a claw-back clause. AMCON’s exposure to unsecured loans, a minority of assets purchased, was limited to 5% of face value. By the end of 2011, AMCON had accumulated a total notional amount of N4.2trn ($26.46bn) in NPLs, at a cost of N1.76trn ($11.09bn). This amounted to four times more NPLs than banks had disclosed in their regulatory filings, according to CBN data.

BOND EXPOSURE: Combined with the Tier-2 capital injections into eight banks, AMCON had built up a net exposure of N3.6trn ($22.68bn) in three-year bonds held by the CBN and N1.7trn ($10.71bn) in bonds held by banks – three-year bonds guaranteed by the federal government with no coupon, yielding 11.8%. The banking industry’s aggregate NPL ratio declined from 34.4% in November 2010 to 4.95% by the end of 2011. Having brought the net asset value of all banks back to positive territory and setting a September 2011 deadline for recapitalisation, AMCON supported private investors’ recapitalisation of intervened banks, including the acquisition of five lenders by existing Nigerian banks and the injection of new shareholder funds in two others. This raft of acquisitions brought the number of licensed banks down from 24 prior to the crisis to 20 afterwards. First City Monument Bank (FCMB) acquired FinBank in July 2011, driving 56% growth in its assets to N881bn ($5.55bn) by the first quarter of 2012; Sterling Bank acquired Equatorial Trust Bank in August 2011, yielding combined assets of N504.05bn ($3.18bn) by the end of 2011; Ecobank bought Oceanic Bank in October 2011, creating the sixth-largest lender with assets of N1.32trn ($8.32bn); while Access Bank bought Intercontinental in January 2012, creating Nigeria’s fourth-largest bank with N1.64trn ($10.33bn) in assets.

Union Bank was recapitalised by a consortium of new investors led by private equity firm African Capital Alliance, which invested $750m in the bank for a 65% stake in March 2011. Existing shareholders in Wema and Unity Banks were allowed to recapitalise their institutions on a standalone basis. In early 2013, AMCON still held stakes of 4% each in Access Bank and FCMB, With a resolution of the 2009 banking crisis still ongoing, the Asset Management Corporation of Nigeria (AMCON) has restructured its bonds in circulation to banks, including the Central Bank of Nigeria (CBN). By paying down its dues and converting bonds held by the CBN into 10-year-maturity paper, AMCON has extended the window to recuperate eligible non-performing loans (NPLs). Having successfully collected the low-hanging fruit among the NPLs, the priority will be to dispose of AMCON’s stakes in the three banks it took over while continuing debt collection efforts. AMCON is also set to actively manage its asset holdings through market making in the securities lending market. While the 2009 banking crisis was undoubtedly severe, timely intervention by regulators quickly stabilised the situation. The key will be to wind down state intervention in the sector as banks diversify their growth drivers.

AMCON RESCUE: Following the CBN’s N620bn ($3.91bn) injection in mid-2009 of unsecured, unsubordinated debt, roughly equivalent to Tier-2 capital, the AMCON Act in July 2010 established the “bad bank” to acquire eligible bank assets and start the process of debt collection. AMCON purchased NPLs at varying haircuts (the percentage subtracted from the market value of an asset that is being used as collateral), paying for them by returning AMCON bonds to banks in exchange. The bulk of NPLs, N2.46trn ($15.50bn) at face value, were acquired by December 2010 at a cost of N866.2bn ($5.46bn). These were mainly margin loans to stockbrokers, acquired at a 60% premium over prices in the third quarter of 2010. In April 2011 a further N675.2bn ($4.25bn) in non-margin NPLs was acquired at a cost of N377.8bn ($2.38bn), while in December 2011 AMCON completed a third and final round of purchases of N885.3bn ($5.58bn) in assets, which included repriced assets acquired during the first round in December 2010 and “systemically important loans” to high-net-worth individuals that had defaulted, at a cost of N515.2bn ($3.25bn). Loans backed by collateral were purchased at valuations made by the banks, albeit with 13% in Sterling Bank, 17% in Ecobank and 25% in Union Bank. Three failed banks – AfriBank, SpringBank and Bank PHB – were taken over by the Nigerian Deposit Insurance Corporation (NDIC) in 2011, restructured as temporarily publicly held banks – Mainstreet, Enterprise and Keystone Banks, respectively – and transferred to AMCON for resale to strategic investors.

AMCON RESOLUTION: Although AMCON’s current exposure represents 11% of GDP, a resolution of the banking crisis is not expected to cost taxpayers, as the government’s guarantee on AMCON bonds is not meant to be exercised. The CBN established the Resolution Cost Fund (RCF), a sinking fund, in 2011, funded by annual contributions of N50bn ($315m) from the CBN for 10 years and a 0.5% levy on all banking assets annually (up from an initial 0.3%, starting in 2013), yielding more than N100bn ($630m) a year on bank assets worth over N20trn ($126bn). This levy on AMCON is expected to trim return on equity for the top six banks by 200-300 basis points in 2013, according to frontier market investment bank Exotix. Over the full course of the resolution, the sinking fund is expected to cover 65% of AMCON’s cash flow, while NPL recoveries should cover 14%, sale of stakes in intervened banks an additional 3%, reinvested income some 16% and the sale of the three AMCON-held banks some 2%. In May 2013 AMCON announced a restructuring of its existing three-year bonds, the first of which were to mature in December 2013. “We will be restructuring the remaining N3.6trn ($22.68bn) in bonds held by the CBN in 2013 in 10-year bonds,” Mustafa Chike-Obi, AMCON’s managing director, told OBG in June 2013. “Since these will continue to be held by the CBN to maturity there is no fiscal implication for the state. The Debt Management Office is particularly happy with this.” AMCON intends on fully paying down the N1.7trn ($10.71bn) in bonds held by banks and pension funds in 2013 and an additional N400bn ($2.52bn) in 2014, financed mainly through funds recovered on acquired NPLs and a minor contribution from the sinking fund. This 35% reduction in its bond liabilities effectively extends AMCON’s window for debt collection whilst also reducing its impact on bank treasury positions. AMCON’s restructuring of its liabilities was widely welcomed, with Moody’s Investor Services reaffirming the country’s “Ba3” credit rating in June 2013, saying that “the move eliminates the government’s indirect exposure to private creditors.”

EARLY LOSSES: While AMCON reported a loss of N2.37trn ($14.93bn) in its first financial results disclosure in December 2012, this only represented the marking to market (a measure of the fair value of accounts that can change over time, such as assets and liabilities, to provide a realistic appraisal of the current financial situation of an institution or company) of its acquired NPL holdings rather than new losses. The banking sector as a whole swung back to marked profitability in 2012, achieving record year-on-year growth of 166.7%.

While NPL recoveries have been significant in the two years to mid-2013, with some N85bn ($535.5m) in assets recovered by first-quarter 2013, AMCON is conscious that the first NPL recoveries represent the low-hanging fruit. Having restructured the 460 largest loans – accounting for 80% of AMCON’s NPL portfolio value – AMCON converted part of the debt into equity and has sought down payments of 10-20% of outstanding debt, according to the IMF. Yet controversy surrounding the status of a N1.2bn ($7.56m) outstanding debt owed by Ecobank’s chairman, Kolapo Lawson, to AMCON in July 2013 reflected the ongoing nature of NPL restructuring. Despite concerns over potential moral hazard created by AMCON’s takeover of banks’ non-performing assets, AMCON has been particularly proactive in recovering NPLs by publishing details of defaulting debtors. “While recoveries on NPLs will account for most of the value of the AMCON bonds paid down in 2013, we expect the 0.5% levy on commercial banks will account for 66% of the total value over the course of the full resolution,” AMCON’s Chike-Obi told OBG.

In total, AMCON has acquired 12,000 individual NPLs, according to the IMF, with average maturities of five years. In 2013, AMCON claims to have restructured some 40% of the NPLs on its books, of which around half had returned to performing status by June 2013. While recoveries stood at 112% of the eligible banking assets’ purchase prices, AMCON’s target over the full course of resolution is for the recovery of 80% of NPLs’ purchase price. In the meantime, AMCON will actively manage its holdings, particularly shareholdings in Nigerian banks, for instance becoming the largest licensed securities lender (alongside Stanbic IBTC, UBA, First Bank and Capital Bancorp) once securities short-selling starts in the second half of 2013. “If they want to short-sell and want to borrow the assets, I can lend them the securities,” AMCON’s Chike-Obi told OBG.

BANK SALE: With interest on the part of both foreign investors and mid-tier domestic banks in the three sanitised banks held by AMCON, the first and smallest bank, Enterprise Bank, was put up for sale in June 2013. Having injected some N318.6bn ($2.01bn) into Afribank (Mainstreet), N296.9bn ($1.87bn) into Bank PHB ( Keystone) and N121.4bn ($764.82m) into Spring Bank (Enterprise) – worth a combined N736.9bn ($4.64bn) – AMCON expects to gross some N341bn ($2.15bn) in the sale of the three banks. As of October 2013, AMCON was seeking buyers for Enterprise, and expected all of the sales to be completed by September 2014.

After rebranding in the first quarter of 2012, all three banks achieved a return to profit. In unaudited results released in the second quarter of 2013, Mainstreet posted post-tax profits of N18bn ($113.4m) in 2012, while Enterprise and Keystone reported N7bn ($44.1m) and N5bn ($31.5m), respectively. This was a stark turnaround from the three banks’ combined loss of N21.82bn ($137.47m) in 2011. While AMCON contracted Citibank and Renaissance Capital to valuate the three banks – Mainstreet on the one hand, and Keystone and Enterprise on the other – AMCON retained Citibank and local investment bank Vetiva Capital as the financial and legal advisers on Enterprise’s sale in July 2013. With 220 branches, Mainstreet is expected to fetch the highest price of the three, although Keystone’s roughly 200 branches also make it a potentially appealing target.

While South Africa’s FirstRand Bank has publicly shown interest in the two larger banks, it ruled out acquiring Enterprise Bank in the second quarter of 2013. FirstRand’s negotiations to acquire Sterling Bank had already fallen through in 2012 due to contrasting valuations for the lender. AMCON claims to have received some 20 expressions of interest in the smallest of the three banks. With Fidelity having shown interest in Mainstreet when it was still AfriBank in 2011 and Pakistan’s Habib Bank close to a deal for Keystone when it was still Bank PHB, analysts expect significant interest from both local and foreign investors.

“We will sell our stakes in the three bridge banks, starting with the smallest, in the coming year,” AMCON’s Chike-Obi told OBG. “Our two key criteria are the best price and the preservation of employment at the lenders. We would be willing to accept a lower bid to meet this second goal.” While this may rule out acquisitions by existing banks, given the likely rationalisation between two merged banks, AMCON is eager to encourage competitive bidding to ensure the best possible price. In addition, acquiring one of the banks may be an appealing option for some local players. Pressures on Nigeria’s midsized banks as they seek to achieve scale to compete against the largest-tier banks in the market may prompt them to seek inorganic sources of growth.

DEADLINE REVISION: AMCON’s role as a temporary institution means it will eventually need to wrap up. While the IMF has called for AMCON to be resolved by 2017 in its Article IV consultation on Nigeria in April 2013 in order to avoid moral hazard for banks creating risk assets, it seems likely that AMCON’s funding plan will be followed. AMCON’s plan to wind the institution down completely after 10 years of resolution has been widely welcomed by the banking community, whose liquidity is set to grow on the back of AMCON bond payments in 2013, as well as independent ratings agencies.