The Central bank of Nigeria’s (CBN) recently released regulations capping banks’ FX borrowings at 75 percent of shareholders funds is seen by analysts as having the effect of preventing bubbles developing in domestic oil and gas mergers.
“The CBN is trying to apply brakes to recklessness in overpaying for assets,” said Layi Fatona, MD of indigenous oil firm Niger Delta Exploration & Production, at an investment forum in Lagos last week.
“The new directive will make companies look elsewhere rather than to Nigerian banks.”
Analysts say there is increasing demand for assets in the Niger Delta, which holds a large portion of Nigeria’s 37 billion barrels of oil reserves, spurred by divestments from International Oil Companies (IOC) with total completed deal size of over $6.7bn between 2010 and 2013.
Local oil companies, who have remained for the most part peripheral players in the upstream sector, have stepped up to snap up the assets getting divested by the IOCs.
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Financing for these takeovers have been mostly through syndicated loans and internally generated funds.
Shoreline Natural Resources Ltd acquired Shell’s OML 30 for the previous record amount of $850m. This was financed by both international and local financiers; specifically, Standard bank and Stanbic IBTC.
Local investment banks are also stepping up to the plate to participate in these transactions.
Oando Plc indicated in a statement that the required credit facility for its Conoco Phillips acquisition was arranged by three foreign banks and two Nigerian investment banking firms.
The banks are BNP Paribas, Standard Bank and Standard Chartered Bank while the investment banking firms are FBN Capital and FCMB Capital Markets, with FCMB Capital emerging as lead arranger.
“ In terms of sector lending, the oil and gas players planning M&A deals are likely to bear the most brunt of these rules over time, as many were looking to the local banks to support them in their upcoming deals,” said Adesoji Solanke, SSA Banking Analyst at Renaissance Capital in a Nov 03 note.
“This is supportive of Ildar/Temi’s (Rencap oil & gas analysts) views in recent reports that going forward, the capacity of the local banks to fund all the upcoming M&A deals is increasingly getting limited. The banks’ capital constraints and increased risk in upstream oil/gas loans in light of falling oil prices, further underlines this point.”
Loans to oil and gas companies were equivalent to 24.21 percent of all loans, in December 2013, according to the CBN in its recent Financial Stability Report.
While Nigerian assets are currently offered at a discount to global assets; this discount is narrowing as asset bid prices rise, according to research and investment firm CBO Capital.
“On average, assets are sold at up to a 45 percent discount compared to global prices and this makes Nigerian assets among the most attractive investments, considering the huge upside potential on the reserve profile of the assets,” said CBO in a November 2013 report.
PATRICK ATUANYA
