AMCON’s N5.21tr and the 2030 Wind-Down Target Date – How Realistic?

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Sunday, September 14, 2014 10.30 PM / Smart Advisors, India
 

The Asset Management Corporation of Nigeria (AMCON) was established on the 19th July 2010, when the President of the Federal Republic of Nigeria signed the AMCON Act into Law with the aim of preventing an economic collapse post the global meltdown in 2008. 
 

The company was created to stabilize and take care of bad debts of various banks, in an attempt to prevent bank failures and runs on banks in the country. AMCON effectively took over the non-performing loan assets of the banks in the Nigerian economy, and the agency spent over N 5.6 Trillion to acquire non-performing loans and also injected fresh capital into eight nationalized banks with a N 620 Billion bailout. As a result of this infusion, AMCON took over three of the eight banks it rescued. AMCON has found potential buyers for two of the three banks, viz. Enterprise Bank and Mainstreet Bank, and is likely to divest its stake to the new owners by the end of this month.
 

AMCON raised funds to acquire these assets via sale of bonds (which were guaranteed by the CBN), and it has been redeeming these bonds over the past few years, and currently only around N 4.6 Trillion worth bonds are pending redemption of which about N0.8 Billion is due for redemption on 31st October 2014.
 

Unlike other similar models in other countries, AMCON is funded with no recourse to the treasury of the Federal Government of Nigeria. The sources of cash flow are from recoveries made from EBAs, proceeds from sales of assets and shares in intervened banks, cash income reinvestment, Annual Contributions from the CBN and the sinking fund contribution. The sinking fund is a contribution of 50 basis points of total asset on a yearly basis by banks into a pool is in the custody of the Central Bank of Nigeria (CBN). This will only be used if there is any gap in the repaying of the AMCON bonds on maturity to the bond holders. All these arrangements are to ensure that no tax payers’ money is expended in resolving the banking industry crisis.
 

We believe that the model followed by AMCON takes into account the banker, the borrower, and the tax payer – which is, in our view, is better than the model that many countries followed to get out of the crisis. Also, the management's vision to complete the entire process by 2023, and wind up AMCON is commendable, and if this target is met, the company will join an elite club of companies that were formed for similar reasons and met their objective within the stipulated time, without too much burden on the public or on the economy as a whole.
 

The Mission of AMCON is:

·         Spearheading the recapitalisation of affected Nigerian banks;

·         Providing a window for banks to sell off NPLs;

·         Freeing up valuable resources and enabling banks to focus on their core activities;

·         Getting banks lending again to spur economic growth;

·         Increasing the confidence in banks’ balance sheets; and

·         Increasing access to restructuring/refinancing opportunities for borrowers.
 

 

Details of Distressed Assets Acquired

AMCON has acquired various assets ranging from equities, mortgages, debentures, etc. from over 21 banks. The assets acquired are diversified, and so are the loans taken from various banks. In our view, this is a positive step since AMCON is able to then combine assets using its discretion and re-sell them or use the income from this to repay the bond holders. The diversified base gives it leeway with potential buyers of these assets, and for better utilization.
 


 

Analysis

AMCON has been fulfilling its brief of converting the non-performing assets into better performing assets, or selling the assets for a gain. Its revenues have grown by 21% YoY between CY12 and CY13, and we expect this to increase going forward on the back of disinvestments such as the sale of Enterprise Bank and Mainstreet Bank; as well as the sales of its stake(s) in Union Bank Plc and Ecobank. It would help to know however, how much AMCON has recovered from the Nigeria's debtors (esp. the billionaires) who owed most of the loans taken over by AMCON in the first place and if any bankruptcy action (as provided by the law) has taken place or is being considered. Further, information on how much the banks have contributed (or expected to contribute in the next few years) to the Financial Stabilization sinking fund would ordinarily encourage more insightful analysis.
 

The management has however (from the latest financials provided) been able to reduce costs associated with pruning these assets, and the cost of interest expense as a proportion to interest income came down from 367% in CY12 to 307% in CY13. In our view, this cost will reduce substantially going forward, as AMCON has been able to better utilize these assets, which when combined with an improving economy, is likely to result in better margins going forward.
 

AMCON has been able to redeem bonds over the past year, with the outstanding debt levels on the books reducing to ~N3.6 Trillion in CY13 from ~N$4.7 Trillion in CY12. Given the managements’ ability to generate returns from the distressed assets it had acquired, this level is likely to drop over the next few years. We believe that the company will be able to meet its stated goal of closing down by 2023 based on these projections.

 


Final Thoughts

AMCON was established for the sole purpose of ensuring that there is no systematic collapse in the banking sector, and we believe that it has carried out this mandate very well. The government of Nigeria has created a strong vehicle, without too much impact on the public, giving AMCON some flexibility in utilizing the assets it took over.
 

AMCON has since stopped buying non-performing loans and only the CBN can invite it to purchase more in the future. This is a scenario not considered in this analysis nor is it one that resonates with the current model. Yet, the safeguards in place requires that if any bank exceeds the 5% ceiling for NPL’s, the CBN requires them to make full provisions, or sell such loans off to another entity. This can only be achieved at a notable loss to the bank; hence acts as a disincentive for such.
 

The management of the company has done a good job of turning around the banks it took over, and getting the most out of the assets it purchased, and presenting financials based on a full compliance with the IFRS (the first government agency to do this).
 

That said, arguments and concerns remain about how we got here i.e. the process adopted in creating debts in the books of the Central Bank of Nigeria. The counter-intuitive argument by industry experts has been that the true measurement of AMCON is easily measureable in the social success its actions have achieved, viz: that no bank depositor fund was lost, no banking institution failed with all its attendant consequences, saved industries and employment for manufacturing and construction companies that did not have to close down due to a lack of funding or access to capital and the confidence it instilled in the financial system leading to record profit levels by the banks which encourages the conviction that their contributions to the ‘Sinking Fund’ is sustainable.
 

The next few years should give us a better indication.
 

 

Financial Statements

 

Analyst Certification:

The Research Analyst(s) who prepared the research report hereby certify that the views expressed in this research report accurately reflect the analyst(s) personal views about the subject companies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report.

 

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