Business leaders differ on impact of exchange controls on dollar loan repayment

Already feeling the pinch from slumping oil prices and slowing economic growth, Nigerian companies are having to find new ways to get hold of foreign currency due to Central Bank restrictions but they differ on how this is impacting their ability to repay foreign loans or interest on them.

Yields on a number of dollar corporate bonds rose close to record highs last week, reflecting investors’ anxiety, but Nigeria’s richest businessman and the country’s biggest investor across the border insists that no borrower will default due to the currency shortage.

Since 2007, Nigerian financial and energy firms such as FBN Holdings and Seven Energy have issued more than $5bn of dollar-denominated debt on international capital markets, including almost $3bn in Eurobonds since the start of 2014, according to Thomson Reuters data.

But storm clouds have been gathering over Africa’s top oil exporter and biggest economy as benchmark crude has again fallen below $50 a barrel, less than half the mid-2014 level.

Plunging energy revenues, which make up 70 percent of government income and 90 percent of foreign currency earnings, have hit public finances and the naira. It has lost about 15 percent in the past year, with devaluations in November and February before Nigeria pegged the national currency.

Companies across the board have started feeling the dollar shortage due to restrictions imposed by the Central Bank to halt the naira’s fall and preserve its foreign currency reserves.

Aliko Dangote, Nigeria’s most prominent businessman and Africa’s richest man, who produces anything from spaghetti to cement, disagrees. Dangote told Reuters that those “looking for dollars to pay interest will get it from the Central Bank”.

“I have not seen anybody who has defaulted on the paying of interest. It won’t happen,” said Dangote, giving his backing to Central Bank restrictions that have been unpopular with those who have struggled to secure dollars needed to import goods.

Some others maintain the foreign currency rationing is hurting.

“This is an enormous problem for the organisations … which have issued Eurobonds but also some of the more local corporates who are in the manufacturing business, trying to access dollars to get the interest payments made on time,” said Angus Downie, head of economic research at regional lender Ecobank.

“If the oil price does not rise soon for some companies that have borrowed in dollars, they will struggle to make payments and the end result would be that they would have to default.

“So far the Central Bank has in principle enough ammunition to deal with this risk,” said Samir Gadio, Standard Chartered’s head of African Strategy, adding that the difficulties were probably more with loans and dividend payments abroad than with Eurobonds.

Foreign bond and equity investors are also fretting over a policy vacuum as President Muhammadu Buhari, elected to power in April, has yet to appoint a cabinet or economic team which can help provide a hint of the government’s economic direction.

Yields for corporate dollar-denominated issues reflect the rising premium investors demand to hold Nigerian debt.

Access Bank’s seven-year Eurobond issued in June 2014 yielded 14.8 percent on Wednesday, hovering just below a five-month-spike hit earlier in September. Fidelity’s four-year Eurobond changed hands with a yield of 14.879, just off a record high hit on Tuesday.

The only international debt issue this year was made in April by Lagos-based development financier Africa Finance Corp.

Some analysts believe there is an over reaction in the market and point to the hysteria over the recent implementation of the single treasury account mechanism which took out about N1.5trn from the banking system. A day after the market calmed down.

Bismarck Rewane, CEO of Lagos-based consultancy, Financial Derivatives, said Nigerian banks and firms were still able to keep up with interest payments and he expected the Central Bank would probably relax the rules at some point.