asian petro-chemical company. Under a 40-year Off takers’ Agreement-Owners’ contribution equity, this project basically costs land acquisition to the tune of about US$100,000. This project, however, requires a total of $5 million to put a full operating plant in place. Construction of the required ponds and pans along the sea shore to facilitate crystallisation and other chemical activities would take a minimum of 12 months. The crystallisation pans require base salt of about 3 meters to facilitate crystallisation. Production of a critical mass of salt is required to meet revenue requirements of US$300,000 per annum to meet debt repayment obligations and operational costs. This process would take a minimum of 12 months. NEWCO approaches Bank A for a US$6 million loan facility, which is granted. This 2-year receivables-backed facility is expected to be repaid from month 1. The other terms of this facility require a total principal and interest repayment of approximately US$25,000 per month over the 2-year duration of the loan. The size of NEWCO’s operation guarantees volumes in excess of 200 tons of salt per month to generate US$25,000 for the debt servicing. This can only occur after 36 months when enough salt bases have formed in the crystallisation pans. To meet its debt obligations and working capital needs, NEWCO commences salt harvesting immediately the plant is completed and its repayment obligations have risen beyond the US$25,000 per month requirement because of an initial 1-year default. Enough salt volumes are not being generated and the quality of the salt is below standards required by its Asian off taker. NEWCO’s revenue forecasts are below targets provided in its business plan submitted to Bank A for funding. Its cash flows are constrained and operational requirements like maintenance, salaries, etc., cannot be met. NEWCO is forced to halt operations and Bank A decides to foreclose, while NEWCO is forced to fold up. The immediate question is “NA WHO CAUSE AM?” Is it lack of funding or the use of inappropriate funding that caused NEWCO’s demise? This is the bane of many Ghanaian businesses I have helped to re-structure in the past. Each time a roll call of the challenges Ghanaian businesses face is made, lack of funding features prominently. The experience of our model business described above indicates that this is really not the case. What most Ghanaian businesses and for that matter SMEs need is not just funding but some particular type of funding to make them successful. By some type of funding, we mean a myriad of funding sources including, conventional secured, unsecured, subordinated, or participating debt to preferred or common equity that meets the requirements and cash flow attributes, including size, timing and cash flows cycle of these businesses.Unfortunately, many of the businesses I have helped restructure have simply been given enough money to fail. The common type of funding many businesses in Ghana know is debt (both secured and unsecured). Many of these businesses are, therefore, over-leveraged and their cash flow capabilities are severely constrained. Unfortunately, our banks and other financial institutions rarely assess the suitability of the type of funding they extend to businesses that approach them. A “one size fits all” approach is what many have adopted.For our model business (NEWCO) described above, a simple structuring of the transaction could easily save this brilliant business concept and make it an extremely successful story. A US$100,000 debt, US$6 million equity capital structure generates a 2% equity / 98% debt capital structure. This is an extremely over-leveraged position. The point here is not to say that leverage is bad. For tax purposes, for instance, many businesses have significantly improved Return on Equity by adopting the right form and level of leverage.What NEWCO requires is capital that gives it sufficient time to cash flow. For this reason, the usual short-termist approach many Ghanaian banks like Bank A usually adopt should not be the type of funding NEWCO should be provided. Additional equity which in most cases is the most appropriate funding for long gestation capital projects should have been a key funding component of NEWCO’s capital structure. If Bank A felt NEWCO was viable enough to deserve US$6 million, by assessing its cash flow pattern and business cycle, a moratorium on both principal and interest and a longer repayment period of say 5 years should have been provided. A reduced loan amount, coupled with additional equity could significantly reduce the repayment burden and allow NEWCO enough time to get its technical operations right, in order to generate enough cash flow to service the facility and meet its on-going operational needs. This analysis presents a simplistic view to the solution of NEWCO’s challenges. But, this is all that many SMEs in Ghana need to succeed. After all, the exotic funding types like swaps, options and other forms of derivatives have been blamed for the sub-prime crisis and many are beginning to turn to plain vanilla approaches for simple, less sophisticated transactions in less developed countries.  The Writer, Nana Amoto Mensah
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