Last week, reports confirmed that Municipality Waste Management Contractors Limited, a private company promoted by Visionscape Sanitation Solutions Limited, may have defaulted on a N4.5 billion coupon payment due on March 4th, 2019.
Let’s Explain
Municipality Bond obtained: In March 2018, Municipality Waste Management Contractors Limited approached private investors, pitching them to buy its N4.85 billion bond. The bond was part of a N50 billion Medium Term Note Programme put forward by Visionscape. The bond was eventually purchased by private investors. It was never publicly sold or listed.
Bond details: The bond attracted a coupon of 15.75% per annum, which was payable over nine installments. It was reportedly assigned an A1 rating by the rating agency — Augusto, citing the fact that the Lagos State Government had supported it with its ISPO. Augusto probably did not consider the fact that such guarantees normally would have to be supported by an act of parliament.
Lagos State Government “guarantees” the bond: The Lagos State Government announced that it had provided an Irrevocable Standing Payment order, guaranteeing that the bond will be paid from its Internally Generated Revenue (IGR). Typically, bonds backed by payment from FAAC allocations get deducted by the Federal Government and remitted to bondholders. However, Lagos State preferred to use its robust IGR which, in hindsight, was a bad move for Visionscape. IGR appropriation is backed by law.
Sinking Fund sunk: The Lagos State Government was also supposed to maintain the sinking fund by putting aside about N772.3million, quarterly, ahead of the bond’s maturity last week. That apparently did not happen.
Visionscape deal thrown out: After the Lagos State Government reportedly fell out with the political gladiators in the state, the State House of Assembly, in October 2018, ordered the PSP operators to take over the job of disposing wastes in all the local governments across the state. This was an effective way to kick out Visionscape, even as the company’s subsequent protests yielded no result. Unfortunately for them, they did not have the sympathy of Lagosians.
Default Occurs: On March 7th, 2019, news broke that Vissionscape had defaulted on the debts, following its failure make payment for the coupon on the due date. As expected, the news rattled many of the company’s investors. This was, perhaps, the first time in years that news of a bond default will happen, particularly a bond purportedly backed by a state government.
Visionscape Reacts: The company at the center of the controversy responded that it was “confident” that it will resolve the issue in “due course”. In a statement, the company said the following:
“Lagos State is a beacon of fiscal responsibility with an exemplary track record of fulfilling its obligations. We continue to actively engage all stakeholders to address the issues at hand and we are confident that all will be resolved in due course.”
SEC Reacts: Seeing as this matter is within the regulatory purview of the Securities and Exchange Commission, many Nigerians expected it to react. And it did react, stating that since the bond in question is a private bond, that there was very little it can do. According to SEC, it only fully intervenes in such situation if it has to do witu an investment that was sold to the general public.
“Being an issuance by a private company, it was not offered to the public, but to qualified investors by private placement.
The transaction was therefore not subject to the prior review and approval of the Commission and does not fall within its regulatory preview.”
Not a green bond: It is also important to note that contrary to media reports, the bond is not a green bond.
So, what next?: Investors will have to call in whatever security they have left, if they are to get back their money. At this rate, all parties may have to wait for the new government to resume office before an amicable resolution is reached on this matter. The bond yield will also rise above the 15.75% coupon, as investors will price the bond price of N1,000 per note much lower to accommodate the risks of further defaults.
Wider implication: Companies looking to do business with the Lagos State Government (and other state governments as a matter of fact), will have to look at this issue closely. Whilst the Lagos State Government had often absolved the private sector in similar Public Private Partnership deals (case in point, Lekki Expressway concessions), this issue may well have a wider impact. Deals like this will, henceforth, need to go beyond obtaining the backing of the state government, but must be gazetted into law for it to transcend leadership changes.
Dig deeper: Recommended further reading on this story
The bond was issued in three trances with different coupon rates. it is just not 15.75. The first tranche was issued at 18%