Oil business be it distribution, trading or exploration is capital intensive that requires enhanced technical know -how and optimal efficiency in management. Without tactical and strategic planning and implementation, it becomes quite easy to go into debts. The problem of debts that was accumulated by Ifeanyi Ubah and its Capital Oil is an indicative of a management lapses that can be corrected when the parties involved sit down, sort things out and work together. With company’s reform, pragmatic orientation and sound management the financial climate will improve. But before that debt re-negotiation and restructure are the ways forward for Capital Oil and Asset Management Corporation (AMCON).
It has been in the news for a while the struggle between CEO of Capital Oil, Ifeanyi Ubah and Nigeria’s Asset Management Corporation (AMCON) as it endeavored to forcefully squeeze out its debt from Capital Oil. The Asset Management Corporation (AMCON) was setup by Nigerian government to buy back bad loans from the previously collapsed banks and to rejuvenate struggling banks with infusion of new capital. AMCON was also empowered with the responsibility of getting those defaulted companies that took out the loans from the insolvent banks to pay back their debts.
The problem here is that as AMCON moves in one direction, Capital Oil was moving in the opposite direction. With its clout the government run entity has flexed its muscle and Ubah has been temporarily arrested and was later released. But that has not produced the money that Ubah’s indebted Capital Oil Company owned. Therefore it is appearing that AMCON effort is not yielding any reasonable and tangible results. Therefore AMCON should be open to a brand new and credible alternative.
AMCON would have embarked on peaceful resolution with Capital Oil instead of restoring to bullying tactics and public humiliation. After all, Capital Oil is not the only company that has outstanding debts with the banks. AMCON could have achieve more by leveraging the instrumentality of its financial capacity and capability to negotiate with Capital Oil by sitting down with Ubah’s Capital Oil and devise ways to settle the debt. The stipulated option would have ally and orient their perspectives and bring into sink of a common purpose and affirmative result.
AMCON's Mr. Mustafa Chike-obi pic:proshare
It was reported in the news that an Abuja Federal High Court has ruled for AMCON to withdraw from the occupation of Capital Oil facility but AMCON declined, preferably waiting on Federal Appeal Court to give its own ruling. According to Managing Director and Chief Executive Officer of the Asset Management Corporation of Nigeria, Mr. Mustafa Chike-obi:
"The judge made a surprising ruling which we have either appealed or we are going to appeal. He basically said we should go and talk to the guy (Ifeanyi Uba) and we have been talking to him for two years. He owes us for two years - N53 billion and interest has accumulated to N12 billion - and he hasn’t paid us a kobo and so I don’t know how much talk the judge wants us to do."
This is an enormous debt and AMCON should exercise its prerogative to get the taxpayers money back but Ubah’s vision and prospect for Capital Oil must be respected, for he built the company and was able to guide it successfully before the problems began to manifest in the deleverage of debts. It is impossible to run a big business without accumulation of the debts but the key point is to manage the debt successfully with limited risk by not given it the room to overrun the business entity. This implies that both parties should set out for productive talks that will be supervised by the court. Occupying the company facility and premise will not bring out the money in question but a comprehensive and fundamental negotiation rooted on court proceeding and backing can be more productive.
The poor climate of debt management in Nigeria’s economy is not peculiar to Capital Oil but has permeated the country’s economic and financial landscape. Even the government of Nigeria was having a problem in managing its debts until Dr. Ngozi Okonjo-Iweala stepped in and reorganizes the country’s financial sheet. Therefore it is reasonable and logical to create a pathway for country’s business entities to be enlightened on how to manage their debts through the filing and utilization of bankruptcy rules and regulations. The rules of debt management for companies have not be fully elucidated, elaborated and appreciated by ministries of Justice and Finance. The Nigerian government has not been a capable hand in the protection of public shareholders when such problems of debt, liquidity and bankruptcy arises.
The closing down and locking the gates of Capital Oil will not do the trick for AMCON. To continue with that is a illogical decision without any positive ramification. When door is closed that means that regular people that worked for Capital Oil will lose their jobs. And with the problem of high unemployment in Nigeria, the last thing government can do is to encourage and contribute to the status quo.
The key here is not to allow companies and business executives not to pay back their loans but to find ways by fabricating pathways that will enable such companies to restructure its assets by going through bankruptcy rules and regulations. Take America for example, when companies become highly indebted they can file for bankruptcy which is called “Bankruptcy Chapter 13’:
“Chapter 13 of the United States Bankruptcy Code, codified under Title 11 of the United States Code, governs a form of bankruptcy in the United States that allows individuals to undergo a financial reorganization supervised by a federal bankruptcy court. The goal of Chapter 13 is to enable income-receiving debtors debtor rehabilitation provided they fulfill a court-approved plan. This is in contrast to the goals of Chapter 7, which offers immediate and complete relief of many oppressive debts. It is a form of debt consolidation.”(Wikipedia)
Even AMCON is having problem with its balance sheet, Bloomberg news reported that: "The Asset Management Corp. of Nigeria, set up by the West African nation to buy bad debts from banks, said it spent 5.6 trillion naira ($35.5 billion) in last year to acquire non-performing loans. Amcon, as the company is known, bought loans worth 4 trillion naira “with the acquisition costs at more than twice the initial estimates” accounting for the remaining expenditure, Chief Executive OfficerMustafa Chike-Obi told reporters today in Lagos, the commercial capital. It made a net loss of 2.43 trillion naira, while total assets amounted to 3.34 trillion naira.”
The point here is to come into an understanding with the parties that AMCON is working to extract the defaulted loans. It is doable by working with them legalistically and creating a strategic pathway for long term collection of the payment on the bad debts via negotiation by using the instruments of bankruptcy and other financial tools as leverage. Even the assets of the corporation can be swapped by negotiation not by making public scene. AMCON in this case can be allocated some shares in the corporation with time duration under the supervision of a court. AMCON should subscribe to a more civilized and enlightened methodology of collecting debt payment rather than resort to street fight with debtors.
Two major financial and banking institutions - Citibank consortium – and Renaissance Capital consortium have been appointed by Asset Management Corporation of Nigeria (AMCON) to appraise the value of three banks it nationalised last year because of bad loans and poor management, before they go to the market for investors’ acquisition.
Asset Management Corporation of Nigeria (AMCON) was founded 19th July 2010 and was signed into law by President of the Federal Republic of Nigeria “to be a key stabilizing and re-vitalizing tool established to revive the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy."
Eight banks suffered from a major collapse due to bad debts and poor management and were bailed out with $4 billion from Central Bank of Nigeria (CBN), while AMCON was set up to recapitalize those rescued banks.
Reuters reported that "Nigeria nationalised three lenders last year after they failed to find new investors before a recapitalisation deadline and changed their names to Mainstreet Bank from Afribank; Enterprise Bank from Spring Bank and Keystone Bank from Bank."
"Chike-Obi told Reuters last month AMCON may list the three nationalised lenders instead of selling them to rivals, as it seeks to determine fair value for the banks. Previously, AMCON said that more than 20 firms - banks and private equity investors - had expressed interest in acquiring the nationalised lenders, but AMCON is keen to have them valued before starting any negotiations," reuters further reported.
Mustapha Chike-Obi, Chief Executive Officer/ Managing Director AMCON confirmed that it gave between three and six months for Citi and RenCap to finalise their evaluation.
Nigerian Taxpayers to buy $14.6 Billion of Toxic Debt
Taxpayers of Nigeria will be exposed to toxic debts of the past rescued banks and the Nigeria’s Asset Management Corporation (AMCON) is expected to buy $14.6 billion of bad debt to recapitalize the rescued banks. The Asset Management Corporation is a state-owned entity that was set up to handle and accomplish the transaction.
The burden on the backs of the Nigerian taxpayers can be backbreaking, the resources that would have been utilized to ameliorate living standard are being diverted to salvage the banking sector. Almost 70 percent of Nigerians are mired in poverty surviving with less than two dollars a day. The country’s crumbling infrastructures needed rebuilding and makeover. But rescuing and recapitalization of the failed banks probably have the zenith priority.
Without doubt Nigerian structural imbalances especially in the areas of banking and finance must be rectified but the burden of the banks bailout and recapitalization must be equally distributed. The responsible parties and culprits that caused the banking failures must also face the music and taxpayers must be rewarded with transparency and probity.
“The state-owned Asset Management Corp. of Nigeria, or Amcon, will value loans backed by shares in listed companies at about 60 percent of the 60-day average price to Nov. 15,” while the unsecured loans will be estimated at a quantify valued of 5 percent of the principal and original value according to Central Bank of Nigeria (CBN).
“Central bank Governor Lamido Sanusi said on July 1 that Amcon would clear about $10 billion of toxic debts by year-end at a cost of “roughly” $5 billion. Much of the bad debt stems from loans to speculators in the local stock market and operators in the oil and gas industry. The purchases aim to revive lending by the banking industry. Nigeria, Africa’s most populous country and biggest oil producer, last year fired the chief executive officers of eight lenders and bailed out the industry with $4.1 billion to avoid a collapse of the industry. The Senate approved the appointment of board members for Amcom on Nov. 3.”
The shares of the toxic banks debts purchase will be “assume” by Asset Management Corp. of Nigeria (Amcon). These assets will be retained by Amcon for at least two years before the shares will be trade in an open market. The point must be made that these banks were infused earlier with almost $4 billion for their rescued while the managing directors that mismanaged banks and shielded their debts from the book were dismissed by Central bank Governor Sanusi Lamido.
Monetizing debt and effects of inflation
The government intervention through AMCON in the purchase of the toxic debts enable those banks to be replenish with funds to further and enable financial transactions. Money for this bailout which is to increase the money supply does not fall from the sky. The Central bank of Nigeria (CBN) has to print more money to purchase the bad debts packaged in form of stocks and assets. In this situation a whopping $14.6 billion will be injected into the banks’ bloodline.
Many of African countries have GDP smaller than injected fund and Nigerian economy is not a methodical and disciplined run economy. The injection of $14.6 billion poses the danger of triggering higher inflation. Already the Nigerian Federal Reserve Bank appears to be floundering in the task and control of inflationary trends. CBN at the end of 2009 promised to hold down inflation below 9 percent but at the end of third quarter of 2010 inflation was standing at 13.6 percent. By September inflation fell to 13.4 percent but it is not likely to slow down as the application of monetary policy wanes. This is not to suggest that Sansui’s CBN is losing the battle on inflation but there is so much the monetary policy can do.
It does make sense to regulate on the frequency of the fund infusion in the market. A massive in flow of fund may do damage to the monetary base and increase inflation. Nigeria does not need market disruption and stress from increasing inflation. The increasing flow of money into the financial market can allow the ugly head of inflation to surface. AMCON and CBN have the expertise to deal with that therefore we will not have sleepless nights on that.
The troubling trend
The Nigerian taxpayers who are the stakeholders in this transaction must be properly informed on the dangers of the investing of 2.2 trillion naira ($14.6 billion) on bad debts of rescued commercial banks. These commercial banks were recapitalized with $4 billion in the past and now again this gigantic sum of money is being sink into the banks.
Although AMCON, the state-owned company underwriting the transaction has pledged to be transparent with the holdings until the shares are traded. The point is that there is no guarantee that taxpayers will have appreciative returns when the assets are sold. The government promised to revitalize the lending institutions and increase liquidity in the market by devouring the toxic debts. But in a free and capitalistic economy that is devoid of central planning and command economy the government expectations may not be realized.
The bad debts may not be necessarily toxic to Nigeria’s economy as a whole. Of course, it does impact on the financial market but its severity has been minimized with the initial $4 billion recapitalization of the failed commercial banks. The government’s concern was that bank lenders were holding on given loans to business entities therefore it became necessary to infuse a large fund to stop the credit crunch and sputtering or even the insolvency of the economy.
Nigeria’s economy at the moment is not doing badly and GDP is evidently bulging. As of the last quarter the economy has been growing at over seven percent and according to the financial minister Olusegun Agaga the economy is expected to grow up to ten percent in 2011. This is an affirmative and tremendous growth by any standard, showing that further injection of funds into the banking sector may not be intrinsic.
We are not suggesting that buying the toxic debt is not needed but Nigeria’s economy will not be detracted without the transaction. The acquiring of the toxic debts by the government will probably enhance the market confidence and encourages investors to look favorably into the Nigeria’s financial stocks.
This is bailout and handout capitalism, where taxpayers rescued failed business transactions of the well connected companies. The danger to this that it may likely to bastardize the emerging Nigerian capitalistic economy which is centered on risk taking and taking chances. The detrimental ramification is the spurring of cronyism, dependency and the ultimate death of innovation. When government increases spending by buying toxic debts from commercial banks, its dominant role comes with more regulations which is a threat to laissez-faire capitalism.
The taxpayers may not have to worry a lot because those handling the transactions including CBN’s Sansui, Finance minister Agaga and AMCON’ Chike-Obi are men of integrity and accountability. And with these gentlemen Nigeria is probably in good hands but Nigerian taxpayers with healthy skepticism must “trust but verify.”