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WE HAVE SPENT N770BN TO BUY BANK'S BAD LOANS - MUSTAFA CHIKE-OBI

By NBF News
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Chike-Obi
Contrary to the belief in some quarters that what the Assets Management Corporation (AMCON) has given to rescued banks at the moment, in exchange for problem loans are mere Promissory Notes; and that the banks would wait till 2013, the maturity date of the purported bonds before selling them to make new loans, Mustafa Chike-Obi, AMCON's managing director explains that what was given to the banks were not Promissory Notes but fully tradable bonds, and that they don't have to wait till 2013 before selling them.

Those bonds he said are good investment assets, carry a good coupon, would be fully tradable and listed. 'And any bank that wishes to sell its bonds in the market would be able to do so. They don't have to wait till 2013. They can sell their bonds anytime they want and are free to start making good loans anytime they want.'

With over 26 years experience in international financial matters, Mustafa Chike-Obi, before his appointment as managing director of AMCON, was the managing director of Madison Park Advisers LLC – an investment advisory firm specializing in investment consulting, brokering of fixed-income securities and some venture capital activities. The company is located in New York City. After his first degree at the University of Lagos, Obi undertook further education at Stanford University and Stanford University Graduate School of Business. He had a stint at Kidder Peabody and Company as a marketer of mortgage-backed bonds before joining Goldman Sachs where he worked between 1984 and 1992, and rose to the position of vice president.

In this interview with Daily Sun, he pointed out the way forward for the Nigerian financial system, the modalities as well as the progress made so far in the process of cleaning up toxic assets from the balance sheets of banks in Nigeria.

Taking over the banks
AMCON is not taking anything from anybody to sell to somebody else. What AMCON is doing with the banks is that the banks have gotten into trouble, due to the large amount of bad loans. AMCON is buying the bad loans from the banks, giving them enough capital so that they can start doing business again; because banks are a critical element of any modern capitalist society. The banks must function so that they can provide credit to other businesses for the economy to grow.

Should small shareholders sell their shares or wait for a turnaround?

AMCON is not the best place to go for investment advice. There are investment professionals and stockbrokers; there are investment banks that can give investment advice. AMCON will not give anybody advice as to what to do with the shares. What AMCON will do is to get the banks on a good footing, so they can continue to do their important business in the economy.

Recent operations
AAMCON has to buy all the non-performing loans in the industry so that the banks don't spend their time chasing bad loans, which also cripples their ability to make new loans. We are interested in the banks cleaning up their balance sheets, so that they can make new loans. We have spent N770 billion so far to buy all the margin loans from everybody, and the non-performing loans from the rescued banks. What AMCON will be doing next will be to buy the non-performing loans from the healthy banks; some of the loans from the Nigeria Deposit Insurance Corporation (NDIC) that are eligible, and also to buy the balance of the non-performing loans that will reduce the bulk of loans in the whole system to a level that will be acceptable to AMCON and the Central Bank of Nigeria.

What type of loan can NDIC sell to AMCON?
When they submit their loans to us, in the next couple of weeks or so, we will know the type of loans they have. But the AMCON's Act instructs that AMCON must buy loans from NDIC. So, we will obey the law, and when they submit the loans we will know what it consists of.

Why did you postpone the February 28 date for replacement of consideration bonds with fully tradable bonds?

Let me correct this. It was not postponed. We issued a consideration bond for three years duration for a purpose. Those bonds are good for three years but we, in the interest of liquidity and tradability, wish to issue a tradable bond that is more liquid, so that the Central Bank is not the sole source for providing liquidity to those bonds. We gave a suggested time of end of January and end of February.

But what matters is that it is done before the end of the first quarter, in conjunction with cleaning out the rest of the non-performing loans. So, it wasn't a deadline but a mere target. What would be a postponement is if we don't do it by March 31. That has always been the hard deadline. I have two hard deadlines: the end of first quarter for taking out all the NPLs, and the end of second quarter, for recapitalising the banks.

Getting waivers from the Ministry of Finance
There is a process for obtaining waivers. There is a process for obtaining registration. There is a process for obtaining listing. There is a process for doing bond issue. It is a complicated process. The waivers are from many places and because AMCON is a new institution, it needed waivers from certain requirements. We have struck those waivers and we are reasonably certain that we are going to obtain all waivers that are necessary.

Withdrawal of loan related cases in court.
Some of those loans are subject of court cases. The AMCON Act says that if there is a pending court case, AMCON will still acquire the loan and you know AMCON is a law abiding body, we will await the outcome of court cases. That means we can still acquire those loans and the law suit will continue. If there is a settlement between AMCON and the debtor in the meantime, that will be good, but AMCON respects the court and will work through the courts of the land; then we will see what the courts would say in cases we cannot resolve between us.

Any room for withdrawal and arbitration?
Well, arbitration is a technical term. We prefer to use consultation. But withdrawing a case is not AMCON's matter. Sometimes the debtor is in court as a plaintiff. So you cannot withdraw a case for somebody else. However, in cases where there is a meeting of the minds, yes it doesn't make sense to fill the courts with meaningless suits. But if there is no agreement, we will respect the court system and see what happens next.

Instructing the banks to withdraw suits.
When AMCON buys a loan, it becomes the sole owner of the loan and its liabilities. So it is not a case of advising the bank to withdraw a case. The bank concerned no longer has standing as it were in that case. AMCON has to decide what to do in its best interest.

Criteria for core investors
There are very, very strict criteria. The core investors have to be licensed by CBN. Invariably, the requirement for being a core investor is a CBN matter. Suffice it to say that the CBN is diligent in making sure that the new investors have funds, have experience to run a bank and that they abide by the reforms in the banking industry. They must abide by the codes of corporate governance and other requirements that qualify them to be licensed as the owner of a bank. But that is a CBN matter and you can rest assured that the apex bank will make sure that only professional and suitable investors will emerge.

Possibility of review of 5% payment for unsecured loans

No, we are not considering review of that. Unsecured loan that has been bad for a year or so, I don't understand how anybody can feel comfortable that they can recover much out of it. Moreover, many of them are not recoverable. So, we considered the fact that it is possible to recover one out of twenty. That is how it got to 5 per cent. We believe that 5 percent is fair estimate of what we will recover from unsecured loans and non-performing loans.

Loans backed by hard-to-liquidate assets like tank farms, or private jets

We are going to value the collateral behind the loan as best as we can. We have professionals doing the valuation; we know what Tank what farms are worth. We know what Private Jets are worth. We can value these things and we will value them appropriately.

CBN's approval of foreign exchange derivatives
I think that anything we can do to develop our markets, make foreign investors comfortable; anything we can do to protect the value of our exports and imports in such a manner that people can know what to expect, it's a good thing. It is wonderful for the Nigerian economy, and it is long overdue. I sincerely endorse such products that could move the economy forward.

Advice on Forex derivatives' trading based on experience in financial matters

People have their business plans. It is not my responsibility to advice people on foreign exchange derivatives trading. But I can tell you the value of this. The value is that if somebody has his debts in dollars and his income in naira, he is very uncomfortable; because he does not know what the naira will be worth when it is time to service his debt. The ability to have certainty, as to what your naira will be worth when your income is in one currency and your liability is in another currency, is a good thing. I think it will encourage foreign investors to come here, earn naira and know what it is worth when it is time to take them out. This is a wonderful development.

Responsibility of shareholders and the banking public in the reform process

I think that shareholders should be much more diligent in watching who runs their banks. I think the era of leaving management to do what they want to do is not good for anybody. You saw what happened. Management ran those banks into the ground, the shareholders are the ones taking the heat. I think shareholders must realize that the former management of the rescued banks lost all their investment.

It is only the good faith of the Nigerian government, because of the importance of the banking system that allows them to get something, out of the disaster that occurred. Every shareholder must start from the point of view that they lost everything. But that because of the importance of the banking system, the CBN, Ministry of Finance , Federal Government and the National Assembly decided to rescue the banking system; and in that rescue they would get something. What they get out of it at the end is a lot better than what could have happened if the banks had been allowed to fail.

It is believed in some quarters that what you gave to banks are Promisory Notes

We do not give Promissory Notes, what we are giving is bond. Those bonds like I told you would be fully tradable and listed. And any bank that wishes to sell its bonds in the market would be able to do so. However, you must remember that those bonds are good investment assets and carry a good coupon. It will be foolish for a bank to sell them and just keep the cash. Banks are in the business of acquiring assets so they can make money. So, I believe that the banks would hold on to these bonds until they can make loans. It is only when they make loans that they can sell the bonds and fund their loans.

So they need not wait till maturity of the bonds in 2013 to start real lending

Definitely, they don't have to wait till 2013. They can sell their bonds anytime they want and are free to start making good loans anytime they want.

Complaints of stockbrokers about AMCON's activities

I have not heard of any such complaints. They have not been addressed to me. However, the stockbrokers have trade groups and organizations. The proper thing for them to do is to formally address their grievances to either the Securities and Exchange Commission who oversees them, the Nigerian Stock Exchange or in some cases to address it to AMCON and AMCON will listen; because we will always do what is best for the Nigerian capital market.

Debtors approaching AMCON for better deals
You must understand how it works. AMCON does not decide what loans to buy. The Central Bank tells AMCON what loans it can buy and from whom. That is the law. So, anybody that thinks he can choose to come to AMCON is uninformed and quite frankly foolish.

They will not get any better deal from AMCON than they will get from the banks. AMCON is not interested in encouraging debtors to default intentionally so as to get a better deal. Any debtor that comes to AMCON and cannot satisfy his obligations will find much tougher enforcement than they could find in any bank. My advice to debtors who think the corporation is a better place, is to think twice because they will find out something different.

Jail option for serial, recalcitrant borrowers
AMCON does not have those kinds of powers; all we can do is to try and recover our money. If you read the AMCON Act; it will explain to you what can happen. But AMCON does not have the powers to jail anybody. That is reserved to the courts and the attorney general. All we are in business to do is to recover the bad loans we are buying at the best possible value to the tax payer.

Advice on how to deepen the financial system in Nigeria

We have to do things that bring investors to the table. Nigeria's problem in the capital market is lack of investors. We have to have people who are confident that they can go into the income capital market and make investment as a savings mechanism. We have to get international investors more comfortable with the governance and I think SEC is doing a wonderful job of it. I think we have to create new products that are tailored to what people need in Nigeria. There is a lot to be done in order to deepen our markets and I believe that if we work together towards this goal, we will do that.

How do we get more people included in financial services?

We have to again, have people comfortable with being banked. We need to reach out to them more and make the benefits of banking clearer. We need to reduce the cost of banking. These things are important because it also crucial that more people are included in the financial system. That is a big job. You asked me based on my background as a financial expert. That is not AMCON's job, but AMCON will assist in any way to make this happen.

Can we talk about you?
I'll not discuss anything personal in this interview. It is about AMCON, it is not about me.