By Osaruyi Orobosa-Ogbeide, FDC
A Fallout of the Banking Crisis
The Nigerian economy is still in a recession despite the recovery in the capital markets. The relative stability in demand for foreign exchange in a consumption-led, import dependent economy, are pointers to the fact that business is experiencing a lull. While some economists argue that the economy has bottomed out, others are of the view that it is still not underway.
The proponents in favour of the argument that a recession is imminent are companies in the real sector i.e. manufacturing enti-ties. During the recent boom (2003-2007), a number of these companies with good brands and products over-extended them-selves. Their recklessness in managing creditor relationships and their businesses were overshadowed by the abundance of credit. In a bid to address the recklessness of creditors (banks), the CBN intervention elicited trauma within the banking system as banks had to make huge provisions for losses. This, in addition to the political crisis and heightened level of uncertainty, increased risk premiums to a point where banks are now unwilling to lend de-spite excess liquidity. Credit growth to the private sector was 39.8% in 2008, 26.1% in 2009 and 11.82% in 2010 (annualized). This share increase in credit availability had varied consequences, affecting both properly managed and mismanaged companies.
The well managed companies are emerging stronger as they encroach on the market share of their competitors. The actions of many have been predatory, leading to the demise of their competitors. The strategy of staying focused and gaining market share from productivity gains and attracting capital off-shore has made acquisition of weaker competitor less appealing. In the words of a thriving and leading FMCG player, “Our activities in the market place will not only erode my competitors’ market share but destabilize them to a point where their entire value proposition will be less attractive to a potential investor”.
The woes of struggling companies in the real sector have been further compounded by the CBN‘s eagerness to sell the ailing banks. In a bid to remain attractive and retain value, these distressed banks are pulling the plug on their debtors, i.e calling in their credit lines. The banks are using both orthodox and unorthodox means to recover their assets. Many of these debtor companies who had embarked on expansion programs due to the disguised market boom are now paralyzed, as they cannot get credit to complete their projects. Working capital is virtually non-existent and has led to low capacity utilization. Average industry capacity utilization is approximately 35%. Another issue to con-tend with is the strong divergence in income distribution. A high gini coefficient (the disparity between rich and poor) of 43.7% in a recession means depressed demand as the rich can consume only a limited amount.
As pledged collaterals are being demanded by banks, a number of these assets (physical and financial) have become distressed. The job losses have been enormous and salaries remain unpaid.
A Unique Opportunity for Private Equity and Distressed Asset Companies
This phenomenon in the Nigerian real sector is a classic illustration of the activities of Private Equity companies in South America between 2001 and 2005. During this period a number of companies with good brands, management and assets were faced with pending liquidation as they were unable to raise funds to meet their working capital requirements.
However, demand was fairly strong especially in the export market. A number of private equity companies and Distressed Asset Management Companies such as: Carlyle Group, IBM Venture Capital, Fondo de Fondos, Invercap, GLIC, Quilvest, Advent Inter-national, Portland Private Equity took positions in these companies. Within a 3-5 year period their return on investment was astonishing. The sharp demand in the domestic market and consolidation in the various industries (not many players survived) fuelled the recovery and high returns.
The question is: can private equity (PE) companies do the same in Nigeria? The answer is yes.
Although there are fundamental differences between these markets, the principle remains the same. A growing population, pending economic recovery story, a regional market are all factors that could fuel demand. Most of these companies are in dire need of good management as only a few have been able to institutionalize corporate governance standards, an additional factor that PE firms could bring to the table. However, many private equity companies must deal with the peculiarity and reality of the Nigerian market. They must understand that there are pockets of value in relatively small amounts. Therefore deal sizes (above $20m) must be realistic and revised in order to meet the needs of the Nigerian markets.
Advice to CEOs
Companies with underlying value must learn to strategically man-age the creditor relationship especially in difficult times. There must be a concerted effort to communicate effectively in order to satisfy their creditors and attract the limited credit available. They should be one step ahead, by optimally restructuring their facilities before the “plug is pulled by the creditor”, which may then force them into liquidation.
Light at the End of the Tunnel, But Not So Soon
With the passage of the 2010 budget, which is expected to infuse cash into economy, temporary resolution of the political deadlock, passage of AMC law and resolution of the banking crisis, an economic recovery is imminent and a number of these companies will benefit from the recovery.
However, given the fact that the dam-age has been severe and that the lag between event and response has widened (especially with economic policies in Nigeria due to the weak structural linkages) the expected recovery may be delayed.
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