[Bankrupt Afren] The Nigerian Banks That Could Suffer $185m Loan Losses

The fallout from the global oil price collapse which has hit the balance sheet of most oil producers (both countries and companies) hard is finally extending to Nigerian banks.

According to Afren documents, Nigerian banks have at least $185mn principal exposure to the bankrupt firm which is now in receivership.

Zenith has $100mn to OML26, $5mn to Ebok; Access has $50mn to Okwok/OML113 (Aje), $5mn to Ebok; and Stanbic IBTC has $25mn to Ebok.

Renaissance Capital in an August 19 research note says that regarding the Afren exposure Zenith Bank is in the most comfortable position, followed by Access Bank, and then Stanbic IBTC.

According to RenCap:

“From our discussions with Zenith management and Renaissance Capital’s oil & gas analysts, we believe that of all the banks with credit exposure to Afren, Zenith is in the most comfortable position. The asset is producing, located onshore, and has low operating costs.”

On Access Bank RenCap says:

“According to Access management, it has a first-ranking lien on the Okwok and Aje fields, though we note that some of the bank’s claims are subject to counterparty consent. Both assets are offshore and not producing. While most of the $50mn was spent developing Okwok, Aje is expected to produce first, by late 2015; Okwok production could happen in 2016/2017. At $50/bl, our oil & gas analysts value Okwok negatively at -$161mn and Aje at $45mn, implying 90% potential credit recovery for Access.”

Meanwhile it seems Ebok creditors (Stanbic) are likely to be wiped out.

According to RenCap:

“Ebok is located offshore and is Afren’s largest producing field. Afren has a $300mn syndicated facility from a series of local and international banks on this asset. While the loan was originally secured using Ebok reserves, cash flows and material contracts, the creditors’ rights were relegated via an inter-creditor agreement on 30 April 2015, when Afren secured life-saving interim funding of c. $200mn. This implies that in a liquidation scenario, the providers of the interim funding have a superior lien to the Ebok creditors and bondholders. At a $50/bl long-term oil price and at 15% WACC, our oil & gas analysts value Afren’s share in Ebok at $158mn unrisked NPV, leading us to conclude that the creditors would likely have to write off this exposure.’’

Fig 1: Stanbic IBTC loan book by sectors

Source: Stanbic H1 2015 results presentation

Our take on Nairametrics

That is some cold comfort for investors especially those that own Stanbic stock.

Stanbic’s $25 million or N5 billion exposure to Afren is equivalent to 16 percent of Stanbic’s current total Non-performing loans (NPLs) of N31.1 billion as at Half year 2015, according to Nairametrics calculations.

Stanbics NPL to total loans ratio had already deteriorated to 7.2 percent in the H1 period.

Meanwhile oil and gas loans made up 15 percent of the bank’s loan book (See Fig 1), while oil and gas NPLs as a percentage of total NPLs for Stanbic was 3 percent for the period (H1, 2015), unchanged from Full year 2014.

This basically means investors should prepare for more provisioning for oil and gas related credit impairments by Stanbic in the next two quarters as the firm has yet to book any major oil related NPL so far this year.

As for other financials exposed to the oil and gas sector?

We believe that with oil prices seeking to test the $30 mark, those cash flow assumptions by the banks management and RenCap analysts are overtly optimistic