Lagos– investadvocate in its usual manner was in a Question and Answer Session at a Media Parley with Business Editors by Union Bank of Nigeria Plc. The major issue discussed is the ongoing recapitalisation of the Bank to beat the September 30 2011 deadline set by Nigeria’s Central Bank for the Eight Rescued Banks. Excerpts as presented by the Bank.

Will Union Bank still be around by September 30?

Indeed, we will definitely be around. Our recapitalisation process is progressing well. I believe that prior to this time, the last public communication on the recapitalisation process by us was in relation to the execution of the Memorandum of Agreement (MoA) with a group of Private Equity Investors, led by the African Capital Alliance Consortium. We did at that time highlight the members of the Consortium. You will also recall that at that time, we had mentioned that we would be proceeding to the next phase in the process, that is, the negotiation and execution of the definitive and robust agreement called Transaction Implementation Agreement (TIA). This is the agreement that provides for the final details of how the recapitalisation process and the imminent investment by the Consortium will be implemented.

As published this month, we have now signed this agreement. It is a detailed document of how the relationship will work and the way the Bank will be recapitalised based on agreement. With the execution of the agreement, the recapitalisation process is now in full steam. The TIA is officially announcing the engagement of Union Bank and the core investors, subject to the approval of the Regulators and the Shareholders

With the signing of the TIA, we have gotten, as an institution into what we call a substantive agreement which will be presented to two key parties: the Regulators and the Shareholders for their blessing. It will now no longer be left in the hands of both the Management and Board, but the determining parties will now be the Regulators and the Shareholders. On the Regulators side, the initial key Regulators to approve are the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC), and the Federal High Court.

Therefore in terms of next steps in the process, following the execution of the TIA, we will obtain the CBN approval of the TIA, and then we will be approaching the SEC for clearance of what is known as the ‘Scheme Documents’ and separately the Rights Issue Circular. Once we have the SEC clearance of the scheme, we will be making an application to the Federal High Court to convene what is known as the Court Ordered Meeting of the Shareholders for the Scheme while we will also call for a meeting of the Shareholders to approve the proposed Rights Issue.

At this meeting, the Shareholders will be presented with the recapitalisation proposal and once approved by them and sanctioned by the Federal High Court, then this will trigger the injection of Capital into the Bank by our three partners, the Assets Management Corporation (AMCON), who will make sure that the Negative Capital of the Bank is restored to zero, and then there is the Core Investor and the Shareholders who will get the Capital of the Bank to Capital adequacy level. The Shareholders money will come in through a Rights Issue. We expect that once Shareholders approve, and the Federal High Court sanctions, the three partners will bring in money by September.

So Union Bank will be around, well after September 30. That in a nutshell is what we are doing on recapitalisation.

How comfortable are you with the Shareholders in view of the contention of most of the Rescued Banks’ Shareholders since the process started. Are there factors disturbing the process? Have there been issues with the Shareholders and the Foreign Investors?

I think each Bank is unique in its own way and the process for each Bank is unique. I can speak authoritatively for Union Bank and I can be very clear on that side. What is common is purely the aspect relating to how we all came into the Bank through CBN’s intervention. Beyond that, each Bank is arranging its recapitalisation in its unique way.

There will always be the Shareholders who agree and those who do not agree. And even when you take every institution, even without the CBN intervention, every Bank among its Shareholders, will have those who will disagree with what is going on in their Bank. But I believe that there has been too much emphasis on those who do not agree. What is going to be very useful is to request for the number and the volume of shareholding that those who disagree represent. How many are they? Though the law allows you, even if you are the only dissenting voice to raise your issue and even if you have only 1 share, it does not mean that this cuts across all Shareholders. We have over 500,000 Shareholders. When you have over 500,000 Shareholders, you should not expect everybody to be saying the same thing. But you should be able to do your best for those who are saying something different and to show them all the evidence that you are doing the right thing, and that is what we are doing.

So we should not generalise that all the Shareholders are in disagreement of the process. For Union Bank, we expect success and the reason is very simple. We have carried along, our various constituencies in different ways. We have had different meetings with different groups of Shareholders and stakeholders so that they are updated. We also made sure that openly, when they have questions, they are free to call us. I think in the last four weeks, several stakeholders have called me to find out if we can meet the September 30 deadline and I have always told them the position.

For Union Bank specifically, on our Foreign Investors, we have been very careful on how we went about choosing them. If you remember, I did tell you that there were many parties that were interested and we went through a rigorous process in selecting them. At Board level, there is a Board committee, and then there is the main Board and then we had the External Advisers also, who were assisting us with the process. We went through a rigorous process to choose. But beyond that, even before we signed the Agreement, the Investors had to come to Nigeria and were interviewed by us (the Management and the Board). They were interviewed so that we can know that they are who they said they are and also to know the value they are bringing to the Bank. We also went through a process for them to show that they can commit the money we are demanding, because we do not want to start a process and later find out that the parties don’t have the money.

Having done that within ourselves as Board, we went to the next stage where we carried out full due diligence on each of them. They call it confirmatory due diligence, where all parties do the full detail review of each other to know that what they think they are,  is what they really are. If some of you come to our Bank, it is not unusual to see some Foreigners hanging around the Bank and they fly in at different times and have their own different types of review. We also had international third parties who were doing their own due diligence on them, so that we also, can independently get information from those parties. This was the period we used to make sure that we get to the stage where both parties are very comfortable. So in that process, I believe we have done substantial unveiling of each other, that we do not expect any surprise. I believe that because the Board and Management did a decent job at the initial stage, during the second phase we did not find anything that will affect the transaction. So we are now at a stage where having signed the TIA we will now go through the regulatory approval.

Please explain the Negative Capital?

I will use some analogy. As you know, for all of us (intervened Banks), we have Negative Capital. It is not unusual for a Company to have Negative Shareholders’ Fund. It will always be negative when you are not making Profit and when whatever Capital you put into the Company has been eroded. So for instance, if you have Capital of N50 million as a Company and you made a loss of N120 million, automatically, your Capital is no longer N50 million, it is N50 million minus N120 million, which means that your Capital is negative by N70 million. When your Capital is minus N70 million, if you are an Ordinary Company, you can decide to bring in some money or you use the Profit to work your way out of it over time. When your Capital is negative, it is almost like saying you are bankrupt because everything you own has been wiped out as a shareholder.

However, in the Banking system, it goes beyond that, because banking is a licensed and regulated business and because banking has a major party; the Depositors, in that business. Often, the Capital that the Shareholders bring in is less than what the Depositors put down. So if you look at Banks, even those that do not have Negative Shareholders Capital, compared with their Depositors’ Funds, Capital is always small compared with the deposits. Because the Regulators licence Banks to be able to take other people’s money, use it and intermediate for others, the Regulator has its rules about what the Capital of the Bank should be, vis a vis the deposit it is taking and vis a vis  the various things it is doing. Even internationally, there is what is called the Capital Adequacy Ratio (CAR), where your Capital must be a minimum of a particular amount of your Qualifying Assets. So it means that even if you have Capital and it is positive, you can only grow by as much as that Capital allows you to grow, vis a vis how you relate it to your Total Assets.

So, if you come down to Union Bank, we have Negative Capital because our income is less than our expenses and we have given out loans that went bad and could not be repaid. By our Audited Accounts in December 2010, our Negative Capital was N182 billion. In addition, there is a Minimum Capital adequacy requirement that we must meet for a Bank our size on top of the Negative Capital. This total amount will be provided by AMCON, Core Investors and Shareholders.

If AMCON is taking shares, how does AMCON get the ownership in the Bank? Are you going to create additional shares for AMCON?

First, existing Shareholders are not selling what they have, in other words, this is not an Offer for Sale. It will be an Offer to AMCON and Core Investors of new shares to be issued as well as a Rights Issue to existing Shareholders, who want to own more shares. What will be sold will be additional new shares being issued and this will be given to the additional parties that became a Shareholder. Those additional parties will be the existing Shareholders (Rights Issue) and new parties (AMCON and Core Investor).

But is it necessary for AMCON to come in. Wouldn’t it be better to have this done between the existing Shareholders and Core Investors so that the Government doesn’t come into the Bank at all?

We need at least N200 billion to take the Bank’s capital to zero level, and then on top of this we need to take our Capital to what is referred to as “Capital Adequacy” level, which is statutorily a minimum of 10 percent of risk weighted assets (an ideal of 15 percent), if the Banking Licence of the Bank is to be retained. The Bank thus needs close to another N100billion after getting to zero level to be adequately capitalised.

From the data we have for the last four to five years, Public Offers as low as N20 billion failed to be fully subscribed, not to talk of N300 billion for one Bank out  of eight Banks needing large sums of Capital. Investors do not want to put down money without being assured that the Bank will be fully capitalised. If the Negative Capital is not covered, the Bank would have failed to meet the Statutory Capital Requirement and thus stands the risk of losing its Banking Licence with Shareholders and New Core Investors losing their investments. What AMCON is doing is significantly reducing the risk of failure by picking up the Negative Capital whilst leaving Shareholders and Core Investors to finish the capitalisation. This is very important and good for the Banks.

What is the Total Capital that would be put into the Bank at end of the process?

The precise figure cannot be determined until when we cut off. If the cut off is end of July, whatever Profit or Loss that the Bank  made between January and July 2011 is added to December 2010 figure and so it is at that point that you can be precise. So, you can only give estimate now. This is around the N300billion.

Considering the fate of NITEL, what is Plan B for the Bank’s recapitalisation?

Your comment on NITEL is a very useful one. I know such things do happen where an approved Core Investor does not provide money when called upon. This is especially so if you don’t do your homework before hand and making sure that those Investors are committed and have the ability to pay and honour their contractual obligations.  And to do that, you must have done a lot of home work in terms of due-diligence and investigation of the parties beforehand. All the members of the ACA Consortium are parties that if you investigate them, you will get data that most of them manage billions of dollars. That tells you that their ability to pay exists and that to me is very fundamental.

Now, what is plan B? Plan B can be many options that are not as comfortable. Plan B can be to hand the Bank over to the Nigeria Deposit Insurance Corporation (NDIC) to liquidate, Plan B can be AMCON or Government to become 100 percent Shareholder, if there is appetite.

You know there were two things done in the International Financial Markets affected by the global meltdown. It was either they allowed the Bank to fail, like Lehman Brothers or they (Regulators) took over the Bank, like Northern Rock. The CBN decided that it would not allow such takeover to happen, unless there is no other choice and that is what has been happening in the past one year. Unfortunately, there has been pressure not to allow the private capitalisation process to happen and when there are pressures like that; you have to move to the next level. We can’t keep leaving Depositors hanging for too long on CBN forbearance. What the CBN has done in its own wisdom is to say that this process will not continue forever and that by September capitalisation process must be concluded. In other words, they are saying that they are removing their forbearance and going to the next stage. I think what we ought to be doing is facing those who are slowing the Banks down from allowing the Banks  get out of their current unsafe situation and move on. Let’s not look at the Regulators. They (CBN) have assisted so far, because they didn’t need to provide forbearance and guarantees. The fact, that they kept Depositors confident and maintained that no Depositor will lose any Kobo means that they will protect the largest Stakeholders, the Depositors.

Who will lose if we do not conclude the capitalisation by September? The Shareholders! What we have done is to make sure that our Plan A is solid and able to materialise, so that the Shareholders do not lose out. For us, that is the most important.

Source: UBN