Nigerian banks risk losing $185 over exposure on Afren’s financing

Zenith Bank Plc.

Zenith Bank Plc.

*Zenith, Access & Stanbic IBTC banks exposed

22 August 2015, Lagos – Nigerian banks involved in syndicate financing of Afren Plc’s onshore and offshore activities are at risk of losing $185 million (N31.45 billion) to exposure following doubt over the company’s ability as a going concern.

Renaissance Capital Research, in its report released yesterday said “Afren is in administration and in this note we explore the possible implications for Nigerian banks. We conclude that Zenith Bank is in the most comfortable position, followed by Access Bank, and then Stanbic IBTC.”

According to Afren documents, Nigerian banks have at least a $185mn principal exposure to Afren. Zenith Bank has $100mn (N17 billion) to OML26, $5mn (N850 million) to Ebok; Access Bank has $50mn (N8.5billion) to Okwok/OML113 (Aje), $5mn ( N850 million) to Ebok; and Stanbic has $25mn (N4.25 billion) to Ebok.

According to Rencap “From our discussions with Zenith management and Renaissance Capital’s oil & gas analysts, we believe that of all the banks with credit exposure to Afren, Zenith is in the most comfortable position.

The asset is producing, located onshore, and has a low operating cost – which implies that its production economics still make some sense at currently low oil prices. The February 2014 facility is primarily secured by a charge over Afren’s interest (via FHN 26 – the SPV) in OML26, and its cash flows. According to Zenith management, other Afren creditors do not have claim to OML26. We do not think Afren plans to sell this asset and our oil & gas analysts believe that its cash flows should be sufficient to repay the loan, valuing the asset at $114mn.”

Rencap in the report, said “According to Access management, it has a first-ranking lien on the Okwok and Aje fields, though we note that some of the bank’s claims are subject to counterparty consent. Both assets are offshore and not producing. While most of the $50mn was spent developing Okwok, Aje is expected to produce first, by late 2015; Okwok production could happen in 2016/2017. At $50/bl, our oil & gas analysts value Okwok negatively at -$161mn and Aje at $45mn, implying 90% potential credit recovery for Access (facility recovery value largely dependent on Aje).”

Rencap further stated that Ebok is located offshore and is Afren’s largest producing field. Afren has a $300mn syndicated facility from a series of local and international banks on this asset. “While the loan was originally secured using Ebok reserves, cash flows and material contracts, the creditors’ rights were relegated via an inter-creditor agreement on 30 April 2015, when Afren secured life-saving interim funding of c. $200mn.

This implies that in a liquidation scenario, the providers of the interim funding have a superior lien to the Ebok creditors and bondholders. At a $50/bl long-term oil price and at 15% WACC, our oil & gas analysts value Afren’s share in Ebok at $158mn unrisked NPV, leading us to conclude that the creditors would likely have to write off this exposure” it noted.

In conclusion, Rencap said “After speaking to bank management teams and reading multiple documents on Afren, we think the devil is in the detail. We view the feedback from the banks as the optimistic scenario and note that there are legal and contractual technicalities that could cause significant losses with regard to exposure to Afren.”
*Peter Egwuatu – Vanguard

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