Hi guys, is there some place I can find WACC for Africa and West Africa specifically? Or if anyone has access to this info. could you pls. let me know? Thanks in advance !
Does this make sense? If a loan was given to a company and then the company defaulted, it then says it can now only pay back the loan amount but with a discounted WACC rate applied. The company goes on to say the WACC is 21% for West Africa. Does this sound weird? 1) Why would WACC be applied on a loan? My L1 memory isn’t too good, but wouldn’t WACC be only applied if there was equity involved? So here, only the cost of debt would be used right? 2) 21%? Isn’t that way to high for anything? 3) Is this how defaults are played out? Not an expert in this. Just wondering whether default plays a role for the WACC to come into picture. Trying to help a friend who had a business in West Africa with this issue, so appreciate any feedback.
Anyone?
It’s hard to answer the question without more details. However: a) wacc can be applied to any capital structure including just debt but you would usually just call it your average borrowing rate or something. b) What return would you take to invest in equity in West Africa? Personally, 21% sounds too low to me because West Africa just seems like malaria, Mugabe, and blood diamonds to me. There’s almost no expected return that would convince me to invest any money there. c) Who knows how debt defaults are played out in West Africa? I know that Vinny will break my legs if I default on my debts I keep incurring by betting on the Mets and I know the process by which corporate defaults are dealt with in the US and it is very uncertain here. d) The wacc seems completely irrelevant in determining how a company should pay back its debts in default.
Hi JDV, Thanks for replying. The issue here is I believe the company might be trying to pull a fast one on him. That’s why I thought it was kind of dodgy that they would mention a WACC rate on a loan payment. I told him exactly what you just mentioned, that it would just be whatever the borrowing rate was agreed (Libor+something) or the market rate, whatever they want to negotiate. I told him to send an email asking them justify the rate and give the breakdown of it. Secondly, the way they said the loan would be paid, its kind of like they are treating it like equity. Discounting it back with WACC, which I found very strange as well. I didn’t know you could do that even during liquidation. P.S. Belated welcome back by the way !
Pretty sure WACC of CONGO > WACC of Rwanda. You can’t just throw a smoothed over WACC on Africa. This is why; http://static02.mediaite.com/geekosystem/uploads/2010/10/true-size-of-africa.jpg?ref=nf
Pretty sure WACC of CONGO > WACC of Rwanda. You can’t just throw a smoothed over WACC on Africa. This is why; http://static02.mediaite.com/geekosystem/uploads/2010/10/true-size-of-africa.jpg?ref=nf
Im with nuppal here. COngo is definitely higher, just read this article for instance, thats gotta lift it about 2 or 3 percent!! http://sify.com/news/croc-causes-plane-to-crash-killing-brit-pilot-and-19-others-news-international-kkwr4fhfhjg.html
^ That and if you read the Economist at all you’ll read that Rwanda is actually a pretty interesting story. Relatively stable politics, decent infrastructure and a leader that the majority of the population likes and elects with not as much controversy surrounding him f X X King with the competition.
Years ago I was sponsoring this little girl in Rwanda named Niyodasaba who was a Hutu or a Tutsi or who the hell knows what but she was 9 years old and someone locked her in a church and burned it down. The goal was that she and my daughter would write each other letters and my daughter could learn about different cultures while I felt good about myself for paying for this little girl’s education and healthcare. Fine lesson in other cultures I got to teach my daughter after that. I would like to get really medieval with the guy who did that and 21% wouldn’t do it for me to invest in Rwanda again.
JoeyDVivre Wrote: ------------------------------------------------------- > Years ago I was sponsoring this little girl in > Rwanda named Niyodasaba who was a Hutu or a Tutsi > or who the hell knows what but she was 9 years old > and someone locked her in a church and burned it > down. The goal was that she and my daughter > would write each other letters and my daughter > could learn about different cultures while I felt > good about myself for paying for this little > girl’s education and healthcare. Fine lesson in > other cultures I got to teach my daughter after > that. I would like to get really medieval with > the guy who did that and 21% wouldn’t do it for me > to invest in Rwanda again. You should lever up his beta and pull financing.
Ahh guys…appreciate the responses…thanks for the input! FYI, I am just talking about the West African region here, which is where the company and business are located. Obviously, there are regions where the WACC must just be WHACK! Maybe somalia, ethiopia, rwanda, congo etc. West Africa seems more stable - Ghana, Nigeria, Benin, Ivory Coast, Cameroon etc (maybe excluding Sierra Leone and Liberia, not sure what the status of those countries are right now). That’s one of the reasons I thought 21% might be high up. But if the consensus says that its normal, then I won’t argue on that. But again, its the wrong application of a rate for the situation I am thinking.
JoeyDVivre Wrote: ------------------------------------------------------- > It’s hard to answer the question without more > details. However: > > a) wacc can be applied to any capital structure > including just debt but you would usually just > call it your average borrowing rate or something. > > b) What return would you take to invest in equity > in West Africa? Personally, 21% sounds too low to > me because West Africa just seems like malaria, > Mugabe, and blood diamonds to me. There’s almost > no expected return that would convince me to > invest any money there. > > c) Who knows how debt defaults are played out in > West Africa? I know that Vinny will break my legs > if I default on my debts I keep incurring by > betting on the Mets and I know the process by > which corporate defaults are dealt with in the US > and it is very uncertain here. > > d) The wacc seems completely irrelevant in > determining how a company should pay back its > debts in default. Few things: 1. The OP’s question is naive and ambiguous - how do you find WACC (whatever that is for a collection of 52 different countries?) - same question like asking what is WACC for Asia or the Americas? 2. Your second point is pretty ignorant and stupid, it doesn’t sound different when some westerns ask me what is the Capital city of Africa. Yes, Africa represents the worst in many respects - poverty and famine, but to assume that the whole continent - and West Africa in particular, is all about malaria and blood diamonds betrays the intelligence you supposedly have; I am African and spent early parts of my career working as a consultant to MNC’s in sub-saharan and west africa, on transaction due diligence on their FDI’s. If there is no expected return that can justify any investment there, how do you explain that Shell, BP, Chevron, Rio Tinto and BHP have made recent investments worth billions of dollars in West Africa? What do you know about Africa the guys running these co.s don’t? It may be a good idea to educate yourself first before giving half baked rumors masquerading as objective piece of advice. 3. The biggest decision and risk for investing in Africa is political risk, which depends from country to country. Currently, for Africa, this is 5/10 - but again there are more democratic countries like Ghana, South Africa, Kenya - and many others. What investors need to do is mitigate this risk, and there are many tools including political risk insurance. Political risk is manageable.
Yo, read my comment again, I don’t invest in West Africa and gajillions of other people don’t and that (apparently) has made the cost of capital 21%. I’m too old to need crap like that in my life. It’s not an insult to Africa; it’s the market’s assessment of the risk there.
Mzungu, I agree the title may have been misleading, but I have mentioned that the WACC for the region of West Africa, not Africa as a whole. That’ll be a very absurd question to actually ask. In fact, I thought 21% was high for West Africa, which seems more stable that the rest of the other regions, and hence my suspicion. But if companies have assigned 21% (or whatever the rate might be), it probably because of some reason, including political risk that you talked about. I had only two specific questions: whether the WACC rate made sense, and whether it was the right application of a rate in this case (WACC on a loan). Thanks
just a note supporting the variability of WACC in Africa… Botswana is consistently in the top 10 mining jurisdictions in the world, placing in between many canadian provinces and US states and ahead of most of the “politically stable” world. Botswana is not in Western Africa, it is in central africa, one of the worst places in the world, yet it pulls in “top 10 best mining jurisdiction awards consistently” meaning its WACC can’t be that high despite its geographical proximity to the politically unstable states of Zimbabwe and the DRC. Western africa is an emerging area with growing political stability (Ivory Coast, Mali, Ghana, Mauritania, Burkina Faso). Their WACCs will likely represent that of Botswana’s rather than the DRC’s within the next decade or so, as major projects are underway and the economies gain some stability. Saying ‘all of africa is bad’ completely ignores the progress a country like S. Africa has made over the past two decades. ignoring the past two decades would mean China and India would still be living in absolute poverty rather than challenging the US for the economic crown of the world, to put that in perspective.
to sum, a WACC of 21% for any of these: Ivory Coast, Mali, Ghana, Mauritania, Burkina Faso, makes sense depending on its industry, and considering the company defaulted, a WACC of 21% for a company that obviously has/had a decent chance of defaulting makes sense.
JoeyDVivre Wrote: ------------------------------------------------------- > Years ago I was sponsoring this little girl in > Rwanda named Niyodasaba who was a Hutu or a Tutsi > or who the hell knows what but she was 9 years old > and someone locked her in a church and burned it > down. I’ll stick with Discovery Channel to educate my daughter about other cultures.
^ Good call.
Matt, thats good info. there. I’ll check up on that. Just to avoid harping on the same topic, I guess 21% can be justified then, but would it be a correct application of the rate on a loan payment? I would assume just the borrowing rate or current market rate would be used. Thanks.