10 Interesting Lessons from the Debt Financing of Preferred Bidders for PHCN’s Assets
Proem:
In the last edition of this column, we had started a series on why the Nigerian Electricity Supply Industry (“NESI”) reforms could be an exception to the popular concept of obsolescing bargain; a concept which predicts that once the investor (particularly a multinational) had sunk its costs, risk capital and assets in a developing or less developed country, its susceptibility instantly increases. This week, we take a break from that topic and look at the lessons or interesting issues thrown up from the financing transactions done in connection with the acquisition of Power Holding Company of Nigeria (PHCN’s) assets.
The Financing of Preferred Bidders
It is trite that a person or entity may raise finance through equity or debt. Equity would involve various means including raising money from the stock market, from family, friends and that person or entity’s savings. Debt financing on the other hand principally refers to borrowing to fund a project, activity etc. There were rules for the financing of the acquisition of the companies created from the former PHCN. These rules included the fact that the debt financing for such acquisitions was in every case, not to exceed 70% of the consideration payable.
With the privatization process of the power generation (Gencos) and power distribution companies (Discos) hived off the PHCN nearing completion and hand-over scheduled for October 1, 2013, we take a look at a few lessons from the financing process.
Lesson 1
Improved Nigerian Banks with Deeper Pockets
If the reports in the dailies a few days ago are anything to go by, Nigerian banks still lag behind their South African counterparts. That notwithstanding, a lot has improved. I say this, because much of the debt finance for the process was provided by syndicates/ clubs of Nigerian banks. Many of the banks were also involved in more than one transaction. This fact suggests that Nigerian banks are now more liquid and robust than ever and are more willing to take risks.
Lessons 2
There is Real Belief in Government Reforms- the CP/CS Dichotomy
I probably had not done any substantial financing transaction before this set of financing but quickly learnt that prior to drawdown of any facility even if the Facility or loan agreement had been signed, certain Conditions Precedent (CPs) must be fulfilled and in this regard, Lenders’ counsel had to provide written confirmation of the fulfillment of same. However, certain typical CPs for financing transaction of this nature were waived or regarded as Conditions Subsequent (CS), particularly issues which government had not yet finalized, such as the resolution of labour issues. The lenders/ the counsel either agreed to make these CS or CPs to the provision of working capital and or capex finaning. This does show real belief that the government led by Dr. Goodluck would play its own role.
Lesson 3
Definition of Terms such as Group or Affiliates Could be ‘deal breakers’
Matters which appear to be as simple as the definition of terms, were capable of deal breakers particularly where a member of a syndicate or club had information other parties did not have.
Lesson 4
Section 159 of the Companies and Allied Matters Act (CAMA) Raises Real Financing Issues
Section 159 of the CAMA stipulates that a company should not provide financial assistance for the acquisition of its shares where such assistance would reduce materially, the net assets of the company, except in limited situations which do not cover the transactions herein. The foregoing meant that there was a limit to the kind of security structures that could be put in place or provided by the preferred bidders who were borrowers.
Lesson 5 The BPE and NERC More Efficient than Ever
It became clear from the various financing transactions that, with the speed at which the Bureau of Public Enterprises and the Nigerian Electricity Regulatory Commission provided responses to queries, they were now more efficient than ever and serious for business.
Lesson 6
Liability Transfer to NELMCO Requires Firm Resolution
Although, there are statutory instruments making references to transfer of legacy liabilities to the Nigerian Electricity Liability Management Company Ltd/Gte, the specifically transferred liabilities are not readily available, save for as specified in the liability transfer agreements which are yet to be signed. There are references in the statutory instruments to these liabilities put ‘no one’ has seen the schedules. The government does need to clear the air on this as many banks gave debt finance on the basis that they ‘trust’ government to keep its promise of assigning these liabilities to NELMCO.
Lessons 7
Issues around Fees and Charges
Although, the Central Bank of Nigeria had earlier issued a directive on charges/fees payable for loans, syndication etc. there were still interesting issues around these particularly for the fees that the directives say are negotiable and not capped.
Lesson 8
The Partial Risk Guarantee
In certain cases a part of the security for the debt financing falls away upon the provision of the third party collateral support in form of the International Development Association/ Federal Government of Nigeria Partial Risk Guarantee. There were indeed interesting issues as to what the PRG was, whether anyone (including the popular Azura project) had obtained the PRG in Nigeria and whether same could be applicable to Discos.
Lesson 9
Provision for Renegotiation of Facility/Loan Agreement and Tying Working Capital Financing to Provision of Acquisition Finance
Some lenders understand that foreign banks are likely to offer many of the preferred bidders cheaper loans once the privatization becomes entrenched thereby encouraging re-financing and a premature exit from the current financing arrangement. Therefore, many of the banks providing acquisition finance have either made the fees for early repayment as a result of a re-financing very high, tied the provision of working capital/ capex to the provision of the acquisition finance or altogether made renegotiation after a while, obligatory.
Lesson 10
Financing as an Area of Specialization is neither Boring nor really Difficult
Prior to this time, I had not really done financing and thought that with the several buzz words and very long facility agreement subject to several reviews and debates, it must be quite difficult, tedious and boring. Ironically, same is quite interesting if one understands the basics, important principles of law and the rationale behind certain provisions. Further, a good grasp of the Loan Market Association template, like FIDIC for construction, is very pertinent.
Conclusion
The privatization, thus far has been reasonably successful with many preferred bidders now only waiting to physically take over their new assets. The lessons above and many others may be useful for working capital and Capex financing. These lessons would also be useful for the financing of the NIPP plants.
For more information on the power sector financing, read the text, “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by Ayodele Oni, with contributions from internationally recognized electric power and power financing lawyers-Peter Henley and Arun Velusami.
Ayodele Oni (ayodeleoni@outlook.com), a solicitor, specializes in international energy (oil, gas and electric power) investment law and policy.
By: Ayodele Oni