Exotic Capital says Etisalat Nigeria Loan Impact Is Manageable

Etisalat, a few days ago, was taken over by a consortium of banks, led by Access Bank PLC and other Nigerian banks including  Zenith Bank, GT Bank, First Bank, UBA, Fidelity Bank, Access Bank, Ecobank, FCMB, Stanbic IBTC Bank and Union Bank.

The takeover followed the collapse of the effort by Emerging Markets Telecommunications Services, EMTS, led by Hakeem Bello-Osagie, to reach an agreement with the banks on a debt restructuring plan for its about N541.8 billion debt.

Exotix Capital, as a result, did a thorough analysis of the whole crises and found that Etisalat Nigeria loan Impact Is manageable.

·Some context to the loan.
Etisalat Nigeria took a syndicated bank loan of cUS$1.2bn (NGN192billion) in 2013 from 13 Nigerian banks, for the purpose of refinancing its existing loans at the time and funding its network expansion. Of the US$1.2bn loan, US$600mn is secured by assets (NGN115bn) and pledged shares (US$235mn) of the parent company; we note that local press reports that some of these loans have been paid down recently. We believe the majority of this secured exposure lies with the Tier 1 banks. Etisalat Nigeria has struggled to meet obligations since 2016 and has had to rely on assistance from its shareholders, Etisalat Group (who owns 40% of the company), UAE SWF Mubadala (who owns 45%) and Myacinth (a Nigerian holding company with 15% stake controlled by Hakeem Bello-Osagie, who currently serves as the chairman of Etisalat Nigeria). Etisalat Nigeria has been struggling with several years of losses on the back of low revenue generation, given tough competition and the weak economic backdrop and more recently also on the back of FX revaluation losses on its FCY loans and its dollar operating costs.

·  Where we are now:
Etisalat missed its most recent repayment to banks, which was due in May. This time around, shareholders refused to give further bailouts or convert its shareholder obligations to equity to reduce the pressure on the company. Recall that UAE SWF Mubadala has been trying to divest from Etisalat Nigeria for a while now; in the past there was talk of interest from another Nigerian Telco, Globacom, and from a group of private investors. This interest may have been stymied by the high gearing of the company (we suspect debt to EBITDA could be as high as 5x).

–  Default notice:
The syndicate of Nigerian lending banks has issued a Default & Security Enforcement Notice to the UAE’s Emirate Telecommunications Group (the holding company for the Etisalat Nigeria stake), requiring it to transfer its shares of the company to a security trustee by 23 June 2017 to be warehoused receivership. Etisalat Nigeria is also talking to a group of private equity investors. Funds raised from any potential sale will be used in part to repay the loans.

–  Is a CBN bailout likely?
Given the weak state of AMCON finances, we think this is unlikely. However, CBN recently directed exposed banks to halt further action on the debt, meaning some form of bridge funding could be under consideration to cover the period until a new buyer steps in.

·  Implications for banks.
Covered banks’ exposure ranges from a high of NGN80bn at Zenith to NGN4.5bn at FCMB (see figure 1). All but Diamond and Wema Bank have exposure to Etisalat within our Nigerian banks universe. We think the first call of action will be for the banks to restructure this loan. However, in the event that these banks aren’t able to restructure the loans at favourable terms with the company, then one of two things will have to happen:

(1) The banks swap their loans to equity, recognising the loans as investments. We don’t expect banks to have the capacity to take on such investments or be a willing party to a loss-making underlying asset.

(2) The banks restructure the loan, although in the near term they will be required to make provisions on the loan, until they find a buyer.

We believe the second scenario is more likely, but the banks could possibly resolve with a new buyer before the end of the year.

·  How big a deal is this for banks?
We estimate a modest impact on banks. At a headline level, loans to Etisalat Nigeria represent 1.9% of aggregate bank loans. Likewise, on our sensitivity analysis (detailed below), the Etisalat loans would on average have a -12%, -2% and -0.3bp impact on our FY17f net profit, equity and capital adequacy ratios for the banks, respectively. We believe the banks should easily be able to absorb a shock of this magnitude.

You can read the full report here.