By Davide Barbuscia and Katie McQue | –
Staring down the barrel of long-term weak oil prices, 2016 will be painful for Nigeria’s oil sector. The nation’s indigenous firms that rose to prominence to purchase oil fields from supermajors such as Chevron, Shell and Total are now in deep distress. The billions of debt they raised for these acquisitions risk going unpaid with oil revenues a fraction of 2013 levels.
The scramble to prevent firms such as Aiteo and Newcross from defaulting has begun. And with some banks looking to leave loan syndicates, the market is welcoming the arrival of new entrants – commodity traders.
But with oil now hovering around $30 a barrel, and showing little signs of recovering, how effective can restructuring measures be?
“Close to 100% of the indigenous oil and gas companies need funding of some sort, either to meet debt repayments or fund significant field development capital expenditure,” says Amaechi Nsofor, a director at Grant Thornton.
Although when the drop in prices is this dramatic, new loan agreements are almost impossible. “There’s only so much oil a company can pledge with current prices,” noted a London-based banker.
The oil producers that raised debt financing in 2014 to buy shares in Shell’s Oil Mining Leases (OML) 18, 24, 25 and 29 are at particular risk of default.
At the time the acquisition deals were concluded for these assets, oil prices soared above $110 a barrel and local banks – less risk-adverse than their international counterparts – readily lent on a price basis of about $80-$90 per barrel.
Nigerian banks’ ability to maintain the lines of credit in place is now under question, given their exposure to the sector and also considering the rising cost of US dollar-denominated funding.
But write-offs seem unlikely right now. “The last thing you want to do as a lender is to enforce. If there is still some cash flow, then you would rather restructure,” said one oil banker.
Restructurings will take the form of amend-and-extend exercises through covenant readjustments and extension of debt maturities.
Pushing things down the road in order to trade out of the situation until the oil price returns seems to be the most viable option for both oil producers and banks.
Traders have much-needed US dollar liquidity, and are therefore welcome by distressed borrowers and over-exposed lenders.
“The entry of commodity traders is a win-win situation: they provide additional funding for the borrowers and, as off-takers, they secure the crude. The presence of offtakers adds quality to the credit risk as they also work as hedging providers,” said Humphrey Nwugo, manager with African Export-Import Bank’s special funding unit.
Traders are entering Nigerian oil and gas facilities with a long-term view, hoping in a rebound of oil prices, and while they wait for prices to pick up, they secure the crude. “These are borrowing-base facilities, so those who come in, come in for the long take,” said Oladele Kuti, head of oil and gas and renewables at .
The entry of traders also allows for the exit of international banks and local lenders that are too exposed to the sector.
In addition to the reorganization of banking groups, a common redetermination process is to extend loan terms.
This has met the approval of the Nigerian government, which expressed its intention to extend the licences of OML 18, OML 24, OML 25 and OML 29 beyond their current expiry of 2019, to match the RBLs’ maturities associated with these assets.
But if the negative environment continues for the foreseeable future, amend-and-extend or, rather, “amend-and-pretend” exercises might then be needed for quite some time.
Davide Barbuscia is Loans Editor at Debtwire, based in London, where he covers syndicated loans across Central and Eastern Europe, Middle East and Africa. He can be reached at email@example.com. Katie McQue is a London-based journalist covering energy and natural resources for Mergermarket. She can be can be found tweeting at @katiemcque