Etisalat: How banks got their fingers burnt

AYOOLA OLAOLUWA|

More facts have emerged on how the consortium of 13 banks involved in Etisalat Nigeria’s failed $1.2 billion loan deal got their hands burnt.

BH gathered that their misfortune can be traced to irresponsible lending, brought on by a catastrophic lack of due diligence.

Hints of trouble had surfaced in early March when news broke that Nigeria’s fourth largest mobile telecommunication service provider, 9Mobile, previously known as Emerging Markets Telecommunication Services or Etisalat Nigeria, missed payments on a US$1.2 billion loan it took four years ago from a consortium of local banks.

The troubled firm had obtained the $1.2bn loan in 2013, a seven-year facility, for the purpose of refinancing an existing $650 million loan and expanding its network and improving the quality of service on its network.

However, due to several factors, including alleged unethical practises on the part of its management; the economic downturn of 2015 and sharp devaluations of the naira, which negatively impacted on the dollar value of the loan, Etisalat ran into troubled repayment waters.

This led the company to request the consortium of lenders to consider a restructuring of the loan, while seeking a conversion of part of the foreign currency obligation into naira, a request the lenders rejected.

The banks demanded instead for the parent Emirati Company to recapitalise its Nigerian subsidiary, in which it had a 45 percent stake. The Dubai based firm refused, choosing to divest instead by transferring its shares to a loan trustee.

After  protracted and unsuccessful negotiations, concerned industry regulators, namely the Central Bank of Nigeria (CBN) and the Nigerian Communications Commission (NCC), intervened.

By the time the dust settled, the unprepared banks became the new owners of the troubled network, taking over potential liabilities of the company’s other creditors in some arrangement industry watchers considered to be a bad deal.

Most keen observers who spoke with Business Hallmark blamed the consortium of banks on the their managements failure to carry out critical due diligence before granting the loan.

Though, banking experts have agreed that there is always the potential for things to go wrong, even with the most convincing, realistic and probable business plans, they maintain that the banks failed to follow the number one principle of prudent lending when granting a loan, which is ‘Confirming the identity of the borrower and all other parties’.

“There is no doubt that the banks failed to confirm the identity, and by that I mean the integrity of the borrowers, which is the first and perhaps most critical of the different credit requirements’’, said a lecturer of banking and finance in one of the country’s premier universities who declined having his name mentioned for this story.

According to him, “It is imperative that details of the borrowing company is established – that is, not just the company itself, but who controls it, who is associated with it, who its investors are, if the company or its backers have a history of a shadowy past.”

Said the university don, “If the borrower cannot be established as a trustworthy individual or group of individuals, then the loan application should proceed no further. There were enough red flags for all to see, yet the banks proceeded to grant the loan.

As far as he was concerned It was a known fact that all the promoters of Etisalat Nigeria had dodgy antecedents. The firm’s major sponsors, Etisalat International and Mubadala (with 85% control) had pulled off a similar scheme in Tanzania and India.

He was equally of the opinion that their Nigerian partner (with 15% control) also had a dubious past. Yet again, this red flag was ignored, and no explanation demanded. Some people should be made to pay for the oversight, insists the lecturer.

Another financial analyst, Kayode Tinuoye of United Capital Plc, blamed the banks for their failure to secure adequate and realizable collateral for the loan.

“Let me state first that even convincing and well thought out business plans fail. However, what is the security pledged for the investment if this happens? What assets are available that can be mandated as security – i.e. what could be sold to repay the loan if the business failed to repay the debt within term?’’

As far as United Capital’s Tinuoye was concerned, “It seems that the banks failed to secure the loans with appropriate collateral. I think they were swayed by the brand name. Much of the confidence the banks reposed in the company was due to the backing of Mubadala Development Company, the main investor in the Emirati mobile operator.’’

“I think the lenders should have been a little more circumspect by making the loan terms more stringent. Was a guarantee sought from Mubadala, especially as the currency mismatch was written large? We do not know. Now, they are in trouble. But I think all hope is not lost. They have the option of selling the network or finding new investors for it. Through this they can recoup their money”, Tinuoye said.

Another investment lecturer, Prof. Leo Ukpong, a Professor of Financial Economics at the University of Uyo, Awka Ibom, described the Etisalat debt saga as unfortunate.

Ukpong who is the Dean of the School of Business Studies, University of Uyo, said the unfortunate development shows deterioration in corporate governance and a failure to learn from the ugly past.

“The problem started a while ago when Etisalat failed to service the loan. The loan is too big for the company to have been left with to manage alone. The banks failed to do their oversight functions. And I think this is where the allegation of collusion comes in.’’ he said.

“However, I am not too sure with this line of thinking. It is quite possible for two or three banks to collude with corrupt officials in the telecoms firm to perpetuate fraud. But how do you explain 13 banks coming together to do that. This is almost an impossible task to achieve. One or two would have disagreed and spill the bean.

“Despite that, I believe the banks should have managed the debt problem better by moving in earlier to restructure the loan before it went bad,” Ukpong said.

However, an investment banker, Kofoworola Turner, defended the banks, noting that they could not have envisaged the naira would take a turn for the worse only 3 years later.

“To be fair to the banks, there is probably not much they could have done differently. That is, beside not giving the loan in the first place. A banker had to be insane not to lend to Etisalat money. The telecoms industry used to be a cash cow for investors. With 20 million subscribers (14 percent market share), the network is an important firm in Nigeria.’’ argues Turner.

“I learnt that guarantees were indeed sought and received from the Mubadala nominees on the company’s board. However, judging from how easily the foreign directors were able to extricate themselves, they probably thought it was not watertight. This suggest that the banks did not tie up the loose ends”

She also advised that banks should do due diligence and structure their transactions properly to ensure they do not lose money in the future.

“This is a lesson to banks. They should have forced strategic firms such as Etisalat, MTN Glo and others to list on the Nigerian Stock Exchange (NSE) before they could access loans from them. If Etisalat had listed, it would have needed to publish its accounts regularly. Alleged financial shenanigans misdeeds would probably have come to light much earlier. And Mubadala would not have easily walk away from its responsibilities.

“The troubled firm would also have been able to raise equity capital by issuing additional shares. There could have been more benefit to the economy certainly, from dividend payments and capital gains to its equity investors. Better transparency might have made the public more sympathetic for sure. Public pressure early on could have instigated needed changes in time to forestall a default perhaps.

“This is where relevant bodies such as CBN, SEC, the National Assembly and others come in. They should institute laws that would ensure transparency and ensure that this kind anomaly is minimised or difficult to occur”, she advised.