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Despite Challenges, Analysts Allay Fears Over Power Sector Loans

June 9, 2014

Inspite of the teething problems confronting investors in the Nigerian power sector, the likelihood of default in repayment of power-sector loans has been underplayed by some economic players, who also make a big case for government intervention to hedge the banks and investors against loss, reports Festus Akanbi

In the estimation of the Managing Director of Asset Management Corporation of Nigeria (AMCON), Mr. Mustafa Chike-Obi, all the money deposit banks in Nigeria today are healthy. His vote of confidence in these financial institutions was understandably hinged on the fact that the creation of AMCON has offered the banks the opportunity to have their mess cleared by a resolution option through the Asset Management Act 2010. It was therefore a great relief for the banks, the shareholders and depositors that the burden of non-performing loans which nearly crippled some of the banks by 2009 was effortlessly removed from the banks which, like the Biblical prodigal son, were told to go and sin no more.

The relief the resolution gave the banks later manifested in robust performances in virtually all the indices and this further raised their capability to participate actively in the recent privatisation of the nation's power sector. As at today, not less than $2 billion have been released so far to the various power sector investors, a feat that put paid to initial fears that the Nigerian banks might not be liquid enough to fund the power sector privatisation. And to effectively cope with the sheer quantum of the funds needed, quite a number of the banks have gone to the debt market in order to acquire long-term funds needed for the power sector financing.

Search for Long-term Funds The search for long-term capital by the banks is to support the long-term financing needs of most firms that acquired the generating and distribution companies in Nigeria. While some banks have already raised the amount of capital they need to support their clients from the Eurobond market, the rest are still weighing other available capital raising options. For instance, Zenith Bank Plc recently sold its debut $500 million dollar-denominated bond. The bank had explained that the proceeds would, among other things, enable it finance the power sector.

Similarly, Diamond Bank Plc also issued its debut $200 million five-year Eurobond. The bank also plans to tap the equities market to raise about $300 million. Diamond Bank is seeking to raise $500 million additional capital. On the other hand, while Union Bank is seeking approval to raise $750 million, Access Bank at its recently held Annual General Meeting got the approval of its shareholders to raise $1 billion.

The Fear Unfortunately however, the enthusiasm of banks to roll their resources behind the power privatisation process seemed to be diminishing by the day.

The truth is that as a result of a chain of developments in the power sector, analysts said achieving the financial projections laid down between the various power companies and their banks may be a tall order. Today, the generating companies are complaining of a number of challenges, chief among which is lack of gas needed for the transmission. Other challenges include vandalisation of gas pipeline and power assets. The situation at the generating level is obviously taking tolls on the performance of the various distribution companies with the attendant strain on revenue generation.

THISDAY checks showed that most of the Discos are far from their revenue targets amidst strident complaints by electricity users who insisted nothing had changed in power supply. This scenario is already giving some bank executives goose pimples as it dawns on them that the current developments are already making nonsense of their initial projections with the attendant fear of a return of the era of loan defaults in banks.

The seriousness of the situation has also made some analysts to fear that the new Governor of the Central Bank, Mr. Godwin Emefiele, could find his leadership tested by a new round of loan defaults widely expected in the country. This is because of the $2.5 billion spent by the buyers, $2 billion came from bank loans. Power plants cannot get sufficient natural gas to meet Nigeria's energy demands, and the national grid needs an overhaul. Some new owners won't be able to sell enough electricity to meet loan obligations. "The central bank will have no choice but to be flexible with the banks and allow them some forbearance," Credit Risk Officer at United Bank for Africa Plc, Adebayo Adebowale was quoted as saying. But the question raised by some financial market watchers last week bordered on the readiness of AMCON to once again come to the aid of the affected banks should the need arise.

When confronted with this scenario, Chike-Obi, who acknowledged the fear over the fate of power sector investors, said people should not look at AMCON's direction in case the problem of loan default crops up again. He said: "I think the mood in the country right now is for AMCON not to buy any more loans and as far as we are concerned, we are not buying any more loans. So, it will be very unfortunate if the scenario you painted comes about but people should not look to AMCON's direction if that crisis should come up."

Systemic Risk In the opinion of the Managing Director, Financial Derivatives, Mr. Bismarck Rewane, the Federal Government is the last resort for the resolution of the crisis in the power sector. Analysing the scenario in the power sector, Rewane said: "Investors in the power sector borrowed money in order to buy equity by buying shares in the companies. Now the companies have to borrow money to finance their operations, that is key. There is the risk that if the companies go down then the equities becomes valueless. But as far as I know, banks have lent money to these companies to buy their shares so they have no money that can be lent to these outfits. That is a big problem. It is a systemic risk which is going to be solved either by government putting some money or issuing guarantee to banks to lend them, otherwise the power sector is not going to move.

"If you guarantee, just like the Bank of Industry, which has been intervening in some sectors, it can help but if you actually have the capacity, you wouldn't have had that problem. The entire process of power privatisation is questioned. Now we are where we are, so to get out, those people need money at a short term. You can see what happened to the aviation sector. We gave them to the private sector, but today, Aero Contractors and many of them are in Asset Management Corporation of Nigeria (AMCON) because the crux of the matter is that we need quality management, we need equity. What they did was to use debt to acquire the equity. So we have a potential problem. I believe we are getting to a situation whereby the Federal Government of Nigeria will have to intervene to support those institutions."

No Cause for Alarm Yet Looking at the development in the power sector from banker's point of view, the Managing Director Wema Bank Plc, Mr. Segun Oloketuyi, said all the banks that participated in the power sector financing were aware of the challenges in the sector, saying that was why they chose long-term financing for the project. According to him, "It is obvious that loan repayment is done from the cash flow. When the cash flow is challenged, and then there is need to worry about the quality of the loans. I think the problem we have today is a carry-over of what the defunct Power Holding Company of Nigeria (PHCN) had always been. Generation is low and on top of it, leakage is also very heavy. I doubt if all the power generated get to their destination. If we don't have power to supply, we also don't have revenue to collect. So the Gencos are not generating enough so also the Discos will not have enough to distribute. It paints a gloomy picture but I also think all hopes are not lost because I'm sure those who went into this have this realisation that it is going to be a long-term investment. It is not going to be a short-term lending in my view.

"If we take a short-term view of these projects, I think we may run into trouble but if we take a long-term view of the lending we have done then I'm sure it will get better because this country cannot go on like this without adequate power. No country can develop without power, it is a developmental agent. The major input in power generation is gas. Investment has also been done in gas to convey gas from the point of production to where we are going to utilise it. Pipelines are required; those investments need to be made. Without them being made, it will be a tough one and I think government also need to concentrate on infrastructure needed. A lot of support is needed in the transmission line so that leakages in the transmission line are also minimised, then we will get there. But if we take a short-term view, what is going on today will be a big challenge."

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Source: AllAfrica

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