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Mensuel : Edition de décembre 2010
Rubrique : Bourse/Fonds
Titre : Imtiaz : a fresh way to invest …
Article : Since 2008 crisis and its related uncertainties, individuals and companies have significantly increased their savings, and they have looked for secure investments as decoupled as possible from financial turmoil risks. Institutional investors (e.g. pension funds, insurance companies, or mutual funds) have endured, in general, significant losses, and have, therefore, increased their appetite for more secure long-run assets with stable cash flows.

In the meantime, governments have increased their public deficits to keep economic activity alive, and this has occurred despite the risk to see their ratings lowered, and the resulting increase in financing costs. This increasing need for public funding together with the tougher capital requirements for banks imposed by Basel III, may very easily result in a new liquidity crisis, or at least in a protracted low liquidity situation in which the private sector would find difficult to obtain financing, with the correlated impact on economic growth.

What should we do to avoid this critical situation? There is no simple answer, and the solution should be a combination of different actions, but the first step to be undertaken by the financial industry should be to help in restoring trust. When investing, trust is an essential attribute for any kind of development of a business or a country. Here starts the main concept of Imtiaz with the aim of fostering the economic development of a large number of countries. How Imtiaz should contribute to restore trust? By offering secure investment opportunities in infrastructure/industrial projects with a reasonable return on the long run, without debt-leverage-high risk-speculation, in full transparency for all participants and fully decoupled of financial turmoil risks.

Imtiaz is a new concept of investment fund, based on the principle of concession, which raises funds on the market and invests them directly in the development/operation of utilities and/or of industrial projects (in partnership with the appropriate specialized companies). Imtiaz invests only in life essential business (typically in, but not limited to, energy, water, food, health, or transport), where revenues can be forecasted, and with a guaranteed minimal value on the long run. Imtiaz is declined in two forms: Imtiaz Utility (UY) and Imtiaz Corporate (CE). In both cases, Imtiaz owns the purchased/developed assets during its lifetime, delegates the development and operations to a third party (usually a large private/public company), and transfers its assets for a small residual value at the end of its lifetime to the co-promoters of the project. By owning the production assets, investors have a tangible guaranty and limit the correlation of their activities with the unfortunately recurrent financial crisis.

Imtiaz’s revenues exhibit a reasonable expected return (5-15%) on a 15-25 years horizon, and are secured by a purchase agreement of all production with a government or a state-owned/private company, and by a put option of its assets at a predefined residual value at the end of Imtiaz’s lifetime. Imtiaz Utility enables governments to continue to support the development of infrastructure projects by transforming their current subsidies (which are used at lost funds) into active investments (producing a return greater than the debt cost), while facilitating the contribution of the private sector in the financing of those projects. Imtiaz UY can also be fully used by private companies to finance the development of utilities that they will also operate. Imtiaz UY is also a financial product which could drive exports by delivering a technical solution and its financing, without a long process of loan syndication, and world wide thanks to the fact that Imtiaz is eligible to be Sharia compliant.

The funds borrowed by a government and invested into an Imtiaz UY should not be included into the budget’s deficit (discussion in progress with federal authorities) because there would be transferable shares of a tangible asset facing the debt, and the investment return would be greater than the debt cost. Imtiaz’s shares are transferable on a secondary market (exchange place) like any Exchange-Traded Fund, but also on its primary market (transfer agent) like any investment fund. Imtiaz has also an internal mechanism to redeem shares, on a best effort basis, when primary and secondary markets are not liquid enough. Imtiaz Corporate enables a company to buy/develop and operate, in collaboration with an Imtiaz fund, an industrial project for which the company will have neither to commit capital nor to increase its debt.

Imtiaz CE will own the asset during its lifetime and will receive a percentage of the turnover generated by the asset, which is fully operated by the company. At the end of the Imtiaz’s lifetime, then the asset ownership will be transferred to the company for a predefined residual value. Since the company will probably involve some of its own resources to operate the purchased/developed asset, then it is very complex to define just the net income of this particular asset. This highlights why it is simpler for both, the company and Imtiaz CE (investors) to consider a repayment scheme only based on the turnover. If the company is in default to pay or to reach the turnover objectives (under certain conditions), then an exit fine would be paid to Imtiaz or Imtiaz would receive the pledged collateral (cash, company’s shares, mezzanine arrangement …) from the company. When the asset (eg: aircraft), purchased/developed by Imtiaz, can be operated by another company, with no coupling with the initial company, then Imtiaz CE should not be considered like an operational leasing and should stay off-balance sheet (in IFRS sense). In this particular case, the only provision on the balance sheet should be the exit costs.

Example of an Imtiaz UY scheme for energy projects:

GRAPHIQUE VOIR JOURNAL

Example of an Imtiaz CE scheme for aircraft operating projects:

GRAPHIQUE VOIR JOURNAL

Imtiaz CE, in the example above, carries a great interest for an airline, because it could finance this project without increasing its direct/indirect debt. The airline company could invest its excess cash into the project, like any other investor, and would also be able to redeem/subscribe shares according to its treasury needs. In the same example, aircraft manufacturers can also invest to support their clients (airlines) but also to take part to their business, in a form of leasing, without locking up the full cost of the aircraft.

Revenues received by Imtiaz, on a monthly or quarterly basis, would be used:
- to cover the running costs,
- to repay the capital to investors,
- to pay dividends according to the guaranteed minimal revenues,
- to pay extra dividends based on extra sales,
- to build up cash reserves into an internal sinking fund,
- to contribute in a limited way to R&D funds.

The running costs include operating & maintenance costs, Imtiaz’s administration costs and also the insurance expenses to secure the Imtiaz’s revenues against potential issues with the underlying assets. Since minimal revenues are predictable on a 15-25 year period, Imtiaz will deliver constant cash flows in capital repayment and dividends payment, and extra cash flows for extra dividend payments related to extra sales. Imtiaz has an internal mechanism based on a sinking fund (cash reserves) which is nurtured from a part of capital repayment. This part should represent a minimum of about 20% of three periods of capital repayments.

The sinking fund principle is to increase Imtiaz’s liquidity by having a way to redeem shares when primary/secondary markets do not provide the required liquidity. In case of redemption by Imtiaz, the remaining investors will receive less in capital repayment for the current period but they will own more shares from the next period. The redemption price, in this particular case, should be based on a form of yield to maturity with a discount. If during a current period, no Imtiaz redemption has been requested then a portion of the cash reserves will be repaid to the investors. In particular cases, the Imtiaz fund could also contribute modestly to an R&D fund to ease the development and the adoption of new technologies. This could be typical in an Imtiaz UY where a government has significantly invested and wants to support its national industry. This initiative may also help to reduce development and operating costs, and to potentially increase the return of next generation projects developed with an Imtiaz fund.

Imtiaz has also some other advantages:
1) Imtiaz UY reduces the high dependence of infrastructure projects on grants/subsidies and involves the private sector, while leaving the entire control and management to an operator, which may be a state-owned organization or a private company.
2) Imtiaz UY also enables governments to introduce fiscal incentives for investors living in the area or the country where the infrastructure/industrial project would be developed, and without favoring only national companies in order to comply with competition laws in Europe and in the US. In this particular case, government’s national support would be on the project and not on the developer company.
3) Since Imtiaz UY transfers the ownership to a predefined company for a small residual value, there is not difference in final infrastructure projects ownership between using Imtiaz or using grants/subsidies and loans. The difference is that Imtiaz does not need loan syndication and can rally the private sector in an easier way. The difference is also for the predefined company to benefit of a private procurement process rather than to run a heavy and less profitable public procurement process. For Government, this initiative should translate in lower debt and lower public deficit.
4) Thanks to its guaranty level on returns and to its internal mechanism, Imtiaz UY could be compared to a money market fund (in terms of investment security).
5) Imtiaz’s structure easily allows, if needed, to extend its operational capacity through additional capital calls and by using an equalization mechanism between initial and new investors of the Imtiaz fund.

It is our understanding that Imtiaz could be a solution to develop large projects in strategic domains (energy, water, food, health, or transport, amongst others) and to help companies to finance industrial projects, while offering to governments a way to support their industries by investing their grants/subsidies and by getting revenues, like any investor. We are ready to share details about the Imtiaz concept and about the financial models/structures related to Imtiaz, with those governments or financial institutions or corporates that are interested in the subject. Please, feel free to contact us at imtiaz-funds@otimo.lu or to visit http://www.Imtiaz-Funds.com.

Jean-Paul Letombe, OtimO

With special thanks to Mr. José Luis Velasco (KPMG) and Mr. Jean-Michel Hamelle (Grant Thornton) for their help and review.
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