The economic challenges facing the country have left companies in urgent need of more funds at a crossroads, SIMON EJEMBI writes

The ripple effect of the sudden slump in crude oil prices in the second half of last year continues to be felt, no thanks to Nigeria’s dependence on revenue from the product. Apart from leading to the devaluation of the naira and depletion of the country’s foreign reserves, concerns about the country’s economy and uncertainty about the forthcoming general elections made 2014 a bad year for the capital market.

The stock market, for instance, closed the year with a negative return of 16.14 per cent as foreign investors, who dominate the market fled.

The Chief Executive Officer of the Nigerian Stock Exchange, Mr. Oscar Onyema, captured the impact of the negative economic developments on the market in January, during the presentation of the 2014 market recap and 2015 outlook of the Exchange.

He said, “Several macroeconomic developments also contributed to the decline in market performance. These were: fall in crude oil prices and related pressure on the naira; the impact of CBN’s monetary policy changes introduced at various points throughout the year; Nigeria’s declining foreign reserves; festering insurgency in the nation; and uncertainty around the upcoming 2015 elections; and weak corporate earnings.

“The air of uncertainty that hovered over the Nigerian capital market throughout 2014 caused investors to increasingly adopt a ‘?ight to quality’ strategy.”

Although a new year is here and economists and capital market analysts expect a rebound in crude oil prices to drive market recovery in the second half of the year, investor confidence has remained low.

One of the immediate implications of that, according to operators and analysts, is that companies, especially banks, in desperate need of funds may not be able to do so in the short term.

Banks, which have been hit hard by regulatory headwinds, may emerge the biggest losers.

The Central Bank of Nigeria had in August 2014 changed the way banks calculate capital buffers in order to align the country to global standards and also increase banks’ ability to withstand losses five years after it intervened to save the banking sector.

It removed some assets that banks could count as capital in preparation for the implementation of Basel II and III, while limiting Tier 2 capital to 33 per cent of Tier 1 capital.

The bank kept minimum capital requirements for lenders with operations outside the country at 15 per cent and at 10 per cent for those with interests only in Nigeria.

A year earlier, it had directed banks it considered too big to fail to boost their minimum capital ratios to 16 per cent.

The regulatory changes had meant that several banks had to shore up their capital and some of them issued Eurobonds, which they considered a cheaper option than local debt at the time.

According to FBN Capital Limited, the investment arm of FBN Holdings Plc, in 2014, Nigerian banks issued Eurobonds running into over $2bn, aside other dollar-denominated foreign loans, more than the $2bn they raised in 2013.

But those that have plans to raise additional capital this year may have to reconsider the plans as investors are unwilling to make more investment at the moment.

In November, following the devaluation of the naira, top banking sources told The PUNCH that banks faced huge losses on foreign loans.

According to them, Eurobonds and other dollar-denominated loans obtained mostly from international capital markets and not hedged may make some banks to record foreign exchange losses in their income statements.

This, it was learnt, might ultimately reduce the profitability of some banks in coming months.

Late in January, indications emerged that a number of foreign banks had started suspending short and medium-term credit lines to their Nigerian counterparts as a result of the falling crude oil prices, which had continued to fuel exchange rate volatility and uncertainties in the economy.

This came on the back of reports that several Nigerian lenders were seeking extension on the settlement of their debt obligations to the foreign banks.

Yet another report hinted that the banks were at risk of recording huge non-performing loans as a result of their exposure to the oil and gas sector.

In its 2015 outlook, FBN Capital said Nigerian banks were going through probably the most challenging period since the credit crisis of 2008-2009.

Battered all around, market operators and shareholders say the capital market is not ready to lend a helping hand to banks or any other company in need of funds at the moment.

The Chief Executive Officer, Enterprise Stockbrokers, Mr. Rotimi Fakayejo, says it will be tough for companies to raise equity capital at the moment.

He says, “Seeing what has happened already, it would be tough; some banks that wanted to raise issues and had already determined a particular price thereafter had to scale the price down.

“For instance, UBA wanted to come out at N6 but when they saw that the rights issue would not be marketable, they had to scale down to N4. We equally saw the same thing with Access Bank; they had initially planned to raise their own issue at N8.90 but they had to scale down to N6.90.”

According to him, the situation has been similar with regards to Oando Plc’s rights issue.

“In the case of Oando, a rights issue that was already ongoing, they had to change the price because of the response of shareholders. So, invariably, any offer now is not likely to succeed.”

Fakeyejo, however, believes that if a rights issue is done at a discount to the current market price, it may record some success.

He adds that the company’s audited result for 2014 will also be a factor in its success.

Unfortunately banks are highly expected to witness a drop in profits year-on-year as a result of the regulatory headwinds, according to agencies such as Fitch.

The CEO, Highcap Securities Limited, Mr. David Adonri, shares a similar view with Fakeyejo.

Noting that companies recorded successes in raising equity capital last year, he says, “The capital market is not conducive right now for primary issues. Banks may not be able to meet the CBN directive on capital adequacy through capital raising from the domestic capital market.”

According to him, what may happen is that the banks may have to turn to foreign investors.

“But again, we have a situation where foreign investors are pulling out of the market. So, except they are able to identify specific foreign investors, who may be taken long-term positions in the banks, this is not the appropriate time for any issuer to come to the market to raise funds,” Adonri notes.

The major reason for this, he explains, is the fact that “the secondary market is seriously depressed and primary market has been struggling for a very long time to attain the level of confidence that would lead to primary issues”.

“You can see what we are experiencing now with right issues of Access Bank, UBA and the one that was just concluded by Oando,” he adds.

He says moves to get banks to shore up their capital at this time are worrisome as they are likely to give the impression that some of the banks may be in distress.

According to him, regulators should avoid sending out danger signals, which can lead to crisis.

The President, Progressive Shareholders Association of Nigeria, Mr. Boniface Okezie, on his part, advises companies to put all capital raising plans on hold for now.

This, he says, is because the current challenges in the economy – from insecurity to concerns about the elections and the oil slump – make it difficult for people to make more investments.

Okezie, however, says if the elections hold peacefully, the situation would improve.

Although Okezie says Nigerians should not dump their shares like the foreign portfolio investors, he laments the low disposable income of many people.

He says, “If the foreigners are dumping their shares, Nigerians shouldn’t dump. Unfortunately, how many Nigerians have the money today?”

For Okezie, the banks currently raising funds via rights issue should manage the issue the best way they can and get out. As for those yet to start a rights issue he urges them to wait until things improve.

“Any company thinking of coming to the market to raise more capital now should forget about it until after the elections. Let’s watch and see what will happen,” he says.

Punch