Monday, 1 April 2013

Nigeria asks investors to throw good money into its bad bank

Two years on from the start of its cleanup operation for Nigeria’s banking crisis, the Asset Management Corporation of Nigeria (AMCON) – the country’s ‘bad bank’ – is courting foreign investors.

Since its establishment in 2010, Amcon has issued five series of zero-coupon bonds with a combined face value of just under N5.7tn – that’s almost $36bn – which it has used to buy non-performing loans and recapitalise struggling banks. The first series – face value N1.7tn ($11bn) – matures in December 2013, and with African sovereign debt in high demand, Amcon is considering turning to international markets for refinancing.

To this end, Amcon has been on a non-deal roadshow, presenting itself to investors in the US and London. So, who would want to throw good money into the bad bank, one might ask.

Nigeria’s 2008/09 banking crisis was severe, with several major institutions facing failure as the stock market plummeted and risky lending backfired. The Central Bank of Nigeria provided a $4bn rescue to prevent a systemic collapse, with Amcon subsequently established to mop up bad debt. The $490m worth of bank assets bought in December 2012 is, an Amcon spokesperson said in London, probably the last of its NPL purchases.

Recovering the value of the loans will continue for years to come though, and concerns about Amcon’s success in the pursuit were raised in December when it revealed surprisingly large losses of N2.37tn ($15bn) for the year ending December 2011, having published accounts for the first time. This pulled Amcon’s net asset value down to minus N2.36tn. Further losses of N707bn were suffered in 2012.

If there are more surprises to come, some prospective bondholders might worry about getting paid. However, Amcon has stressed the 2011 loss was a one-off arising from a mark-to-market revaluation of investments. Furthermore, its bonds come with a state guarantee, which they describe as “irrevocable”.

Given the unfulfilled demand for sub-Saharan African hard-currency sovereign debt – as evidenced by the recent rush of issuance from the likes of Zambia, Tanzania and Angola – new Amcon securities might prove attractive.

“Amcon debt is de facto sovereign debt”, says Ike Nwobodo, director of emerging markets debt and equity at Exotix. Albeit, he says, carrying a better yield.

“Amcon was incorporated because of the central bank. It fought tooth and nail to incorporate it, and I cannot see how it is vaguely possible that in the event Amcon struggles the central bank doesn’t step in”, he said. Given current market conditions Nwobodo says Amcon can afford to be less generous as regards yield spreads over government bonds, and believes a hard currency issuance is likely.

Amcon themselves are keeping cards close to their chest as regards the exact nature of the issuance, with Amcon’s managing director Mustafa Chike-Obi saying they were still “exploring our options”.
Daniel Broby, a fixed income specialist at Silk Invest, has reservations. “There is not a liquid aftermarket” in Amcon bonds, he says, making it hard for investors to sell the securities should they wish to. “From Amcon’s perspective, their priority should be to facilitate a better secondary market”.
He also has concerns about the pace of Amcon’s recovery operation. Amcon said around 30 per cent of its 12,500 loans have been restructured so far, and that it was targeting a further 35 per cent of what remains this year. It hopes to sell off the three banks it currently fully owns – Mainstreet, Enterprise and Keystone Bank – during 2014.

“They are going to take some time to sort out these debts”, Broby said, “They haven’t disposed of as much of it by now as everyone had hoped, and as a result, they have a funding gap … That’s what’s gone wrong, they haven’t got rid of the asset side that quickly.”

A hard-currency bond issue would, Broby says, create a risky mismatch between Amcons Naira assets and its new liabilities. “That would by definition be bad banking”, he says, “and a bad bank is supposed to be about good banking.”

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