The final transfer of privatised electricity assets to successful bidders in November 2013 marked a key moment in demonstrating that Nigerian banks can provide significant long-term funding to a structurally important sector. The acquisitions were financed primarily through debt, while international investors and banks largely stayed on the sidelines. Indeed, of the more than $3.2bn that was spent to acquire the 14 successor companies to the Power Holding Company of Nigeria and the Egbin power plant, more than $2.8bn was financed through debt.
As loans to Nigerian banks began reaching maturity in 2014, the sector is facing its first great test since the last banking crisis in 2009. Although the loans to the power sector are not sizeable enough to cause a systemic crisis – accounting for around 1.8% of total banking assets and 5.5% of total loans at the start of 2014 and fully collateralised – the way in which banks and their regulator cope with these likely new arrears will reflect the extent of the sector’s sanitisation in the aftermath of the 2009 crisis.
“If growth leads to a loosening of underwriting standards or exposure to new and untested segments, such as mass retail or the newly privatised sectors such as power, then there could be a relapse of bad debt problems,” ratings agency Fitch noted in an August 2013 update on the sector.
Although the federal government originally sought to sell 11 distribution companies (DisCos) and six generating companies (GenCos) as part of its wider privatisation drive, challenges in raising the required funding narrowed the successful sales slightly – to an initial nine DisCos and five GenCos. The Bureau of Public Enterprises reported successful bids of $2.53bn, with $1.26bn bid for the DisCos and $1.27bn for the GenCos.
In a similar process, the government sold 70% of the Egbin power plant to South Korea’s KEPCO for $407.3m. According to estimates by Stanbic IBTC Bank, roughly 70% of the total amount was raised in debt issues – primarily bank debt – while the remainder, funded through equity, was split between 40% as leveraged equity (i.e., debt) and 60% as pure equity.
Hence a total of around 82% of the amount spent on the privatised assets was in the form of debt, while roughly 18% was pure equity. “Many banks took on significant exposure to the power sector amid the general euphoria in 2013, despite the shallow depth of banks’ expertise in electricity,” Solomon Asamoah, deputy CEO and chief investment officer of Africa Finance Corporation (AFC), told OBG.
In addition to the initial financing for privatised assets, banks extended N750bn ($4.56bn) in working capital and funding for additional greenfield power projects, according to estimates by Diamond Bank’s former CEO, Alex Otti, in February 2014. Alongside investment in development finance from AFC, the most active banks were United Bank for Africa (UBA), First Bank, Guaranty Trust Bank, Sterling, Skye, Fidelity, Ecobank and Keystone.
UBA holds the single largest exposure, reporting some $700m in power-sector loans as of the end of 2013, roughly 12% of its loan book for the year, with the intention of extending an additional $2bn by 2017. UBA and its investment bank subsidiary, UBA Capital, were lead advisors on three of the six GenCo privatisations and one DisCo. The bank extended $120m for the Ughelli power plant, backed by Transcorp ( majority-owned by UBA’s major shareholder Tony Elumelu), as well as $122m for Kann Utilities’ acquisition of Abuja Electricity DisCo, among others. Zenith Bank, though slightly less exposed, increased its exposure to the power sector from 1.3% of its loan book in June 2013 to 4.3% of its N1.28trn ($7.8bn) book by December, with the bank indicating openness to greater exposure.
Under the terms of the debt covenants, most of which were concluded in the first half of 2013, banks required collateral from borrowers, most often in property and assets outside the power sector. In addition, in late 2013 the Central Bank of Nigeria (CBN) required that all banks make provisions to insulate themselves from any build-up in repayment arrears on power sector loans. “The power sector loans were collateralised outside the sector,” Niyi Yusuf, the managing director of Accenture Nigeria, told OBG. “Meanwhile, the CBN asked banks to fully provision for these loans since December 2013, given concerns about significant shortfall in power supply by the Transmission Company of Nigeria, combined with low tariffs and delay of the planned review of the Multi-Year Tariff Order,” the government’s methodology for setting electricity prices. The delays in reviewing prices, where rate rises could fund investments in distribution and generation capacity, and gas pipeline infrastructure, prompted banks and the regulator to expect loan repayment delays.
While DisCos typically received moratoriums on debt repayment of 18-24 months, the GenCos received far shorter ones. The first loan repayments were expected in June 2014, with a majority of GenCo loans due for repayment starting in the first half of 2014. “Although power loans to DisCos have 18- to 24-month moratoriums, we are starting to see arrears build up,” Adebayo Adebowale, a credit risk officer at UBA, told OBG. “We expect to see some of these loans fall into difficulty, although banks will have to restructure some rather than foreclose.”
Given the moratorium periods, loans to the power sector have broadly avoided default, though arrears were starting to become visible in the first half of 2014. “By my estimates there cannot be less than N13bn-14bn ($79.3m-85.4m) of arrears in power loans at the moment, although they are not yet classified as non-performing loans,” Kehinde Lawanson, former executive director at First Bank, told OBG in May 2014. The attitude towards such looming defaults on the part of the CBN, under new leadership since June 2014, remained unclear.
Under normal rules, banks are required to provision for 10% of the value of a loan in arrears for 90-180 days, 50% for those in arrears for 180-360 days and 100% for any in arrears for over a year. Though all of the power sector loans are fully backed by collateral – usually real estate and assets outside the power sector – there was significant debate over whether banks would foreclose on these assets. Furthermore, most power sector loan tenures fall between three and five years. “Given the relative newness of privatisation in the power sector, it would be better to have longer tenures of seven to 10 years,” Michael Larbie, CEO of Rand Merchant Bank, told OBG.
The Asset Management Corporation of Nigeria (AMCON), the CBN’s entity responsible for the previous round of bad debt purchases, has already stated it would not intervene in any new round of non-performing loans associated with the power sector, though many expect the CBN would work to avoid a freeze-up in domestic credit conditions if needed. “The CBN will have to extend some forbearance on some of the loans in difficulty,” UBA’s Adebowale told OBG. While the potential arrears build-up is a serious problem, banks’ reticence to lend further to the power sector is another. Although firms that acquired the privatised assets financed their purchases mostly through debt, they will still need significantly more cash both for working capital and for investment funds to expand profitably.
In February 2014 the minister of trade & Investment estimated that some $50bn more will be required by 2017 to expand electricity production. Banks are also constrained by their single-borrower limits, which bar them from lending more than 20% of their shareholder funds to any one borrower (and its affiliated companies). For groups active both in power and in oil and gas, such as Transcorp, this could prove a significant constraint on further leverage.
Campaign to Finance
Firms involved in the sector are thus expected to turn to capital markets, both for equity and bond issues, to fund their future growth. Transcorp, for instance, announced in April 2014 its intention of raising $1bn in new funds – a mix of both debt and equity, in secondary rights issues on the Nigerian Stock Exchange – to fund its power sector ambitions. While this is a realistic option for diversified conglomerates of this kind, firms that are more highly dependent on their power sector assets may face difficulties in raising funds through market instruments, given their lower-than-expected cash flows.
Local investors need significant new funds to meet the government’s stated goals. Yet with international investors largely on the sidelines – or active as technical but not financial partners – companies in the sector will need additional backing from domestic banks in order to weather these short-term teething pains. The CBN, which has been under significant pressure to allow some forbearance for banks that are highly exposed to the reforms taking place in the power sector, has stepped in to provide some support to the sector. In September 2014 it pledged a N213.4bn ($1.3bn) intervention facility, the first tranche of which was transferred to five power firms in early 2015.
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