Lesssons from the Etisalat saga

By Rafiq Raji, PhD

It came to light in early March that Emerging Markets Telecommunication Services (“EMTS” or “Etisalat Nigeria”), Nigeria’s fourth largest mobile telecommunication service provider, missed payments on a US$1.2 billion loan it took four years ago from a consortium of thirteen Nigerian banks. It did give notice a month earlier, though. And it had paid back almost half of the prinicipal. What was the purpose of the loan? The refinancing of an existing $650 million facility and the upgrade of its network. Sounds reasonable. But why couldn’t it pay? The firm blamed a weaker naira and shortage of hard currency. It sought to renegotiate the loan, of course; seeking a conversion of part of the foreign currency obligation into naira. Understandably, the banks did not accept the offer: they took loans in hard currency themselves to lend the funds. What the banks wanted instead was for the parent Emirati company to recapitalise its Nigerian subsidiary, in which it had a 45 percent stake. It refused, choosing to divest instead by transferring its shares to the loan trustee. Now equity holders, the banks would also now bear potential liability for the company’s other obligations. In a nutshell, they got a bad deal. With 20 million subscribers (14 percent market share), EMTS is a systemically important firm in Nigeria. The banks could not just strip the firm of its assets, with job losses and industry chaos in tandem. And should its troubles be handled badly, the potential effects on an already unpopular investment destination could be far-reaching. This point must have been why the Emirati parent dug in its heels, especially as they were able to get away with similar stunts in Tanzania and India. Besides, the Nigerian affiliate only accounted for 3.7 percent of its global revenues. Incidentally, it did signal how feeble it deemed its commitment to EMTS: it wrote down the value of Etisalat Nigeria to $50 million in 2016. Was there anything the banks could have done then, though? Not much. Thankfully, a restructuring plan has been agreed, following the intervention of the authorities. A seven-member board comprising four from the banks, two from local stakeholders and one from the banking and telecoms regulators would now run the affairs of the company temporarily. At least, jobs would be saved. Still, we must wonder about what could have been. And how to avoid a recurrence.

Not so Arab money now
Admittedly, we were all a little starry-eyed. Bear in mind, much of the confidence that Nigerians and their banks for that matter reposed in the company was due to the backing of Mubadala Development Company, the main investor in the Emirati mobile operator. Could the lenders have been a little more cynical? Could the loan terms have been more stringent? Was a guarantee sought from Mubadala, especially as the currency mismatch was writ large? (The Nigerian subsidiary was primarily going to service the dollar loan from its naira earnings. Of course, back in 2013, the banks could not have envisaged the naira would take a turn for the worse only 2-3 years later.) To be fair to the banks, there is probably not much they could have done differently. That is, beside not giving the loan in the first place. A banker had to be insane not to lend to Etisalat four years ago, however. Guarantees were indeed sought and received from the Mubadala nominees on the company’s board. But judging from how easily the foreign directors have been able to extricate themselves, they probably reckon it is not water-tight. And take the issue of the clearly rare dollar inflow of more than US$700,000 from the sale of the firm’s towers to IHS that the banks now allege was diverted (by an unnamed Mubadala-nominated finance chief) to fulfil naira obligations instead; in light of the arbitrage opportunity created by the central bank’s restrictive exchange rate policy. How could the inflow have been diverted without the banks’ knowledge, though? Something is amiss somewhere. It is either a failure of structuring or oversight. And therein lies the lessons for local lenders and investors: Do your due-diligence and structure your transactions properly to ensure you do not lose money. Put simply: assume the worst case scenario. Because ordinarily, Etisalat Nigeria remains a going concern. It continues to earn revenue and its network has not suffered major disruptions on the back of its financial troubles.

Strategic firms must be forced to list
Would events have turned out differently if EMTS were listed on the Nigerian Stock Exchange (NSE)? For one, it would have needed to publish its accounts regularly. Alleged financial shenanigans would probably have come to light much earlier. And Mubadala might not so easily just walk away. It could also raise equity capital by issuing additional shares. There could have been more benefit to the economy certainly, from dividend payments and capital gains to its equity investors. Better transparency might have made the public more sympathetic for sure. Public pressure early on could have instigated needed changes in time to forestall a default perhaps. With the company now “spent”, it would probably be a hard sell now. There is also the dimension about what the Nigerian directors of the company were privy to. It is high time they realise their jobs extend beyond attending a few board meetings and rubber-stamping glossy reports by management.

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. http://www.businessdayonline.com/lesssons-etisalat-saga/

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