How Ecobank accumulated up to $864 million of bad debts and who will pay the bill
(Ecofin Agency) - On June 16, 2017, Ecobank requested the approval of its shareholders for the issue of $400 million worth of convertible bonds. Part of the proceeds of the operation ($200 million), according to the group, will be used to pay back the bridge loan that it granted the resolution vehicle it set up to recover non-performing loans of its Nigerian subsidiary as they impair its financial results.
At December 31, 2016, these debts, according to the group’s annual report, stood at $864 million, up 62% compared to 2015. And despite the fact that the recent crises that shook the lender seem to have calmed, the origin and size of these debts were never really clarified.
Solvable non-performing loans in the capital
Overall, $780 million of gross debts were transferred to the resolution vehicle. Of these, $400 million had already been provisioned as they were considered unrecoverable. Out of the remaining $380 million, $117 million were also provisioned, bringing the net carrying amount of the bad debts to $263 million. In exchange for this sum, the resolution vehicle provided Ecobank Nigeria $200 million cash (lent by Ecobank Transnational Incorporated, ETI). In addition, it transferred to the subsidiary an investment property, owned by ETI and valued at $63 million by experts.
The question here is to know why the bank injects such a large portion of its resources in its Nigerian subsidiary, deciding even to involve its investors in an operation, which will, in the long run, negatively affect small shareholders. Moreover, at December 31, 2016, Ecobank Nigeria accounted for only $322 million of the losses generated by the non-performing loans. There is no indication as to whom benefited from the bad loans provided by the subsidiary or if the loans were guaranteed or not. In the same manner, no detail was given about what the money was used for or regarding the resources (on or off balance sheet?) from which it was derived. Finally, shareholders ignore the conditions under which the resolution vehicle was funded by ETI.
These are questions that must be asked, since the group, received the approval from is last Extraordinary General Assemblyt, o raise $300 million. It’s now look more like it is trying to bury the issue. Indeed, in the event the resolution vehicle is not able to recover the bad debts, the convertible bonds would just fill the gap. And once the Nigerian subsidiary would have transferred part of its issues to the group’s shareholding, it will no more be a liability for ETI, allowing, once again, its consolidated net profits to rise.
Dealing with the Russian threat at all cost
How and why did this happen? If one may recall, ETI, in its annual report for 2016, talking about risk management, affirmed that it studies and handle risks in a targeted and professional manner. “Risk management mainly includes identifying major risks, assessing them, manage risk positions and determine key allotments,” the group explained. Considering this, it is even more surprising that such a deficit would appear in the results of Ecobank Nigeria.
The answer to this interrogation, or at least a partial answer, comes from an audit review conducted by Ernst & Young, and a letter written by a former chairman of ETI. Indeed, these suggest that ETI, somehow, shifts all the blame on its Nigerian subsidiary, which is by far its most performing unit.
In his letter, the former chairman addressing Nigeria’s legal and regulatory authorities, explains that everything began in 2007, when Renaissance Capital, the Russian investment bank, holding a 24.5% stake in ETI’s capital, attempted a hostile takeover of the group. Obviously, not all board members were happy about this, especially Anglo-Saxon lobby made of Public Investment Corporation of South Africa (PIC), which held at the time 19% of Ecobank, and Nedbank (20% at the time).
The letter states that Arnold Ekpe, former chief executive officer of Ecobank, and PIC, during board meetings, discussed of ways to facilitate Nedbank’s takeover by PIC, a move which would have allowed the South African pension fund to take control of 40% of Ecobank. “Further discoveries have also shown that the then GCEO, Mr. Arnold Ekpe has private business connections with the PIC and that he was involved in a plan for the PIC to gain control of NEDBANK thereby creating a situation where the PIC would control a combined 40% stake in ETI. These disclosures were made at a Board meeting held on 30th august 2013 by Mr. Sipho Mseleku, a South African Director on the Board and Dr. Daniel Majtila, the Director representing PIC on the Board and are recorded in the minutes of the meeting,” the document says.
The same source indicates that Ekpe was later appointed Chairman of Atlas Mara, an investment company co-founded by Bob Diamond (Former managing director of Barclays Plc), to buy significant shares of ETI. In this context, it was more than obvious that a takeover by the Russian bank was not well seen. Therefore, a defense strategy, involving a shareholding increase, was conceived to reduce Renaissance Capital’s stake in ETI’s shareholding.
The second phase of the scheme to prevent Renaissance Capital from taking over consisted in purchasing a large volume of shares. ETI’s management at the time decided to proceed to a capital increase in the framework of which Ecobank Nigeria would lend stockbrokers loans to buy ETI shares. Doing so, the group would raise its capital, through almost-fictitious shareholders. Quite a complex scheme it was. The letter from the former Chairman also said the results published for the rights issue that finally took place in 2008 were “false”.
An unexpected guess: the 2008 crisis
According to an Ernst & Young report which was obtained by the Ecofin Agency, a number of irregularities were noticed in relation to the loans granted by Ecobank Nigeria then, and also in relation to the capital increase process. Finally, though the operation went through, an unexpected guess came knocking at the former management’s door. This was the 2008 crisis. Shares purchased unlawfully with non-guaranteed loans plunged, and the debt resulting from the move could not be reimbursed as it was internal.
“Sometime in 2008, the Executive Management of ETI approached the Board to launch a Rights Issue to raise $2.5 billion from the capital market. This rights issue was launched in August 2008 and involved the bank in over one billion naira in expenses. Unfortunately before the offer could close, the global financial crisis had set in and it became obvious that the projected $2.5 billion could not be raised. Upon closure of the public offer, the ETI Executive management reported to the Board that the subscription met the minimum percentage prescribed by the Commission. It has now been revealed that this was false and that the executive management of ETI deliberately misled the Board, the NSE and the Commission,” the letter reads.
Ernst & Young’s report is much more detailed, making mention of shady bank transactions. It also notes that none of those that purchased the shares, under the rights issue, paid for the assets. Truly, while some paid, their money was returned to them.
At the time, Thierry Tanoh, the then Group Chief Executive Officer of ETI, now minister in Cote d’Ivoire, was approached by Nigerian authorities and started investigating the affair. A decision which would cost him his position and two years of legal battles that he, fortunately, won.
Asides the fact that ETI’s management acted to prevent a takeover by Renaissance Capital, which it finally done, three main questions must be asked about the whole affair. First, who benefited from it? Second, did it serve the Group’s interests or individuals? Last, how much of Ecobank Nigeria’s bad debts will be recovered?