The banks’ principal exposure to the energy sector has hit an all-time high of $12 billion. ADEOLA YUSUF examines how recovery of larger percentage of these debts have become a tough task for the lenders.
Banks in Nigeria have modified the tactics for energy sector’s debts recovery as their principal exposures to the sector exceeded all-time high of $12 billion. Aside from the $500 million huge sum in principal exposure to the downstream sub-sector, banks have sunk over $11.6 billion into portfolios by local and international investors, who participated in the string of acquisitions in the oil and gas sector between 2010 and 2015 as well as the takeover of assets created from the defunct Power Holding Company of Nigeria (PHCN). The investors staked about $2.929 billion to acquire the assets of the PHCN under the federal government’s privatisation programme.
“The banks resorted to collateral takeover, particularly for exposures in the downstream sub-sector while the CoR is due largely for the upstream,” a management staff of one of the tier -1 banks told this newspaper.
Head, Energy research for EcoBank Plc, Dolapo Oni had earlier confirmed that banks had begun takeover of assets including tank farms, filling stations , exotic cars and other landed properties used as collateral for loans in downstream sector. “This is however, tough for banks because few investors who have shown interest are under-valuing the assets while many who have the financial muscles are afraid to come for fear of being tailed by the anti-graft agencies,” he said.
Adjudging the success rate of tactic deployed to recover these huge sums – trapped in the sector, as largely unsuccessful, the lenders checks by this newspaper showed, have now factored fresh provisions into 2.5 per cent cost of risk (CoR). This will be run side-by-side with the collateral take over for parts of the huge debts that are going bad.
Threat to lenders
The situation in the oil market has put the operations of some oil firms into jeopardy and remains a threat to the huge sums that had been lent to the sector by banks.
For instance, United Kingdom-listed, Africa-focused Afren Plc has gone into administration. According to Afren documents, Nigerian banks have at least $185 million principal exposure to Afren. Zenith has $100 million to Oil Mining Lease (OML26), $5 million to Ebok; Access Bank has $50 million to Okwok/OML113 (Aje), $5 million to Ebok; and Stanbic has $25 million to Ebok. On the back of this, analysts at Renaissance Capital Limited (RenCap) viewed the banks’ exposures “to Afren cautiously as the administrative proceedings take shape.
“Furthermore, we think it is conservative to assume that oil field disposals following the sharp and elongated decline in oil prices may be protracted. Ideally, we would like to see, at the barest minimum, the banks classifying their exposures to Ebok, while raising collective impairments on other exposures.
That said, we note the following: Stanbic has been proactive, classifying its Ebok exposure as an NPL. It provided at least 30 per cent ($8 million) for it in first quarter 2015. Like Stanbic, other lenders have also factored in additional provisions required into the banks’ 2.5 per cent cost of risk (CoR) guidance. Zenith bank’s management, for instance, has classified its $5 million exposure to Afren and made 100 per cent provision. According to a document of RenCap sighted by this newspaper last weekend, “the $100 million loan to OML26 has not been classified or provided for.”
Access Bank was expected, on the basis of this, to write off its $5 million exposure to Ebok. “If Zenith and Access fully provide for their gross Afren exposures (Ebok and others inclusive), this would imply a doubling of our full year estimated CoR for Zenith to 2.2 per cent, from one per cent, and raises Access’s by 90 basis points to 2.4 per cent, from 1.5 per cent, reducing full year estimated profit before tax by 15 per cent and 21 per cent, respectively,” the RenCap’s report entitled: “Nigerian banks- Afren: The good, the bad and the ugly,” stared.
To CBN, it’s no qualms
The Central Bank of Nigeria (CBN) had earlier stated in a circular on its website said that where exposure to the oil and gas sector (as defined by the International Standard Industrial Classification of Economic Sectors as issued by the CBN), was in excess of 20 per cent of total credit facilities of a bank, the risk weight of the entire portfolio in such facilities would attract a risk weight of 125 per cent for the purpose of capital adequacy computation. But the implementation of the policy has since been deferred to ensure that the ongoing implementation of the Basel II/III capital adequacy framework is not dislocated.
The full year results of some of the banks showed that a significant fraction of their loan books went to both oil and gas and power sector lending, of which most of the commitments were to the upstream oil and gas operators. For instance, United Bank for Africa Plc’s audited results for 2014 showed that while the bank gave out N170.903 billion to the oil and gas sector in the year, higher than the N154.549 billion in 2013, its lending to the power sector also climbed to N83.601 billion in 2014, from N60.970 billion the previous year.
The First City Monument Bank’s full year results for 2014 available on the lender’s website revealed that while N149 billion loans was given by the bank to the oil and gas sector, higher than the N104 billion it did in 2013, its lending to the power and energy sector in the year was N25 billion, lower than N27 billion recorded in 2013. Checks also showed that while Fidelity Bank Plc granted a total of N135 billion loans to the oil and gas sector, lending to the power sector gulped N58 billion in the bank’s loan book.
Similarly, a breakdown of Skye Bank Plc’s lending to the sectors showed that while it lent N19.358 billion to the power sector in 2014, oil and gas upstream –N120.678 billion, oil and gas engineer – N79.456 billion and oil and gas downstream – N21.304 billion.
But financial market analysts had expressed concern about Skye Bank’s $100 million loan to Atlantic Energy. In the same vein, Sterling Bank full year results for 2014 showed that while the bank increased its lending to the oil and gas sector to N131.583 billion last year, from N99.733 billion the previous year, the bank committed N13.743 billion as loans to the power sector.
Also, FBN Holdings Plc’s results reflected a total of N853 billion to the oil and gas sector, while Union Bank Plc granted a total of N93.5 billion and N23 billion to the oil and gas and power sectors respectively. Similarly, Diamond Bank gave out a total of N198 billion and N50.8 billion to the oil and gas and power sectors respectively.
Role played by oil price
The total exposure of the banking system in these asset acquisitions between 2010 and 2015 runs into multi-billion dollars, according to findings and the slump in oil prices has weakened the capacity of the operators to service these debts.
Though the value of the acquisitions in the oil and gas sector was worth about $8.717 billion, Wood Mackenzie estimated the financial involvement of indigenous companies at $7.5 billion.
Wood Mackenzie said in its latest report that over the last five years, the growth of indigenous companies has been underpinned by the acquisition of assets from the International Oil Companies (IOCs).
Acquisition as bait
Shell Petroleum Development Company (SPDC) in 2010 opened the floodgates of assets sale by the IOCs when it announced the transfer of its 30 per cent interest in Oil Mining Leases (OMLs) 4, 38 and 41 to Seplat Petroleum Development Company.
Total with 10 per cent and Eni with five per cent subsequently sold their stakes in the three leases to Seplat, thus raising the operator’s equity to 45 per cent, while NNPC retained 55 per cent, which it later transferred to its producing arm, the Nigerian Petroleum Development Company (NPDC).
In 2011, Neconde Energy paid $585 million to Shell, Total and Eni to acquire their 45 per cent stake in OML. Shoreline Energy Resources paid $850 million to Shell and its partners for their 45 per cent stake in OML 30; Eland Oil paid $154 million for Shell, Total and Eni’s 45 per cent stake in OML 40; ND Western paid $600 million for OML 34; while First Hydrocarbon Nigeria, partly owned by Afren paid $98 million to acquire Shell’s 30 per cent interest in OML 26.
Also First E & P paid $300 million to Shell and partners for 45 per cent stake in OML 71 and 72. Under the latest divestment by Shell, Total and Agip, Erotron Consortium paid $1.2 billion for 45 per cent stake in OML 18; Pan Ocean paid $900 million for OML 24; while Creststar Consortium paid initial deposit of $100 million of the $500 million bid price for OML 25 before the NNPC came forward to exercise its right of first refusal, an action being challenged in the court by the Canadian firm-backed consortium.
The Aiteo-led consortium paid $2.562 billion to Shell, Total and Agip for OML 29 and the Nembe Creek Trunkline. Chevron, which has 40 per cent stake in the joint venture with the NNPC is not left out in the string of divestments by the IOCs as it also sold its 40 per cent stake in OML 83 and 85 to First E & P for $68 million.
The company also sold its 40 per cent stake in OMLs 52, 53 and 55 to Seplat Petroleum; Belemaoil and Amni Petroleum. However, the bid value for OMLs 52 and 55 was not made public but the entire transaction was said to be worth about $900 million. Seplat paid $259.4 million for OML 53 and an additional $132 million to acquire a 22.5 per cent stake in OML 55 from Belemaoil while Amni acquired OML 52.
Brittania-U Nigeria Limited had also paid initial deposit of $250 million, which was raised by some Nigerian banks for these three assets but Chevron is yet to refund the money, as the acquisition is currently the subject of litigation.
Like oil like power In the power sector, over $2.6 billion was staked in the acquisition of the assets that once belonged to PHCN by the private investors.
Before the Taleveras Group paid $260.05 million for Afam Power Station and North West Power Consortium emerged preferred bidder for Kaduna Electricity Distribution Company based on reduction of Average Technical Losses, the private investors had raised a total of $2.238 billion to pay for 10 out of 11 distribution companies and five out of seven generation companies.
Taleveras Group later paid $260.05 million for Afam; while CMEC/Euafric paid $201 million for Sapele to bring the total figure financed by the banks to $2.699 billion.
For the distribution companies, 4Power Consortium paid $124 million for Port Harcourt Electricity Distribution Company; while Integrated Energy Distribution and Marketing Company paid $169 million and $59 million for Ibadan Disco and Yola Disco, respectively.
Interstate Electrics paid $126 million for Enugu Disco; KANN Consortium paid $164 million for Abuja Disco; KEPCO/NEDC Consortium paid $134.75 million for Ikeja Disco; Sahelian Power SPV Limited paid $137 million for Kano Disco. Others include Vigeo Holdings ($129.5 million) for Benin Disco; West Power and Gas ($135 million) for Eko Disco; and Aura Energy ($81.8 million) for Jos Disco.
For the distribution companies, Transcorp paid $300 million for Ughelli Power Station; Amperion paid $132 million for Geregu Power Station; while CMEC/Euafric paid $201 million for Sapele Power Station.
Mainstream Energy Solutions Limited paid $257 million for Kainji/Jebba; North-South Power Company Limited paid $111.654 million for Shiroro; KEPCO/NEDC paid $407 million for Egbin Power Station. Nigerian banks accounted for the funding of these transactions, with UBA Plc alone, for instance, was responsible for $82 million used for the acquisition of Shiroro.
The banks play vital role in Nigeria’s economy, government should therefore, come to their aid in recovery of their loans in the energy sector.
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