Summary:
- An equivalent of 49% of the profits made by Fidelity Bank in 2016 could be lost
- Access Bank could lose an equivalent of 30% of profits made in 2016
- UBA could lose 20% of profits made in 2016
- GT Bank could lose 12% of Profits made in 2016
Etisalat Group (Not Rated) issued a press release yesterday saying that Nigerian associate, Emerging Markets Telecommunication Services (Etisalat Nigeria; Not Rated) received a security enforcement notice on June 9, requesting for EMTS Holding BV (a special purpose vehicle through which Etisalat Group holds its interest in Etisalat Nigeria) to transfer its Etisalat Nigeria stake to United Capital Trustees Limited, the legal representative of the consortium of exposed banks. Etisalat Group owns 45% ordinary shares and 25% preference shares in Etisalat Nigeria.
Etisalat Nigeria, Nigeria’s fourth largest telecoms operator with over 21 million subscribers, is indebted to 13 Nigerian banks to the tune of US$1.2bn. The facility was availed Etisalat Nigeria in 2013 and was u sed to refinance an existing US$650m loan and fund the upgrade of its network.
Etisalat Nigeria began to experience cash flow problems following the steep depreciation of the naira and the impact on its foreign currency denominated exposure. The telecoms provider also has a few inputs denominated in dollars resulting in bloated expenses.
There have been talks with the lenders where various options have been considered. While Etisalat Nigeria was requesting for another loan restructuring (we understand that the loan had been previously restructured), the banks were requesting that Etisalat Nigeria convert an existing shareholder loan (quantum undisclosed but larger than the total exposure to the banks) to equity and inject more equity into the business in order to reduce the company’s leverage before another restructuring can be done.
From our discussions with managements of the exposed banks, we understand the exposure is over 90% collaterised and, for most of them, the exposure as at Q1 2017 was still classified as performing. Accordingly, no charge had been taken on the loan as at the last reporting date.
How the lending consortium will proceed with the company’s management is still unknown. There are however several options available to the banks in our view: i) replace management; ii) leave current management in place while ensuring better oversight; and iii) the last option we see, is for the consortium to sell the Etisalat Nigeria stake through either a third-party sale or management buyout.
Whichever option the banks decide to go with, we believe that they will do all it takes to ensure the company remains a going concern. Even in the event of a possible liquidation (which appears very much unlikely), the banks will still recover a reasonable percentage of their exposure, given their senior debt holdings.
We note however that a major stakeholder in all of these discussions is the Nigerian Communications Commission (NCC). According to the Nigerian Communications Act (NCA), Etisalats operating licence cannot be transferred to a new owner without an approval from the NCC. Based on media reports so far, it appears the regulator would not want a takeover by the banks given the possibility of a major disruption if this happens. We believe the discussions may drag for a while before any action can be taken by the banks and in the process, there may be a need for the banks to take a haircut, albeit marginally.
Impact on COR if 50% of the exposure is lost
Considering the availability of adequate collateral and the current viability of the business, we do not see a possibility where 100% of the exposure will be lost. Leaning towards pessimism, we look at the impact on covered banks Cost of Risk (COR) if 50% of the exposure of each bank is lost. If this happens, we would see an increase in the COR of the banks we cover by about 0.6% to 1.4% with Guaranty Trust Bank showing the highest increase in COR (based on available data).
Looking at the impact on estimated profits for 2017e, in the worst case, we could see 49% erosion of Fidelity Bank’s Pre-tax Profits if 50% of its exposure is lost.
We note that the total Etisalat Nigeria exposure makes up only c.3% of gross loans of the 10 banks we cover. That said, we do not consider even a 100% loan loss a major disaster for the banks.
