Analysts mull restructuring, equity conversion?
By Emeka Anaeto, Business Editor
THE Nigerian bourse closed the week bullish, in line with analysts’ expectations. Activity during the week was broadly bullish, as the market closed positive on all the trading sessions of the week with investors taking position in value stocks.
What is remarkable also was the lead taken by banking stocks, ahead of the second quarter 2017 (Q2’17) earnings season. The sector was bloodied previous week in the wake for more bad news on Emerging Market Telecommunications Company (Etisalat, now 9Mobile) where most tier one banks are exposed to over N541 billion.
Reversal of fortune
However, the reversal of fortune occurred so quickly with the sector gains pushing the Nigerian Stock Exchange (NSE) All Share Index (ASI) higher by 2.47 per cent Week-on-Week to 33,261.66 points, driving the Month-to-Date (MtD) return positive to 0.44 per cent and Year-to-Date (YtD) return to 23.77 per cent.
In line with analysts’ prognosis, the banking index (+6.10%) booked the biggest gain, a deviation from last week, when the news of the apex bank taking over the management of Etisalat created apprehension for the shares of the exposed banks, as traders position ahead of first half 2017 dividend declaration by the Tier 1 banks.
Etisalat Nigeria, had last week released a statement on the planned restructuring of its shareholding to accommodate an equity conversion as regards its failure to meet financial obligations to a consortium of Nigerian banks. Earlier last month the parent company had announced on the Abu Dhabi Stock Exchange, that it had transferred its 45 per cent equity stake and 25 per cent preference shares to a security trustee, who will hold the shares on behalf of the lenders and other possible stakeholders in the company who lay claim to its assets.
The Bank loans
In 2013, Etisalat secured a seven-year US$1.2 billion syndicated facility from Nigerian banks (Zenith Bank, Guaranty Trust Bank, Access Bank, United Bank for Africa, First Bank, Fidelity Bank, Stanbic IBTC, FCMB, Union Bank of Nigeria, Ecobank, Keystone Bank, FSDH and Mainstreet Bank) to refinance existing obligations (estimated at US$650 million, representing 54.17% of total facility) and most part of the remaining fund was used to finance network expansion.
Analysts at Cordros Capital, a Lagos based investment house, said they have had discussions with some of the banks involved in the transaction which revealed that US$600million of the facility was secured by assets and pledged shares of the parent company of US$235 million. The analysts stated: “Given that the Tier 1 banks involved in the transaction provided a larger portion of the facility, it is our thought that they have the first lien on the securitized assets.”
They stated further: “Although, Etisalat’s earnings have been under significant pressure in the past few years, our discussions with the banks revealed that it had consistently serviced the loan obligation since inception. “However, following the evident drag in the macro environment in 2016 – significant currency depreciation (which drove sizable jump in FX revaluation losses on its Foreign Currency Liabilities), weakened consumer spending, coupled with the impact of the competitive pricing environment on subscribers growth, Etisalat’s cash flow was significantly pressured.”
The company’s revenue was flat in 2016, while a further impact of FX blotted related costs (roaming cost, rental charges, and network costs) drove a double digit decline in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) went down 20.86 per cent to N33 billion.
According to recent press reports from the mobile telecom company, the company had financed about 50 per cent of the facility to date. In conformity, Stanbic IBTC Bank’s management revealed that Etisalat met its obligation to the bank as at May 2017 , as such, the loan is still classified as performing.
Earlier in the year, the syndicate had suggested a conversion of existing shareholders loan to equity via a capital raise which would still create excess balance if all shareholders take up their rights.
However, reluctance on the part of the shareholders made the company to suggest a restructuring, but the state of the company’s cash flow and current leverage position caused the banks to enforce the Default & Security Enforcement Notice to the UAE’s Emirate Telecommunications Group (the holding company for the Etisalat Nigeria stake).
There are ongoing talks on the possible options to limit the syndicates’ exposure in case Etisalat is unable to meet upcoming obligation which analysts at Cordros say is most likely.
Impact on the banks
In the face of this circumstance the analysts gave their verdict on the impact on the banks and options available for the parties as follows:
Purchase of the toxic asset by the Asset Management Company of Nigeria (AMCON). The CBN and the Nigerian Communication Commission, NCC, have taken over the management of the company just after directing the banks to maintain status quo on the matter.
Further intervention might likely come through AMCON purchase of the asset, but given the current financial position of AMCON, they analysts are expressing reservations on this option.
They however stated: “If AMCON intervenes, the banks will have to take some hair cut, which by our estimate, might range between 10% to 20% of individual banks’ exposure.”
Loan to equity conversion:
The analysts further posited: “This seems like the most likely option, however, it comes with a possible risk. Given the state of the company, a conversion to equity suggests a share of other obligations to network providers, like IHS. Also, the banks will have an option to either; (1) restructure the management team; (2) maintain status quo on operations; or (3) outright sale of the lien assets which is estimated at US$600 million. The last option seems viable, but given the current state of the company, the sale will be at a sizeable discount to the fair value of the assets, as such, a head cut is likely.”
Outright restructuring of the loan:
The analysts noted that this last option has been the best practice in the banking system; however, the option depends on the prospect of the venture.
Consequently, the analysts stated: “If the banks restructure the facility, they will have to make provisions for it in the interim – which buy our estimate, will only be for a limited percent of the exposure given the viability of the venture and the securitization.”
Etisalat Group which owns 40 per cent of the company, UAE SWF Mubadala with 45 per cent and Myacinth (a Nigerian holding company with 15 per cent stake controlled by Hakeem Bello-Osagie, who has resigned as the chairman of Etisalat Nigeria following the crises) are the major shareholders of Etisalat Nigeria.
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