Nairametrics| With Etisalat, the duo of the Central Bank Of Nigeria (CBN) and the Nigerian Communications Commission (NCC) have a big problem on their hands. The CBN on one hand needs to avoid another financial meltdown precipitated by its forex policy while the NCC is trying to avoid a situation that could scare foreign investors from investing in the telecoms sector.
The top regulators announced a temporary reprieve for Etisalat last week that temporarily put out a receivership action against the telecom firm, giving it some time to hash out a deal that will see the banks get their money back. As situation like these typically unfold sooner or later it is likely that there could be more about this story that meets the eye. For now here is what we know;
- Etisalat got the loan from 13 banks to support roll out financing. The loan of $1.2 billion was obtained in 2013.
- The firm later seeks receivables financing. Receivables financing is an arrangement whereby a company uses its receivables (money owed by its customers) as collateral for loans to purchase equipment or assets.
- Tier one banks Zenith, GT bank and Access took part in both transactions.
- Etisalat then proceeds with its lease back arrangement with IHS. Lease back simply means, to sell an item and then lease (or rent) that same item. Both the sale and the lease back were in dollars.
- Even though Etisalat earned in Naira, it interestingly entered into a lease back arrangement with IHS that requires that it pays back rentals in dollars.
- IHS then issues a dollar bond on the back of the asset it bought from Etisalat. The bond will be securitized by the cash flows from the lease rentals expected from Etisalat.
- With Etisalat missing payment already on this loan, Reuters reports that a JP Morgan had “downgraded IHS bonds due 2021 because of Etisalat Nigeria as it was uncertain whether the company could keep up with lease commitments.”
- Some of the bond creditors affected likely include Nigerian banks.
- While Etisalat has taken several loans in dollars, its revenues are in Naira. The continuing depreciation of the naira against the dollar means the firm will need an increasing amount of Naira to meet up with dollar payments.
- An economy in recession, which has led to a drop in consumer spending, means Etisalat will continue to struggle with revenue.
- First bank, another tier one bank is also indirectly exposed to Etisalat, through a loan it gave one of the Nigerian investors.
- We understand the amount runs into billions of Naira but has not been listed as one of the loans under distress.
- Etisalat is also likely in debt with other GSM operators who they are obligated to pay inter-connectivity fees to. A default here means, other GSM companies may withhold inter-connectivity payments to Etisalat further worsening its liquidity position.
- CBN has very little window for a bailout and my require that Etisalat’s parent company in Abu Dhabi stump up some more cash. However, the Parent company has already converted its inter-company debts into equity, leaving it with little incentive to bailout its loss making Nigerian entity.
- NCC is worried that if this is not handled properly then it could crystallize into a full-blown financial crisis in the telecoms sector.
- Who knows which other telecoms company is under financial constraints?
Clarification;
An earlier version of this article suggested that “rating agencies and IHS now finds itself in an awkward position of not being able to meet the obligations of its bond creditors.”
We have now been reliable informed that it was JP Morgan and not rating agencies that downgraded the bond because of Etisalat missed payments. This does not necessarily mean IHS cannot meet payment obligations to its bond creditors. IHS also issued a press release insisting that the Eitsalat missed payment of US$8.5 million “was more than 120 days overdue from Etisalat” and that it only “represents less than 2.5% of the expected proforma full year combined revenue of the Group for 2016.”