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ALTERNATIVE TEMPLATES FOR RESOLVING SYSTEMIC DISTRESS: LESSONS FROM AMCON

Posted on: 24 Jul 2017

Asset Management Corporation of Nigeria (AMCON) was established on the 19th July 2010, as a resolution vehicle to purchase the non-performing loans (toxic assets) from banks, inject liquidity into the banks and subsequently recover the purchased bad loans.

It was fundamentally created to be a key stabilizing and re-vitalizing tool aimed at reviving the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy.

Kola Ayeye, Executive Director, Asset Management Corporation (AMCON) spoke on the topic: Alternative Templates for Resolving Systemic Distress: Lessons from AMCON at the Nigeria-South Africa Chamber of Commerce breakfast forum sponsored by Protection Plus Services Limited.

He mentioned that AMCON has a great deal of Opportunity Cost such as follows:

  • N3.9trn ($26Bn) will capitalize 2.6M micro businesses with $10,000 (N1.5m) or 260,000 SMEs with $100,000(N15m)
  • N3.9trn ($26bn) could generate 26,000MW at $1m/MW
  • 2.6M businesses could improve living conditions of about 15Million Nigerians assuming dependency ratio of 5.
  • At a cost of N1 million p.a. for quality education for the first 12 years of education, and a Treasury Bill rate of 10%p.a., N3.9trn will support 573,520 children through primary and secondary education.

At such significant opportunity cost, AMCON owes the nation and the banking system a substantial payback.

According to him, AMCON is a child of necessity, the incidence of high non-performing loans in the banking industry, as well as the erosion of capital in some banks, informed the need to set up the Asset Management Corporation of Nigeria (AMCON) in 2010 in order to relieve banks of the burden of toxic assets.

The main purpose of   AMCON is to stimulate the recovery of the Nigerian financial system through the following:

  • providing liquidity to the non Intervened Banks and the  Intervened Banks
  • providing capital to the non Intervened Banks and the Intervened Banks
  • increasing confidence in bank balance sheets
  • increasing access to restructuring/refinancing opportunities for borrowers

It is noteworthy to mention that AMCON is unarguably regarded as a securitization vehicle.

According to the Assets Management Corporation of Nigeria Act (2010), the Corporation is established to achieve among others, the following objectives:

  • Assist Eligible Financial Institutions to efficiently dispose of Eligible Bank Assets in accordance with the provisions of the Act
  • Efficiently Hold, manage, realize and dispose of Eligible Bank Assets (including the collection of interest, principal and capital due and the taking over of collateral securing such assets) acquired by the corporation in accordance with the provisions of the Act; obtain the best achievable financial returns on Eligible Bank Assets or other assets acquired by it in pursuance of the provision of the Act.

  • Paying coupons on and redeeming at maturity, bonds and debt securities issued by the Corporation as consideration for the Acquisition of Eligible bank assets in accordance with the provisions of the Act.

  • Performing such other functions, directly related to the management or the realization of Eligible Bank Assets that the corporation has acquired.

The Financial Implications of Liquidating Intervened Banks, without an AMC, the only option available to the Government would have been to liquidate the Banks through the NDIC (AMCON, 2013). Ten (10) out of 21 Nigerian Banks were exposed to winding up.

He also summarize AMCON Intervention since Inception:In December 2010 , AMCON paid N866.2 billion to purchase of EBAs valued at N2.46 trillion from Eligible Financial Institutions (“EFIs”).  In April 2011, Registration of AMCON Debt Issuance Programme and purchase of additional EBAs valued at N675.2 billion at a purchase price of N377.8 billion. Also in  August 2011 Capitalisation of Mainstreet Bank, Enterprise Bank and Keystone Bank – N736.9 billion.

Whereas in Sep – Oct 2011, AMCON provided Deposit Restoration Funds to ETB, FinBank, Oceanic Bank, Intercontinental Bank and Union Bank – N1.364 trillion.

In December 2011 AMCON acquired additional EBAs valued at N885.3 billion at a purchase price of N515.2 billion. At March 2017, All the bridge banks (Mainstreet, Keystone & Enterprise) have been sold to new investors

Based on AMCON MODEL, it acquired Eligible Assets (EBAs, Restructure EBAs, Dispose Collateral, Issue Debt Securities, Provide Financial Accommodation (Deposit Restoration Fund), Manage Proceeds and Redeem Debt Securities.

Asset Management Corporation has significantly purchase eligible assets. It bought eligible assets worth 3.3 trn for N1.7 trn from banks, financed by Zero coupon bond issue. It provided strong Financial Accommodation, 8 banks provided with N2.2 trn financial accommodation and this protected N4.7 trn depositors fund.

On the Recovery/Resolution, there was aggressive debt recovery effort; Restructuring of debtors business; Sale of assets.

And on the Redemption, Payback capital injected, as well as repayment from sinking fund

Furthermore, AMCON raised N1.7 trn from bond issued in 3 tranches, used it to buy eligible assets, expected to get a margin from recovery. According to Ayeye on Eligible Banks, Owners took the hit and transferred assets with book value N3.3 trn to AMCON.

He  added that Asset Management Corporation of Nigeria has provided 8 banks with financial accommodation worth N2.2 trn to protect N4.7 trn depositors fund, injected N1.379 trn into 5 intervened banks (Intercontinental, Oceanic, Finbank, ETB & Union, acquired 3 bridge banks (Keystone, Mainstreet & Enterprise) from NDIC & Invested N1.012 trn into them. The N2.3 trn financial accommodation is expected to be covered by the improving margin on asset purchase.

Also, at redemption, there appears to be a huge deficit that the government might need to make up for or extend the life span of  AMCON based on the following:

  • There was an instant of N1.6 trn margin when eligible asset worth N3.3 trn were bought for N1.7 trn.  The margin was expected to even rise
  • This has not been the case as the assets value has not risen
  • The economy has been worse than the period when the assets were taken
  • Hence, recovery has not been as expected
  • The 0.5% contribution of the banks to sinking fund was based on the assumption that their capital would grow by 20%
  • This growth projection has not been met. Hence, lower contribution.

Recovery/Resolution

The assets were passed on because they were bad. The first 5-6 years of AMCON were a period the economy was booming. If the debtors had difficulties paying, what happens during a receding economy? AMCON helped some firms restructure to facilitate recovery. If a debtor still cannot pay his obligation, then the entity is taken over. (Aero contractors and Arik are case studies). Recovery effort is key to redemption of bonds.

According to him, the Financial Stability Report released by the Central Bank of Nigeria for December 2016 revealed that three banks in the country failed a Capital Adequacy Ratio (CAR) test in the event of a default in inter-bank lending. Two of the banks were Systemically Important Banks (SIBs). However, none of the banks involved were mentioned in the report.

The CAR for commercial banks in the country is set at 10% for national banks, 15% for banks with international subsidiaries and 16% for SIBs.

The report also revealed that smaller banks in the country were more exposed to a risk of default in the oil and gas sector, and that the banking industry as a whole would fall below CAR requirements if there was a 200% spike in non-performing loans (NPLs).

Though recent signs are suggesting so, AMCON’s balance should not be grown. Instead, any of the following options should be considered:

(i) Total failure: Allow total failure, protecting only insured depositor.

  • Depositors will suffer massive losses with potential run on surviving banks and economic disruption.

(ii) Partial failure: Allow failure but migrate insured depositors and assets to strong institutions

  • Massive losses to be suffered by depositors

(iii) Total Protection: Protection depositors through wholesale acquisition by other banks.

  • This offers stability to the financial system and protection of depositors.

The presentation helped participants to understand that the essence of AMCON is to procure total protection for organization that suffer distress, protect all depositors through wholesale acquisition by other banks and offers stability to the financial system & protection of depositors.