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Published On: Mon, Jun 26th, 2017

Etisalat crisis drags market to three week low

FELIX  OLOYEDE

The crisis between telecommunication company, Etisalat Nigeria, and a consortium of 13 commercial banks over a $1.2 billion loan has dragged the All Shares Index (ASI) down to its lowest value in the past three weeks. The problem has knocked the wind from the markets sail as investors begin to take profit from their banking sector positions. The ASI and market capitalization dropped-4.99 percent week-to-date to 32,122.14 and N11.11 trillion respectively; this was their lowest values since June 2, 2017 when the ASI and market capitalization closed at 31,371.63 and N10.85 trillion respectively.

Source: NSE/Business Hallmark

Source: NSE/Business Hallmark

 

The price of Brent Crude declined -3.24 percent to close at $45.39 per barrel last week due to glut, making investors worried about the stability of the Nigerian economy, which has been in recession since the first quarter of 2016, but was showing signs of recovery when oil price started appreciating and climbed to almost one and a half year high of $57.10 on June 1, 2017.

Investors expressed their apprehension when news broke that Etisalat Nigeria’s largest shareholder, which is based in the United Arab Emirates, Mubadala Development Company was pulling out of the company after talks to restructure its $1.2 billion debt to a consortium of 13 quoted local banks fell through. The panic that accompanied this planned pull-out made the banking index dip -6.78 percent to 386.53 on Friday from 414.65 on June 16, making it the highest drop among the various sectors listed on the exchange.

Source: NSE/Business Hallmark

Mr Johnson Chukwu, Managing Director, Cowry Assets Management Company Limited, asserted the stock prices of banks exposed to Etisalat Nigeria declined because discussions between them and the telecom company collapsed and regulators prevented the lenders to take over its operations.

“It is expected that these banks would make additional loan provisions to accommodate this delinquency, so the market is pricing this provision and this affected their share prices,” he explained.

He stated further that the stock market gauges current performance and outlook, so, it would respond to any factor that would affect the economy.

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“The   drop in oil price that at some point was below the $44.5 benchmark would ordinary affect the market performance,” he claimed, “good a thing was that the price of Brent has moved above the benchmark price.”

Mr Pabina Yinkere, analyst with Vetiva Capital Management Limited believed it was the decline in oil prices and some profit taking that caused the capital market to run into a bearish mode last week.

“Oil prices are weakening and you know how sensitive the Nigerian economy and market are to oil prices that could have been one of the reasons the stock market was bearish,” he opined, “The market has rallied since mid-April, I think it was time for some profit taking.”

Yinkere argued that the Etisalat loan was only about 2 percent of the total loan portfolio of the affected banks, making it insignificant to be able to cause their share prices to be adversely affected.

Access Bank, Zenith Bank, Guaranty Trust Bank, First Bank of Nigeria, Fidelity Bank, First City Monument Bank (FCMB), Stanbic IBTC, Ecobank, United Bank for Africa (UBA) Plc and Union Bank of Nigeria Plc formed the consortium of commercial lenders that gave Etisalat Nigeria a $1.2 billion facility for the payment of the telecoms foreign loan and also for the expansion of its network.

Three of these banks were among the 10 highest losers last week.

Jaiz Bank Plc, Diamond Bank Plc, FBN Holdings Plc and FCMB Group Plc were among the 10 top losers during the week, shedding -17.98 percent, -15.04 percent, -14.51 percent and -12.50 percent respectively between Monday and Friday.

Neimeth International Pharmaceuticals Plc (N0.68), AshakaCemPlc(14.07) and Livestock Feeds Plc. (0.91 1) were top gainers, appreciating 44.12 percent, 21.39 percent and 20.88 percent respectively week ended June 23, 2017, while Transnational Corporation Of Nigeria Plc(1.86) -23.12 percent, Jaiz Bank Plc(0.89)and Fidson Healthcare Plc(3.30)were the top losers, shedding -23.12 percent, -17.98percent and -16.67percent of their value.

 

The Etisalat debacle has been seen as a mix of poor capital planning, weak credit management and dodgy corporate objectives. The company was propped for crisis as far back as 2015 when it took a loan of slightly under $2 billion to overhaul its operations and install further infrastructure. The problem was that business met greed. The owners of the company leveraged its cash flow to live lives of barons. They quickly consolidated a jet set mentality that wrongly interpreted the easy popularity of etisalat among young Nigerians as a free pass to a life of exuberant luxury. Ultimately poor service quality, vendor indebtedness and reneging on payment agreements with technical partners saw the company collapse like a poorly made soufflé. The company’s chairman Keem Bello-Osagie is not new to such fumbling business practices as he was embroiled in a similar challenge as chairman of UBA in the 1990’s.

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The lending banks themselves were not without blame as their credit appraisal mechanisms failed to point out the obvious overleveraged position of etisalat. The company’s emergent cash flow position confused or perhaps more accurately seduced credit analysts to ignore the company’s weak ‘free cash flow’, its huge capital expenditure and its thinning networking capital. In sum etisalat was a ticking bomb waiting to explode. The hubris of the banks has, allegedly, had adverse impact on their stock prices as several bank stock prices tumbled over the week on heavy trading and profit taking.

Etisalat, which started operations in Nigeria in 2009, was given a unified access license, including a mobile license and spectrum in the GSM 1800 and 900 MHZ bands from the NCC in January 2007.

The Nigerian Communications Commission (NCC) ranks the Telco as Nigeria’s fourth largest telecoms operator, with about 21 million subscribers or about 12.9 percent of the telecom market service delivery space as at January 2017.

MTN holds 40 percent market share with about 60million subscribers; Globacom, 37million subscribers, or 24.6 percent of the market and Airtel 34.6 million subscribers or 22.8 percent.

 

 

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