By Michael Ogunleye and David Graves
Nigerian oil and gas companies are pinning their hopes on Western demand for new debt, as appetite for energy deals wanes. The fall in oil prices, an FX shortage and militant attacks on oil-sector infrastructure have pushed indigenous firms – including those that acquired oil fields from Shell and Total – into deep distress. As a result, several of these companies have been forced to restructure the maturities of their loans.
Amidst these dire circumstances, Nigerian oil and gas companies may be thrown a lifeline in the form of yield-hungry fixed-income investors. Seplat, for example, headed to London in March to discuss a US-dollar bond, primarily with hedge funds.
“These developments come as no surprise to me,” said Femi Ogunkolati, chief executive officer of Synterra, a Nigeria-based conglomerate with interests in energy. “Going forward you’ll see a slew of companies doing this, but pricing will be steep. Local banks don’t have the capacity they used to. Indigenous firms will need to refinance, but with all the supply disruption, doing so may no longer be an option.”
It’s an assertion backed by numbers. At the end of 2016, the average NPL ratio of Nigerian banks rose to over 10%, according to these banks’ financial statements. Exposure to the oil and gas sector took up the bulk of these “bad loans.”
When oil was $110 a barrel, many Nigerian firms that have since been hit with distress borrowed big from these lenders through borrowing base facilities. But when the drop in prices is as swift as over the last few years, hedging strategies can be insufficient and new loans are almost impossible.
“Local banks are focusing on restructuring deals, as opposed to new loans,” said an energy banker. “Banks just want to ensure their existing assets are maintained. We pushed out the maturity profile for one of our clients in the sector last year, but there has been little in the way of new deals.”
The banker was alluding to a $1.5 billion five-year facility Aiteo signed in 2014, with a syndicate of local banks. But militant attacks on oil and gas assets, specifically in Bayelsa and Delta States, have raised concerns about some of the region’s assets, including those of Aiteo.
Aiteo’s creditors subsequently extended the maturity of the loan by two years, the banker said, adding that Aiteo may follow Seplat to the Western market for liquidity. “Sahara Group were doing the rounds a few years ago. Aiteo could do the same.”
Other deals in the pipeline include a $1 billion syndicated loan, used to finance the acquisition of upstream and midstream assets held by Shell. The financing, arranged by Afreximbank, Standard Chartered and VTB capital, will involve a large Western contingent, amid the shortage of dollars locally.
“It’s the big sponsors that have the balance sheets to back these projects,” said a source on the deal. “Nigerian banks used to have a massive FX book – but that space has come under pressure.”
Going forward, deals for local firms with Western investors will largely depend upon the issuer’s reputation, the energy banker said. “It really boils down to the credit, Seplat should get some traction,” adding many of its operations are derived from gas. Nigeria’s Trans Forcados pipeline remains under force majeure following attacks by the Niger Delta Avengers, but Seplat may still get a deal away, sources said.
“Forcados will be coming back online shortly, plus Seplat have developed alternative terminals for oil transportation,” said Dolapo Oni, head of energy research at Ecobank Nigeria. “It’s also more of a gas play,” he said.
They are not the only ones looking for cash. “Close to 100% of indigenous oil and gas companies need funding of some sort, either to meet debt repayments or fund significant field development capital expenditure,” Amaechi Nsofor, director at Grant Thornton, previously told Debtwire.
A circular from the central bank of Nigeria (CBN) could hasten the hunt for liquidity, blocking Nigerian banks’ ability to obtain short-term dollar loans from international lenders. A chunk of the energy sector’s borrowing came from funds local banks received from this market. “These loans have been a lifeline for Nigerian banks, but they have also caused problems. It may slow lending to the sector,” a loans banker said.
However, a third banker suggested the CBN’s decision will have a minimal impact. “The CBN have already implemented measures to curtail the exposure banks have to that sector. Loans made to oil and gas companies have been shrinking for a while. I don’t expect the circular to make much of a difference.”
Michael Ogunleye is the Africa Reporter at Debtwire, based in London, where he covers syndicated loans, bonds, and project finance. He can be reached at firstname.lastname@example.org
David Graves is the CEEMEA Restructuring Reporter at Debtwire, based in London, where he covers distressed debt and restructuring situations. He can be reached at email@example.com