A Review of the Nigerian Energy Industry

Power sector loans threaten banks’ profits

Dollars and Pounds05 June 014, Lagos – Deposit Money Banks face tough times in the third and fourth quarters as loans they granted to power firms have become a major threat to the banks’ financial results.

Already, some executives have confirmed that the lenders may post lower profits in their quarterly results.

This, they said, was because the banks needed to make provisions for the loan defaults by the power firms in line with regulatory requirements.

Banks had offered risk-prone loans worth billions of naira to finance the power sector privatisation last year, which were due for repayment by June this year.

But some officials of banks and power firms close to the deal said the chances of servicing the debts were slim.

Industry experts, who spoke to our correspondent on the issue on condition of anonymity, said most of the recently privatised power firms had been recording losses in their operations.

For instance, they listed the lack of access to gas for most of the generation companies, among other challenges, as a major problem hindering the operation of the power firms.

Some top bank officials also said the development had caused panic in the banks that were involved in the power privatisation process.

However, sources familiar with the situation said banks had begun moves to refinance the power loans to avoid a situation where the default could affect their results severely.

Specifically, the sources said some lenders were seeking offshore funding through Eurobonds, tier 2 capital and others to refinance the loans.

Some of the power firms, it was gathered, were also approaching foreign financial institutions for longer term funding to refinance the loans.

A top bank executive, who did not want his name published, said, “I think the loans may not affect the banks too much. However, it will affect profits. Banks are already seeking offshore funding to refinance the loans.

“Aside this, the power firm investors are also making some spirited efforts to get foreign financiers to refinance the loans. At the end of the day, banks’ exposure to the power sector may not have too damaging effect on their results.”

The Managing Director, Dunn Loren Merrifield Asset Management & Research Limited, Mr. Tola Odukoya, noted that the power firms, especially the Gencos, had been battling with insufficient gas supply, which he said, was affecting their bottom line.

He said the development could affect their obligations to the banks, if nothing was done to help their operations.

Odukoya said there was a need for the Federal Government and other stakeholders to look for a way out of the issue because the power privatisation exercise could not be reversed.

The Chief Executive Officer, Eczellon Capital Limited, a Nigeria-based investment bank, Mr. Diekola Onaolapo, said, to assist the power firms, the process of constructing gas to liquid plants and pipelines used in transporting fuel needed to be fast-tracked.

Also, he said adequate security must be provided for the pipelines and power assets across the country to guard against vandalism.

He added, “How this responsibility will be shared between the private sector and government will be very important to the banks and investors who have already committed capital to the electricity generation and distribution companies. In addition to these actions, the gas price needs to be revisited as the current prices set by the regulator are too low to support efficient supply of gas to the power plants.”

Onaolapo also said, “The need for greater efficiency and reduction of the aggregate technical, commercial and collection losses that may be as high as 60 per cent in some Discos is key.

“Having said all that, while the investors in the power companies may need to consider refinancing with cheaper and longer term funding, in the face of the June payment deadlines, the investors may likely negotiate restructuring of their current bridge facilities with the local banks.”


– The Punch

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