Debtors & Recovery | |
Debtors & Recovery | |
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Sunday, December 06, 2020 / 02.57PM / By Proshare Governance Unit / Header
Image Credit: Scientific American Blogs
On Wednesday, December 02, 2020, the head office of Seplat
Petroleum Development Company Plc,
whose ordinary shares are listed on the Nigerian Stock Exchange (NSE) and the
London Stock Exchange (LSE) was closed to business based on a court order which
permitted a receiver/manager, Messrs Kunle Ogunba & Co to enforce an ex
parte motion requesting that Access Bank
Plc take over SEPLAT's head office premises.
The problem appears to be related to a dispute between Access Bank and
Cardinal Drilling Nigeria Ltd over a loan taken from Diamond Bank Plc (since
acquired by Access Bank Plc) for which the latter has been unable to fully
discharge/could not repay in line with the original terms of the facility. The
loan is a legacy debt that the drilling company owed the now-defunct Diamond
Bank which entered into a merger with Access Bank Plc to form the larger banking
institution (acquiring the assets and
liabilities of Diamond Bank Plc in 2019).
In its letter to the Nigerian Stock Exchange (NSE) on the matter, the
upstream Oil and Gas (O&G) company indicated that SEPLAT was not a
shareholder in Cardinal Drilling Company and therefore was not liable for
its debt obligations.
The unfolding development however represents a material event that could
adversely affect the company's declared earnings and dividend payouts to
shareholders (beyond the debt issue as it concerns a key operating
asset/related party - Cardinal Drilling Nigeria) and thus becomes an issue in
need of better clarity and understanding.
As a follow up to the commentary on the Press
Release by SEPLAT Plc (SEPLAT Plc Refutes Being Party to Cardinal Drilling
Services Loan with Access Bank) some material observations central to the unfolding
actions between parties become important.
The Eye of The Storm
Central
Observations
1.
In the light of the claims and counter claims by
parties, and the information available from financial returns/reports; we
identified two separate strands for necessary market learning, viz:
a)
The obvious Debt Issue; and
b)
The corporate governance matters arising around
disclosures made by SEPLAT Plc.
2.
While we believe that the matter(s) related to the
debt issue are already in court and it would be subjudice to comment on same;
we do however feel obliged to draw attention to two (2) correlated points for
which attention must not be lost:
a) The issue of recalcitrant debtors and the media cottage industry that always ensues, drowning the substantive practice and governance issues and lessons important for market and regulatory growth. This important dimension to risk management and debt collection efforts was a subject of the 2020 DebtorsAfrica report on the challenge of collection of non-performing loans (NPL's) of Nigerian banks. This current case offers yet another opportunity to interrogate the processes in place for a fair resolution of NPLs in order to improve credit administration and debt recovery practices in Nigeria; and
3.
Deriving from point 2b above, there is oftentimes the
case that playing smart delivers unintended consequences and, in this case, a
cul de sac. The argument upon which SEPLAT's public release is premised is that
it has no relationship with Cardinal Drilling Nigeria, yet a cursory
look at publicly available information and listed entity disclosures, without
an attempt to lift the legal corporate viel, reveals the following:
a)
Cardinal Drilling indicated on its website the fact
that it was mid-wifed by SEPLAT Plc viz: "The above innovative commercial
arrangement of SEPLAT mid-wifing CARDINAL DRILLING Nigeria Limited enabled
CARDINAL DRILLING Nigeria funding to be realized as Maurel & Prom through
CARDINAL DRILLING SAS will contribute 40%." (see screenshot below)
b)
SEPLAT Plc has consistently disclosed in both its
interim and annual reports that Cardinal Drilling is a related party.
4. It thus begs the question - "Which of the two
statements is true - between the press release and the published reports? Both
statements cannot be true at the same time. The guidance from IAS24 offers a
guide here.
5. It is this latter point that the market must address
its minds to in the interim, as it goes to the heart of governance practices expected
from listed entities; especially the credibility of representations made by
quoted firms on public trading floors to the investing public.
We believe a clarification will be helpful here, but we must first
address the debt recovery conundrum and how actions should be perceived.
Thinking Through A New Debt Recovery Paradigm
The contemporary problem in uncluttering the debt recovery process
between Cardinal Drilling Nigeria, SEPLAT Plc and Access Bank Plc highlight the
new recovery approach that DebtorsAfrica noted in their 2020 Report on
the nature and outlook of debt recovery in Nigeria.
On page 9 of the introduction to the report, the report
writers noted the need for a new debt recovery approach.
According to the report authors:
To pursue a revitalized and forward-facing credit administration process the report writers advocated for a new approach noting that:
"The new paradigm, however, assumes greater bank customer engagement and better pre-approval assessment and monitoring. The new loan framework follows a different algorithm as represented below:
Illustration 1: Lending Decision Matrix-Balancing
Managerial Competence and Corporate Status
Source: (PDF) NPLs & Bad Debtors: - The Case for a New Industry Approach - Debtors Africa, May 13, 2020
The Bank as Nemesis
The Seplat Plc, Cardinal Drilling
Nigeria and Access Bank debt squabble is a case study in how banks become the
nemesis of borrowers where proper housekeeping had not been done by the borrower
and the borrower's corporate governance oversight may have been lax.
For example, a review of the sequence of events shows that in 2012,
Cardinal Drilling Services Limited applied for and obtained a credit facility
from Diamond Bank Plc (now merged with the larger current Access Bank)
to buy CDS Rigs 101, 201, 202 and 203. The loan was secured by a fixed
and floating Debenture over Cardinal's assets (the "Debenture"). The Cardinal
Rigs were used to provide drilling services to SEPLAT.
CDS 101 and 201 were used to execute SEPLAT's 2019 work programme and
all four (4) Rigs were critical to Seplat's
future drilling plans and to shareholder returns by way of improved revenues
and possible dividends.
Nevertheless, Cardinal Drilling was unable to service the outstanding
part of the loan facility, prompting Access Bank
Plc, which absorbed all the assets and liabilities of the
old Diamond Bank Plc, to pursue recovery of the loan amount outstanding and
accrued interests which is estimated at approx. US$86m.
Access Bank
Plc has since gone to court to enforce its rights and it
would appear that the entangled relationship between Seplat Plc and Cardinal Drilling, suggesting
strong ties between both entities makes the separation of the entities a difficult
task; and it would be up to the courts to establish same or otherwise.
This will also be helpful to the credit practice; as envisaged in the
debtors report.
From an investors perspective however; and indeed from a best practice
governance standpoint, the findings throws up issues that the regulators and
market operators must use to clarify how related party relationships and
transactions are communicated and
understood.
Without prejudice, allowing companies to acknowledge without
responsibility or hide behind nebulous links with related corporate and
individual third parties becomes a major hazard to good corporate governance
and could adversely affect share values and independent shareholder interests.
The Access Bank
Plc and Seplat Plc/Cardinal Drilling Nigeria
case thus offers the market such an opportunity to review, monitor and guide
new regulations surrounding the links between listed entities and their
non-listed associates.
Time for a Paradigm Shift
Banks have been peppered by recalcitrant debtors and as established, old
recovery models appear insufficient especially in periods where recessionary
pressures or unpredictable events like the COVID-19 pandemic result in
disruptions to corporate cash flows (see illustration 2 below).
Illustration 2: Debt Recovery/Management - The Old Paradigm
Source: (PDF) NPLs & Bad Debtors: - The Case for a New Industry Approach - Debtors Africa, May 13, 2020
The new debt management model depends on openness concerning the status
of the borrower (for example, creating clarity around corporate
relationships such as Seplat Plc/Cardinal Drilling
Nigeria) and ensuring that a repository of credit standing is
available for institutions to do pre-lending forensics on the borrowing entity.
This could help in shaping the terms of the loans and define the appropriate
loan structure.
The "C" of character in the five (5) Cs of credit bankers are
traditionally tutored needs a framework for a proper assessment of how to
derisk credits and reduce the probability of loan default (see
illustration 3 below).
Illustration 3: Debt Recovery/Management - The New Indicative Paradigm
Source: (PDF) NPLs & Bad Debtors: - The Case for a New Industry Approach - Debtors Africa, May 13, 2020
A digital repository of debtor action as a reference for credit initiation would be a needed addition to the arsenal of banks in combatting delinquent loans. For companies listed on equity Exchanges, this would help ensure that equity prices of listed entities reflect contingent liabilities that may be off-balance sheets, and in the case of listed banks, it would help bring clarity to the character of assets on its annual statement of financial position. See debtorsafrica.com
Conclusion - Devils at Heaven's Gate
The issue of clarity and transparency in corporate governance has been
highlighted by the ongoing case between Access Bank Plc and Cardinal Drilling
Nigeria in which Seplat Plc has become an interested
party by default in the case of a loan delinquency owed by a 'related party'.
The clarification of the nature of the relation between SEPLAT Plc and
Cardinal Drilling Nigeria is considered important to establish the structure
and cash flow patterns of SEPLAT's Oil & Gas business and the contingent
liabilities that the company could be carrying that may adversely affect its
future earnings. The letter sent by SEPLAT to the Nigerian Stock Exchange (NSE)
and the London Stock Exchange (LSE), with due respect, will appear inadequate
under the circumstance.
To calm investor nerves, the management of Seplat Plc may consider doing the following:
Though the road to hell was paved with good intentions; corporate
chincanery should not be one of the building blocks.
Illustrations - Related Party Disclosures:
1. pg 226 The list of
Seplat's related party transactions is outlined in Note 42 to
the financial statements of the 2019 Annual Report
and Accounts
page 226; Note 42. Related party relationships and
transactions
The
Group is controlled by Seplat Petroleum Development Company Plc (the parent
Company). The parent Company is owned 6.43% either directly or by entities
controlled by A.B.C. Orjiako (SPDCL(BVI)) and members of his family and 12.19%
either directly or by entities controlled by Austin Avuru (Professional Support
Limited and Platform Petroleum Limited). The remaining shares in the parent
Company are widely held. The goods and services provided by the related parties
are disclosed below. The outstanding balances payable to/receivable from
related parties are unsecured and are payable/receivable in cash.
ii) Entities controlled
by key management personnel (Contracts >$1million in 2019)
Cardinal Drilling Services Limited (formerly Caroil Drilling Nigeria Limited): Is owned by common shareholders with the parent Company. The Company provides drilling rigs and drilling services to Seplat. Transactions with this related party amounted to N2.89 billion, $9.44 million (N621 million, $2.03 million). Receivables and payables were nil in the current period (receivables in 2018: N1.49 billion, $4.87 million).
2. pg 35, Note 24 The 2019 Interim management statement and consolidated interim financial results For the three months ended 31 March 2019 (expressed in US Dollars and Naira) - 30 April 2019
page 35. Related party relationships and
transactions
The Group is controlled by Seplat Petroleum Development Company Plc (the 'parent Company'). The shares in the parent Company are widely held.
24a. Related party relationships
The
services provided by the related parties:
"Cardinal Drilling Services Limited
(formerly Caroil Drilling Nigeria Limited): Is owned by common shareholders
with the parent Company. The company provides drilling rigs and drilling
services to Seplat."
3. pg 46, Note 19 The Interim
management statement and consolidated interim financial results For the nine
months ended 30 September 2016 (expressed in US Dollars and Naira) - 27 October 2016
page 46. Related party relationships and
transactions
The Group is controlled by Seplat Petroleum Development Company Plc (the
parent company). The parent company is owned 21.37% by Maurel & Prom (MPI),
15.19% either directly or by entities controlled by A.B.C Orjiako (Shebah Petroleum
Development Company Limited) and members of his family and 13.15% either
directly or by entities controlled by Austin Avuru (Professional Support
Limited, Abtrust Integrated Services and Platform Petroleum Limited). The
remaining shares in the parent company are widely held.
19a. Transactions
The
Service provided by related parties are:
"Cardinal Drilling Services Limited
(formerly Caroil Drilling Nigeria Limited): is owned by common shareholders
with the parent company. The company provides drilling rigs and drilling
services to Seplat."
Related
Links to Seplat's Announcement/Release
1.
Seplat twitter Seplatpetroleum status on
temple Road
2.
Seplat PressReleases
3.
Seplat's Corporate Disclosure on the
London Stock Exchange
4.
Seplat website
5.
Seplat's Corporate Disclosure on the Nigeria
Stock Exchange
Source: Screengrabs of
releases direct from platforms indicated
Seplat's Related Party
Relationship with Cardinal Drilling Nigeria
1.
Seplat 2019 Audited
Report - Note 42, page
226
2.
Seplat Q1 2019 Interim
Result - Note 24, page
35
3.
Seplat Q3 2016 Interim
Result - Note 19, page
46
4.
CARDINAL DRILLING Nigeria - Homepage
5.
SEPLAT
Plc Refutes Being Party to Cardinal Drilling Services Loan with Access Bank
6.
IAS 24 - Related Party Disclosures
Related News - Seplat Plc
1. Visit Seplat Plc's
IR Page in Proshare
MARKETS
2. View the One
Year Share Price Movement
3.
SEPLAT
Plc Refutes Being Party to Cardinal Drilling Services Loan with Access Bank
4.
Seplat appoints Mr. Emeka Onwuka as Chief Financial
Officer and Executive Director with effect from August 1, 2020 - Seplat, July 10, 2020
5.
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8.
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9.
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14.
SEPLAT Announces the
Tax Implications of 2019 Final Dividend...
15.
SEPLAT Notifies of 2019
FY Final Dividend Currency Exchange Rates...
16.
Seplat Petroleum
Development Company Plc Q1 20 Results - Impairment Loss Drags S...
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