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C&I Leasing & ABRAAJ: Here is what’s wrong with this deal

The recent corporate actions being undertaken by C&I Leasing Plc seem to smack of some information asymmetry.



C&I Leasing Plc, Nigerian Stock Exchange, NSE, Suspension

One of the problems in the corporate world is what has come to be known as information asymmetry. Information asymmetry happens every day and everywhere. Information asymmetry is a situation where some relevant information are known to some but not to all.

Where asymmetric information exists, decision making ceases from being optimal and indeed becomes inefficient and leads to adverse selection.

The recent corporate actions being undertaken by C&I Leasing Plc seem to smack of some information asymmetry. First off, on the December 10th, 2018 filing to the Nigerian Stock Exchange by C&I Leasing Plc notifying the stock exchange and indeed its shareholders of its proposal to undertake a 1 for 4 reverse stock split or consolidation, the company noted that “The purpose of the reconstruction is to allow the company to have enough unissued shares to accommodate future plans to raise capital through the equity capital market.

The additional capital will be used to finance the company’s expansion plan, extinguish some liabilities and enhance the company’s capital mix”. In that filing, it was not explicit that the liability it intended to extinguish was a convertible bond.

Fast forward to the January 8th, 2019, notice to the Stock Exchange on the intention of ABRAAJ – managers of the Aureos Africa Fund to convert the loan stock to equity.

In that notification, C&I Leasing noted that “The purpose of the reconstruction was to allow the company to have enough unissued shares to accommodate the conversion of the Abraaj loan stock to ordinary shares……”.

This specificity does not seem to have been offered in the December 10th notification to the Stock Exchange and one wonders if it was specifically explained to the shareholders during the shareholders meeting.

One may argue that it does not make a difference whether the company converts its debt to equity or issues more shares and uses the proceeds to retire the debt. It does make a difference.

In the debt conversion scenario, existing shareholders do not have the opportunity to buy additional shares, (if they so wish) to maintain their proportionate ownership of the company while in the issuing of new shares, they have that opportunity, at least to maintain their existing ownership. Therein lies the dilutive effect of the debt equity conversion.

Diluted EPS Reporting

Ordinarily, when a company has a convertible debt in its books, such a company is required to anticipate possible conversion and as such report not only its basic earnings per share (EPS) on its financial statements but also its diluted earnings per share in anticipation of possible conversion.

An examination of the most recent financial statement from C&I Leasing, approved by the board on October 25th, 2018, did not indicate what the diluted earnings per share was even though they might have known that ABRAAJ might be converting the convertible debt.

Even the 2017 full year annual report only contains information on the basic earnings per share and nothing was said about the diluted earnings per share. I did not examine earlier financial reports, but chances are that they are silent on the diluted EPS.

International Financial Reporting Standards (IFRS)

Most Nigerian companies like C&I Leasing plc, follow the International Financial Reporting Standards (IFRS) and as such should be guided by the provisions of IAS 33 as amended. IAS 33 sets out, among other things, the calculation and presentation of earnings per share for publicly traded companies. IAS 33.66 specifies that publicly traded companies must present on the face of the statement of comprehensive income, basic and diluted EPS.

Many Unanswered Questions

The questions worth pondering are, did the company, its directors, and auditors not know that there was convertible debt in the books? Did they not know of the requirement that when such liabilities are in the books, the impact of conversion should be anticipated and properly reflected in the diluted earnings per share numbers or was this omission intentional? How many other companies in Nigeria are in the habit of not reporting such numbers when they should? Why did the Stock Exchange not require them to indicate to the shareholders the effect of possible conversion on the diluted EPS.

Given the level of financial literacy in Nigeria, corporate citizens should do more to reduce information asymmetry so that relevant parties to transactions could make optimal decisions.

Jaiz bank

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. and (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.



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