29 September 2014, Lagos – Federal Government’s plan to pay off the over N200 billion gas supply debt owed by defunct PHCN will avert the impending systemic non-performing loans in Nigeria banks.
The payment of the debt overhang by the Federal Government will help power generating companies (GENCOs) meet their debt-service obligations to banks on loans of almost N500 billion, on which some have been falling behind. It has also headed off a threat to the banking industry by assisting the struggling GENCOs with an intervention fund.
The N213 billion ($1.3 billion) fund announced by President Goodluck Jonathan’s administration on Sept. 19 will be used to pay off gas-supply debts owed by power companies and to cover revenue shortfalls.
The exposure of banks to the power sector indicate that UBA Plc , Nigeria’s fourth-biggest bank by market value, granted $700 million in loans to several investors, including Transnational Corporation of Nigeria, which got $215 million to buy Ughelli Power, the country’s second-biggest gas-fueled plant with capacity for 900 megawatts.
Guaranty Trust Bank Plc, the largest lender by market value on its part advanced $170 million to Mainstream Energy Solutions Ltd for the concession of Jebba and Kainji hydropower plants.
Zenith Bank Plc, the second-biggest lender, provided N40 billion for the acquisition of two electricity distribution companies in Lagos. Others such as Ecobank Transnational Inc., Diamond Bank Plc and Skye Bank also provided loans to power investors.
“The government is reacting to the risk affecting the power industry as a whole and the sustainability of the reform, which dovetails to the banks,” Pabina Yinkere of Vetiva Capital Management Ltd. told Reuters. “This intervention fund will ease the stress in the industry and in effect reduce the probability of loans going bad.”
Nigeria dismantled its power monopoly and sold the hydro-and gas-powered plants it ran last year to try to bring in investment needed to expand electricity supply, with demand more than three times the current output of about 3,800 megawatts.
Companies including Transnational Corp. of Nigeria Plc, Korea Electric Power Corp. and Forte Oil Plc (FO) paid more than $3 billion for controlling interests in 15 power generators and distributors.
Authorities in Africa’s largest economy are putting together new regulations to protect lenders, electricity consumers and other utilities in the event that the power companies fail, according to central bank Governor Godwin Emefiele and Petroleum Minister Diezani Alison-Madueke.
While the ratio of non-performing loans in Nigerian banks remains low at 4 percent of all borrowings, compared with a high of 35 percent in November 2010, it is expected to increase for electricity companies “as the new distribution and generation businesses pile up debts and struggle under the early phases of liberalization,” Philippe de Pontet, Africa director at New York-based Eurasia Group, said in a Sept. 24 e-mailed note to clients.
The prominent role the central bank is assuming in managing the bailout indicates that Emefiele, like his predecessor Lamido Sanusi, is keen to give the bank “an active role in the economy” through areas including power, agriculture and manufacturing, according to de Pontet.
Under Sanusi, the central bank fired the chief executive officers of eight lenders in 2010 for mismanagement as Nigeria reeled from the effects of the 2008 global financial crisis.
The banks were bailed out with 600 billion naira while the government set up the Asset Management Corp. of Nigeria, or Amcon, to buy bad debts from lenders and save the financial system from collapse. Amcon said last month it won’t buy any more bad debts from lenders.
“The government is sending out strong signals about its intention to make the power sector work,” Dolapo Oni, Lagos-based head of energy research at Ecobank Research, said in an e-mailed response to questions.
“If these interventions allow the declaration of the Transitional Electricity Market, then they may have averted a crisis.”
The bailout will enable an October start to the electricity market, where generators and distributors can buy and sell energy in a process mediated by the Nigeria Bulk Electricity Trader, according to a timetable set by regulators.
The bulk trader has almost $1 billion in risk guarantees provided by the World Bank and Nigeria’s Sovereign Wealth Investment Authority, with an additional $750 million to back trading by generators and distributors. While the bailout doesn’t address all the challenges, it is a step in the right direction, Bismarck Rewane, CEO of Lagos-based Financial Derivatives Co., a risk advisory firm, said.
“The signal is that the power investors will be supported,” he said. “Power is too important that the government cannot let it fail.”