S&P: Nigeria Faces Uphill Task Attracting AMCON 2 Investment

Obinna Chima
with agency report
With non-performing loans (NPLs) stacking up at Nigerian commercial banks, the country is looking to create a second bad loan vehicle, better known as AMCON 2, but the country faces a tough battle to convince private investors to fund it, S&P Global Market Intelligence has reported.

Weak oil prices and exchange rate pressures have restricted borrowers’ ability to service loans, leading to a doubling of the aggregate bank NPL ratio between December 2015 and June 2016, to 11.7% from 5.3%, according to a Dec 13 Fitch Ratings report.
In response, the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDCIC) are eyeing a new “bad bank” to take the NPLs off banks’ books and allow them to lend more to the real economy.

An initial such entity, Asset Management Corporation of Nigeria, or AMCON, was established in 2010 and funded by federal government zero-coupon bonds and the central bank.
AMCON benefits from a full state guarantee of its liabilities.
It played an important role in bringing down then-elevated NPLs, buying 90 per cent of the banking sector’s bad loans by December 2012.

It recovered 56 per cent of the value of all loans acquired from the banks, Fitch said, as well as taking stakes in failed lenders. But it also weighed heavily on Nigeria’s already stretched public finances.

“The existing AMCON financing structure is not sustainable because the bad bank solution has been at a considerable cost to the Nigerian taxpayers,” Oluseyi Ajewole, a financial analyst at Toronto-based logistics firm Damco, said in an interview. “AMCON has been running at a huge loss.”
Now there is increased pressure to take further action on bad loans, which have again reached worryingly high levels.

The fall in oil prices over the last two years, together with militants’ attacks on oil pipelines in the Niger delta, have dented the economy, as has a prolonged dollar liquidity shortage as international investors shy away from lending to local banks.
In September, S&P downgraded Nigeria’s sovereign credit ratings, citing contraction in both the oil and non-oil sectors of the economy.

The CBN and NDIC have now responded by establishing a joint committee to look into setting up a successor bad bank, AMCON 2.
This time, though, the NDIC hopes the entity will be funded and driven by the private sector.

“Known names in the distressed-debt business that may be targeted are Deutsche Bank AG, Morgan Stanley, Goldman Sachs Group Inc. (and) GE Capital,” said Ajewole. Thereafter, local investors would be sought.
These efforts will, if successful, ease the mounting asset-quality problems, Fitch said.
AMCON 2 would likely be a more significant and credit-positive measure than moves by Nigerian authorities to allow banks to accelerate the writing-off of fully reserved NPLs, which came into effect in July.

But locating willing private investors may not be easy at this point. In the current economic environment, growth opportunities for banks are limited, Ajewole said.
Potential investors will need clarity on how likely it is that AMCON 2 will meet their interest payments, how sustainable the entity’s cash flow will be and how quickly it will be able to dispose of the bad loans.

A legal framework strengthening creditor rights would help encourage investors, the analyst said, as would using asset-based securities to offer debt to investors in joint venture partnerships or pooled sales.

The legal framework for corporate restructuring needs to be reinforced, he said.
But the relatively high yields for less risky government debt might be more attractive for investors than the bad bank project, according to Rachel Ziemba, managing director for emerging markets research at financial research firm 4CastRGE.

“I think it might be challenging,” she said. “Investors have choices of Nigerian assets.”
There are also critics who argue the bad banks create a moral hazard problem for Nigerian banks, encouraging them to engage in risky or dubious lending that is then simply passed on to AMCON or AMCON 2.

“The balance of (AMCON) was about N5 trillion or more, and the government budget for this year is about N6 trillion,” Feyi Fawehinmi, a U.K.-based Nigerian finance commentator, told S&P Global Market Intelligence.

Meanwhile, the bad loans continue to stack up. Rating agency Moody’s, in a December 14 report, predicted that the Nigerian banking system’s NPL ratio would reach between 12 per cent and 14 per cent over the next 12 months.
It noted, however, that the banks’ deposit funding bases are stable and have strong capital buffers.

The operating environment is likely to stabilise, Moody’s said, with Nigeria’s real GDP growth set to increase to 2.5 per cent in 2017 and 4 per cent in 2018, after a 1.5 per cent contraction in 2016.