Following some questions that have arisen around the capacity of Nigerian banks to fund the N1.04 trillion or $5.2billion MTN Nigeria fine, Renaissance Capital has done some work to estimate what MTN Nigeria’s funding gap could be.
Consequently, the firm has looked at MTN Nigeria’s gross debt and cash balances as at 1H15, compare this with the Nigerian banking system’s equity value to determine the banking system’s single obligor limit (SOL) to the company vs. the 20 percent of equity SOL cap, and from there it derives how much it thinks MTN Nigeria could raise additionally from Nigerian banks and make an estimate of its potential residual funding gap.
The conclusion of RenCap’s analysis is that should the fine be maintained as it is, Nigerian banks cannot fill the funding gap given single obligor limits, capital and liquidity constraints. In that instance, MTN Nigeria would have to seriously consider external financing options – debt and/or equity, and possibly making adjustments to its CAPEX plans or business structure. That said, everything depends on the final fine amount agreed between MTN Nigeria and Nigerian Communications Commission (NCC) as discussions are still ongoing.
As at first half of 2015 MTN Nigeria had gross debt and cash balances of $1.7billion and $1.3billion, respectively, implying a net debt figure of $325mn. 74 percent of the gross debt was in Naira, and the balance 26 percent in USD; 94 percent of 1H15 cash was in Naira and the balance 6 percent in USD.
“Given that MTN Nigeria’s first half of the year, net debt position, we think consideration must be given to raising external financing to pay the fine. This could include commercial bank loans, a debt instrument, an equity raise etc. Given the magnitude of the fine, should MTN decide to borrow, we estimate that the company’s net debt would increase by 1,606 percent that is to $5.6 billion from $325 million”, Adesoji SolankeSub-Saharan Africa Banking Analyst, head of research – Nigeria said in a report.
However, the banking industry witnessed credit growth of 29.5 per cent to N13.5 trillion compared to that of December 2014. The oil and gas sector continued to dominate credit allocation with 23.8 per cent of the total sectoral credit (24.4% in December 2014). Although the proportion of credit to the sector declined by 0.6 percentage points when compared to that of December 2014 position, credit to the sector grew by 26.3 per cent in absolute terms, similar to the rate of the total credit growth. Nonetheless, the banking industry showed resilience to the impact of a shock of 50 per cent credit default in the oil and gas sector. Under this scenario, industry CAR remained above the prudential hurdle rate at 13.55 per cent. However, this CAR is 0.52 percentage points lower than the end-December 2014 position under the same scenario.
Meanwhile, liquidity ratio (LR) of the Nigerian banking industry decreased by 6.5 percentage points to 39.3 percent in first half of 2015 from the 45.8 per cent December 2014 position.
The decline in the LR position was driven mainly by the large and medium banks with 6.5 and 7.4 percentage points decrease respectively from their December 2014 LR position to 36.9 per cent and 45.5 per cent respectively. This decline may be traced to the sustained tight monetary policy stance of the CBN.
The CBN’s Financial Stability Report further show that the number of banks in the LR bucket greater than 40 per cent decreased from 18 as at December 2014 to 12 in June 2015. On the other hand, the number in the LR bucket less than 40 per cent but greater than 30 per cent and less than 30 per cent but greater than 20 per cent increased from 4 to 8, and 1 to 2 respectively.
Solanke said given MTN Nigeria’s sizable debt position and sector information that the company is a significant taker of credit from Nigerian banks (3% of 1H15 system loans), RenCap assume that the company’s N332 billion or $1.7billion debt is taken entirely from Nigerian banks. For Nigerian banks, single obligor limit is capped at 20 percent of equity. In light of this restriction, data on MTN Nigeria’s 1H15 debt position and data on the Nigerian banking system’s 1H15 equity base, we derive that MTN Nigeria has probably exhausted half of its single obligor borrowing limit.
“On the back of this, we compute that the maximum additional debt MTN Nigeria can raise from Nigerian banks is NGN334bn/$1.7bn i.e. 32% of the fine. In our view, the ability of any bank to further lend to MTN Nigeria would be dependent on the bank’s capital and liquidity constraints, scale of its extant lending exposure to the company and internal exposure limits. Therefore, we think the amount that MTN Nigeria can additionally raise from the Nigerian banking system is probably smaller than NGN334bn/$1.7bn, considering that MTN Nigeria probably already borrows significantly from the larger well capitalised banks today (implying that lesser capitalised banks may be constrained in their capacity to lend additionally to MTN Nigeria given tightening capital constraints in Nigeria)”, he stated.
HOPE MOSES-ASHIKE
