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Ijeoma Nwogwugwu: On bond redemption: AMCON has done well

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Ijeoma Nwogwugwu: On bond redemption: AMCON has done well

by Ijeoma Nwogwugwu

Something of major significance took place on December 30, 2013. On the said date, the Asset Management Corporation of Nigeria (AMCON) redeemed the N1 trillion series one, two, three and four bonds held by institutions outside the Central Bank of Nigeria (CBN). In so doing, AMCON reduced its indebtedness to bond holders, comprising mainly Nigerian commercial banks.

In addition to the first trillion redeemed by AMCON, the “bad bank”, as the corporation is often called, and CBN said another N1 trillion would be redeemed by the corporation by October this year, for the series five bonds. Should AMCON keep to its October target, its indebtedness will be reduced by N2 trillion, representing 30 per cent of the N5.7 trillion it issued as bonds (including the interest component) in the course of resolving the banking crisis between 2011 and 2012. This would leave the CBN as the sole creditor to AMCON.

A bigger feat is that with the repayment of its obligations to bond holders, AMCON would be reducing the risk of the federal government assuming the liabilities that would naturally arise from the non-redemption of the bonds. As Financial Derivatives Company (FDC), an economic and financial advisory firm based in Lagos put it a few months ago, as the sovereign guarantor of the bad bank’s debts, the consolidation of AMCON’s bonds into the national debt, could push Nigeria into the league of countries with debt sustainability problems. With Nigeria’s total debt service to GDP ratio still at 0.5 per cent, it is well below the global average.

That AMCON has started to repay its obligations well before the seven-year period provided by the Act establishing the corporation is noteworthy. Indeed, it is very rare to come across a Nigerian institution that voluntarily redeems its debts within the stipulated timeframe that is expected of it. If AMCON remains on track, it is expected that the institution, which should have been set up with a finite lifespan, would be ready for winding up within the anticipated period of ten years from the date of its establishment. This is irrespective of the fact that the law setting up the bad bank made no provisions for its winding up.

A review of AMCON’s operations shows that it has been able to redeem the first tranche of bonds through a vigorous assets divestment, disposal and recovery programme. Through the acquisition of Eligible Bank Assets (EBAs) or toxic assets, at discounted rates, from the balance sheets of banks as well as the acquisition of the defunct Bank PHB Plc, Afribank Plc and Spring Bank Plc, the corporation reduced the non-performing loans (NPLs) of banks from 35 per cent to 6 per cent by the end of 2012. But in assuming the banks’ NPLs, AMCON was insightful enough to know that a better way of recovering the bad loans of bank customers it had acquired, was to give them lifelines to ensure the sustainability of their businesses and enhance their ability to pay back.

Accordingly, the corporation intervened in the agricultural sector with a N31 billion; manufacturing with N51 billion; the construction industry got N19 billion to support construction firms; while a forbearance of N22.6 billion was extended to stockbrokers who were affected by margin trading. Also, through AMCON’s intervention, no fewer than 7,000 jobs were saved in the aviation industry when AMCON injected N132 billion into struggling airlines. These interventions ensured that jobs were saved and employees continued to provide for their families and dependents.

However, in instances where debtors were unable to pay AMCON back, all of the corporation’s matters have been vested in the Federal High Court, thus enabling judges and lawyers to speedily dispose of cases pertaining to the foreclosure on bad loans taken over by the corporation. It is expected that AMCON will continue to exercise the option of intervention or foreclosure to recover the money it is owed to meet its obligations to the holder of its bonds.

But as AMCON redeems its bonds and increases liquidity in the financial system, the CBN, warns FDC, must be mindful of its impact on monetary stability, especially the general price level in an inflation targeting monetary policy framework and environment. This is premised on the conventional wisdom that there is a positive correlation between money supply growth that could arise from the redeemed bonds and the rate of inflation.

Although FDC was of the view that the inflationary threat posed by the redemption of the series one to five bonds might be limited because most of the holders of the bonds – the banks – have them as part of their portfolios and even exchanged some of these for cash in repo transactions, it is clear and present risk which the Monetary Policy Committee (MPC) of the central bank must keep in view at its monthly meetings.

Nonetheless, on a one-for-one basis, FDC estimates that money supply growth in the past three years averaged approximately 13 per cent, which is well below the average growth in the monetary aggregates over the previous five years of 36 per cent. Therefore, the CBN in anticipation of the possibility of money supply saturation resulting from the redemption of AMCON’s bonds had mopped up more than an equivalent amount of liquidity from the system.

This, FDC contends, has created a money supply gap of N2.3 trillion which will be filled by the monetisation of the redeemed securities of N2 trillion by AMCON and the refinancing of the N4 trillion in 2014 by the CBN. The impact, therefore, will be relatively subdued. There will be undercurrents of inflation that will bubble to the top, but this could be properly managed by a cocktail of measures within the ambit of the central bank.

The bottom line is that AMCON has so far displayed the capacity to redeem its obligations in an orderly manner. The fact that AMCON held off significant blocks of shares has allowed the equity market rally to enjoy relative sustainability. The other benefit is that the values of these assets it acquired from the banks as NPLs, in some cases, have appreciated.

Should AMCON continue along this path, it would be a win-win for all parties concerned, starting from the federal government, the bad bank and CBN, to the bad debtors whose loans were assumed by the AMCON but were given lifelines to keep them afloat.

– This Best Outside Opinion was written by Ijeoma Nwogwugwu/Thisday

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