Access Bank which announced the acquisition of Diamond bank to create Nigeria’s largest banking institution will embark on a fund raising exercise of about $200m to keep its capital well above regulatory requirements, bankers working on the deal told the Financial Times.
Access Bank reached an agreement in principle on Sunday to buy Diamond Bank in a deal that values Diamond at just over $200m (N72.33 billion), creating Nigeria’s biggest bank by both deposits and assets.
“They have their own legacy issues and a loan book that was not properly managed,” said Herbert Wigwe, chief executive of Access Bank, who will head the merged entity.
Wigwe said Diamond would write off all its bad loans before the merger goes through.
READ ALSO: Access Bank says Diamond not bringing toxic assets to books
“We won’t have new bad loans coming to the enlarged entity,” he said. The new bank would have a customer base of 27m, including 12m with mobile accounts, making it Africa’s biggest bank by customers, he added.
People close to the transaction said there would be substantial synergies.
As many as 100 of the banks’ combined 650 branches could be shut with more than 1,000 of the merged entities’ 6,800 staff expected to lose their jobs, they said. However, it is extremely difficult to close bank branches in Nigeria, and it is subject to central bank approval.
Access offered N3.13 a share for Diamond, against a recent price of just N0.87. It will pay N1 a share in cash and swap two new Access shares for every seven Diamond shares.
The bank will soon be seeking the approval of market regulators – the Securities and Exchange Commission (SEC) and Nigerian Stock Exchange (NSE) for the Rights Issue which is expected to take place next year.
“The most important thing is that it is coming before the merger takes effect. It is meant to shore up the capital base of Access Bank. It means that existing shareholders in Access Bank will be better positioned to reap from the bigger entity,” an informed source close to the planned Rights Issue told BusinessDay.
The yields on Diamond Bank Plc’s $200 million Eurobond closed lower for the second straight day at 25.40 percent Tuesday, according to FMDQ data, as investors continued to react positively to the retail lender’s merger with Access Bank Plc.
The bond price also sustained a steady march upwards, rising to 93.59 Tuesday from 93.33 Monday and a record-low of 90 in November. The bond presents an opportunity for investors to make profit as the price nears its par value of 100.
“Investors were heaving a sigh of relief upon the Access and Diamond bank deal and that has paved way for the Eurobond rally we are seeing,” a South-African based fund manager told Business Day.
The inverse relationship between bond prices and yields means that when yields decline, prices rally in a show of high investor demand. During a bond sell-off however, yields rise and prices fall in reflection of negative investor sentiment.
Diamond bank’s Eurobond had endured a thick-sell off that was sparked by credit downgrades from the three largest global ratings agencies, Standard & Poor’s, Moody’s and Fitch.
All three downgrades came in a scorching month of November that also saw the tier-two bank announce it was revising revenue forecasts lower. Investors panicked, sparking a sell-off that has just only been cut short by the merger deal.
Some investors will be beating themselves for not betting on the Eurobond at a time the sell-offs intensified and yields climbed as high as 31 percent late November, which was three times higher than the 10.9 percent average yield on the outstanding Eurobonds of other local banks.
Investors who could stomach the risk associated with the Eurobond have made a killing.
Business Day had reported last week that the struggling bank’s Eurobond presented a bargain opportunity for investors, seeing the price had slumped to 90 as against a par value of 100, less than six months to maturity.
S&P, Moody’s and Fitch all warned of a risk of default, saying they had little optimism that the bank would be able to sell its UK unit in time to repay its dollar obligations.
The Bank’s merger with Access bank means the latter will now be the one to pay international creditors for the loan taken in 2014 which falls due next May, squashing initial concerns over a possible default.
