The Story Of A Visionless Caper: How Political Shenanigans Led To A Bond Default


Thursday, April 04, 2019    / 11:15AM / By Faye & Fraser Briefing Note 


On Tuesday, the 5th of March 2019, bond investors of the oddly named Municipality Waste Management Contractors Limited (MWMCL) expected to receive their scheduled half yearly payments - comprising a coupon and an amortised principal component - of the bond notes issued in 2017. Much to their dismay the day passed by without any bank account alerts. For over a year, Visionscape, a waste management company, and ultimate obligors of the MWMCL bond, had been effectively emasculated by the Lagos state government, who had two years earlier granted it a near monopoly in all matters related to refuse collection and waste disposal in the state. 


Even with the uncomfortable and public nature of the falling out with the Lagos State Government (LASG) - as the bond was guaranteed by the full faith and credit of LASG with a legally binding insurance policy called Irrevocable Standing Payment Order (ISPO) against the state revenue account - there was little cause for concern. That is, at least to the bond holders, if Visionscape did not generate enough cashflows to meet the bond payments, LASG would step in to make them whole. 


Or so they thought. 


Visionscape who?


Despite being Nigeria’s economic capital with a large population and bustling economy, visitors to Lagos would have quickly observed that the state was covered in dirt. This reflects a waste management arrangement, put in place in 2003, which struggled to come to grips with the explosion in population and increasing levels of economic activity. In 2017, as part of a reform plan to modernise waste management in the state, Governor Akinwunmi Ambode outlined a Cleaner Lagos Initiative (CLI) which sought to overhaul the process and parties involved in refuse management in Lagos. 


The CLI introduced a new company, a previously unknown entity called Visionscape Sanitation Services, tasked with the responsibility of managing the entire process of refuse collection and disposal in Lagos. CLI claimed that Visionscape emerged out of a competitive process and that the company was an experienced operator - a claim found to be clearly untrue after some internet sleuthing by Nigerians. Under the arrangement, Visionscape would carry-out refuse collection in Lagos in line with agreed terms and would be paid for this service by LASG. 


But before it could begin operations, the company had to solve a basic problem - how to raise finance to acquire equipment needed for the venture. As Nigeria was in the throes of an FX liquidity crisis, Visionscape could not raise money offshore and that money could not be sourced from the local banking system which was mired in dealing the with fall-out from a spiralling bad loan crisis. 


As Visionscape did not have any history of operating in Nigeria, or anywhere else for that matter, it could not raise debt in its own name. So some investment bankers came up with a rather novel idea - get Lagos to underwrite an amortising bond sale by Visionscape to ensure manageable pricing and gain investor credibility. To allay any doubts, a sinking fund would be created, to which Lagos would make monthly payments which would in turn be used to fund semi-annual bond payments. 


And so a special purpose vehicle with the mouthful name of ‘Municipality Waste Management Contractors Limited’ was floated to suit this purpose. With this, Visionscape approached bond markets with its MWMCL vehicle to raise debt finance totalling N28.5 billion (US$79 million) in three tranches (A-C) in 2017. Curiously, the bond was marketed as a private bond, meaning it did not have to scale onerous SEC requirements and was even dubiously tagged a ‘green bond’ by the promoters. To rubber-stamp the whole process, the LASG cabinet drafted and got the State House of Assembly to pass a bill which provided legal cover for the entire arrangement ranging from Visionscape’s appointment as refuse collectors, to the bond guarantees and the radical overhaul of refuse collection in the state.


A Public Use Levy (PUL) was also to be introduced - effectively a household tax based on the size of each dwelling. The revenues from the PUL were to be sequestered to fund Visionscape’s operations. 


Good idea, bad politics 


However, the entire reform proposal was in deep denial of an underlying political reality behind refuse collection in Lagos. Specifically, the concept behind Visionscape marked a sea change in waste management in Lagos as it sought to replace an ‘ancien regime’ comprising two key players - a state waste management agency called LAWMA and private refuse collectors called PSP operators. Established in 1977, LAWMA acted as the main government agency responsible for refuse collection in Lagos. It was funded from state budgets and loomed large in refuse affairs, but the CLI sought to relegate it to a minor regulatory agency with little teeth. 


More provoking was that under CLI, Visionscape would replace entirely the PSP operators: a motley crew of private waste management operators given monopoly rights for refuse collection across various wards in Lagos state. Beneath the surface, it was widely known that the PSP operating licences were a political patronage tool with which the ruling APC political machine in Lagos placated its members and loyalists at ward level. This patchwork arrangement had been in operation since 2003 but had become clearly insufficient to meet the growing need of a Lagos metropolis bursting at the seams.


The idea of a new tax also became collateral damage following Governor Ambode’s failed attempt to increase property taxes in the state. That attempt ended in a fiasco with the governor effectively walking back the entire property tax hike, even after a failed attempt at turning it into a class war where he promised only the rich would pay. The optimistic sequencing of the reforms was that the PUL would be introduced once the new land use charges had been passed. In the event, the PUL was dead even before it was born. 


Visionscape laid to waste


Despite widespread disillusionment with the economic policies of the ruling All Progressives Congress (APC) at the presidential level, the party had maintained its chokehold over politics in Lagos and had succeeded in weakening the opposition at state level. This implied that the current governor could afford to take the bold gamble with little fear of political backlash at the polls. However, he clearly underestimated the angst and political reach of the PSP operators, who were never going to accept the removal lying down. 


Firstly, the PSP operators began sabotaging and attacking Visionscape trucks and staff at night rendering them unable to carry out their contracted obligation. Though Visionscape had claimed it was an experienced operator, it simply did not demonstrate the competence and planning required to manage the transition which resulted in the return of refuse heaps.

Not done, the highly connected PSP operators got Bola Tinubu, the godfather of Lagos politics and ‘Governor Emeritus’, to withdraw his political support for the current governor. In a stunning reversal from what looked like a certain re-election, Governor Ambode was humiliated at his party’s primaries leaving Visionscape politically exposed without a backer.


With the entire political machinery in Lagos now against the governor and the Visionscape scheme, the Lagos House of Assembly moved to reverse the entire legal framework which set up CLI, in the process disemboweling Visionscape and making it ‘illegal’ for the state to pay Visionscape for its services on the grounds that the company had failed to meet its part of the waste disposal obligations. 


The fear of ‘anti-party’ and the ides of March


Shorn of his powers, the state bureaucracy ceased to respond to the governor’s orders and began acting outside of the regular chain of command in response to fears he might play  a spoiler to the APC. The APC feared that he would fund the opposition PDP in the gubernatorial elections or even defect to them. The APC reacted to this fear by triggering impeachment proceedings against him. 


More importantly,  it sought to suppress any outward payments by LASG using the ‘deep state’ network of Tinubu loyalists across the state bureaucracy to forestall the aforementioned ‘anti-party activities’. Thus, LASG stopped making its monthly sinking fund commitments to bond trustees in Q4 2018. While this should have ordinarily raised eyebrows, the bond trustees still did not see any cause for alarm. Owing to what appears to be an unwholesome close relationship with LASG, the missed payments were viewed as nothing sinister as LASG consistently honoured all bond payments. 


But as 2019 rolled on slowly and the next bond repayment date approached, the trustees soon realised their earlier optimism had been unfounded as the underfunded sinking fund account could only meet coupon payments. A default loomed. Despite pleas to the governor - who claimed he had approved payments - the accounts remained underfunded as the ‘deep state’ resisted making any outward transfers. Even after winning the presidential elections and being in poll position to win the gubernatorial elections at the state level, still no payment came through. Rumours even began to spread that Governor Ambode was gearing up to transfer N1 billion to the opposition PDP. 


Left with no option, bond trustees elected to make only coupon payments but no principal payments on March 5th, 2019 as they likely reckoned that half default is better than full default. Even worse, some technical issues meant that the actual cash transfers occurred a day later. The missed payment kicked off something of a media firestorm and a ratings downgrade to default status. LASG, in its infinite wisdom, chose this exact moment to remain silent and perhaps pushed a provocative narrative through its proxies that it was Visionscape, and not  LASG, that had defaulted on the bond obligations. 


The SEC also did a Pontius Pilate by issuing a clarification stating that the MWMCL bond was not a green bond and as it was a private arrangement, fell outside of its purview. It is safe to say that this did not go down well with bondholders. 


The market always remembers


Less than a week after the default, the APC swept to a landslide victory at the governorship election and after the clinking of glasses to celebrate the win the reality of the implication of a bond default slowly began to sink in. For one thing, the state has two bonds falling due over the next two years - an N80 billion bond maturity for November 2019 as well as an N88 billion due in November 2020. In line with the recent past, the state would be expected to rollover these obligations with fresh bond issuances. In fact, the state was working on a plan to go to the debt markets in Q3 2019. 


Given the default, there was no way Lagos could successfully approach debt markets as it counted local pension funds among the note bondholders aggrieved by the MWMCL default. 


With this in mind and the threat of ‘anti-party’ gone, as if by magic, LASG resumed monthly sinking fund payments which allowed bond trustees to make the note holders whole (inclusive of default interest) by the end of March 2019. Nevertheless, innocence has been lost and the confidence local bond markets had long assumed in LASG has been severely shaken.


Going forward, Lagos would likely need to pay more to borrow and provide more stringent guarantees before it can successfully tap bond markets. The idea of an ISPO secured against the state’s internally generated revenues (IGR) has been shown to be wide open to political interference. While creditors almost always demand an ISPO secured against federally allocated revenues from other states (allowing the money to be deducted at source by the federal government), LASG has long sidestepped this requirement on the grounds that it earned far more revenues from its IGR than from federal remittances.


What becomes of the CLI and Visionscape? Many Lagosians did not fail to notice the recent change in signposts adorning Visionscape’s main waste treatment plant - the giant Visionscape sign atop the building was suddenly taken down and replaced with the five-letter initial of the very agency it had sought to replace; LAWMA. 


Nigeria’s dysfunctional and destructive politics has struck again.




This post, The Story of a Visionless Caper first appeared in Faye & Fraser Briefing Note on Mon, Apr 01, 2019. To subscribe and follow click here



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