Investment Opportunities in Nigeria

Driving Progress – One Connection at a Time

Expert Research Platform

A brief discussion of Current Opportunities in Nigeria with a focus on Credit Investing

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Thursday, 29 September 2016

Speakers

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Babawole Akin-AinaPartner, AO Advisors

• Over 10 years of financial markets experience at Guggenheim Partners, Sandell Asset Management, Dune Capital, and Deutsche Bank.

• Baba has extensive investment and analysis experience and is a credit market specialist. He was most recently a Credit Portfolio Manager for ~$15bn in US & European Focused High Yield and Bank Loan Assets at Guggenheim Partners.

Wale OdugbesanPartner, AO Advisors

• Presently, the CEO of a Nigeria based, family owned and managed food chemicals manufacturer and distributor. Wale has more than 10 years of accounting, banking and management experience gained at AT Kearney, Deloitte and UBUK.

• Extensive knowledge of and connections within the Nigerian Industrial sector.

AO Advisors LLCStrictly Confidential

Nigeria Economic Overview

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Source: World Bank Statistics

GDP: $568.5BN (2014) Population: 177.5MM GDP Per Capita (2014): $3,200.00 GDP growth: 6.0% (10 Year) Credit Rating: B1/B+/B+

Stable/Negative/Stable Oil accounts for close to 90% of

exports and roughly 75% of the country’s consolidated budgetary revenues.

H1 2016 contracted for the first time in almost 25 years at -2.02% growth rate as a result of the global macroeconomic environment and the impact it has had on oil prices; Nigeria’s main source of USD revenue.

The Largest economy in Africa – Going through a recession


The Opportunity Set in Nigerian Credit Of the NGN 12 Trn ($60bn) in outstanding loans in the Nigerian Banking

system as of 2014 – 26% of credit exposure was Energy related ($16bn). In addition, since 2007, Nigerian financial and energy firms 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

This results in two separate but complimentary pools of assets to choose from; – ~$16bn in Oil and Gas related debt on in country bank balance sheets, and – ~$5bn in Euro bond assets that trades on international capital markets.

As a whole, Nigerian banks are overexposed to Oil and Gas and will need to reduce their sector allocation – 26% of credit vs. 11% sector contribution to GDP. They will need to reallocate and this creates opportunities for a variety of investors. – Our conservative estimate is that the opportunity set for USD denominated

bank debt on Nigerian bank balance sheets is ~$5bn (30% of outstanding exposure)

– There is also a healthy demand for Mezzanine Style Debt from Middle Market Companies that are currently ignored or underserved by Nigerian Banks. SMEs account for over 90% of the companies in Nigeria and contribute ~70% of industrial output, and over half of the nation’s GDP.

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The Opportunity Set in Nigerian Credit

What are the Current Options for Credit Investors?

Sovereigns (Eurobonds) Quasi – Sovereigns (Eurobonds) Corporates (Eurobonds) USD Local Bank Debt Private Credit – Mezzanine Investments

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Sovereign Eurobonds – The Primary Option

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Source: World Bank Data

Eurobond Market is main investment avenue of SSA / Nigeria Credit Investors

• The chart shows that sovereign bond issuance in certain Sub-Saharan African countries has risen substantially over the past 4 years. At the end of 2011, bond issuance totaled $1 billion and by the end of 2014, it amounted to $6.2 billion.

• Between 2013 and 2014, a total of 11 countries accessed the bond markets. In 2013, the largest sovereign bond issuance shares were made by Gabon ($1.5 billion), Ghana ($1 billion), and Mozambique ($0.9 billion). In 2014, the largest issuances were made by Kenya ($2 billion), Ethiopia, Ghana, and Zambia – all three at $1 billion each.

• At the time, the issuance of sovereign bonds as a percentage of gross national income (GNI) was moderately low, below 5% for most of these countries, with the exception of Gabon where it represented 10%.

Strong Issuance in Recent Years


Bilateral / Multilateral Sovereign and Quasi-Sovereign Loans..

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Source: World Bank Data , AfDB African Economic Outlook 2016

Another form of Sovereign Credit Exposure

• The chart shows that multilateral and bilateral debt issuance continues to be a major source of SSA debt exposure – especially in the major SSA ex SA economies.

• Characteristics of such loans:• Pari-Passu with Sovereign Bonds • Usually USD denominated • Relatively Illiquid compared to

Sovereign• Normally held on issuing syndicate or

bank balance sheets• Lower duration vs. Bonds as floating

rate assets • Illiquidity yield premium vs. Pari Passu

Bonds • 2014 SSA Bilateral/Multilateral loans were

~$18bn in 2014 and are estimated at $16bn in 2015.

Bank Loans another option …


Local Nigerian USD Bank Debt – Some background

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Source: Afrinvest Nigerian Banking Survey 2015

Nigerian Banking Sector Credit Allocation and Opportunities

Of the NGN 12 Trn ($60bn) in outstanding loans in the Nigerian Banking system as of 2014 – 26% of credit exposure was Energy related ($16bn).

As a whole, Nigerian banks are overexposed to Oil and Gas and will need to reduce their sector allocation – 26% of credit vs. 11% sector contribution to GDP. They will need to reallocate and this creates opportunities for a variety of investors.

Our conservative estimate is that the opportunity set for USD denominated bank debt on Nigerian bank balance sheets is ~$5bn (30% of outstanding exposure of Oil and Gas Exposure).

$60BN in Local Loans


Local Nigerian USD Bank Debt

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Pricing and Characteristics

Of the NGN 12 Trn ($60bn) in outstanding loans in the Nigerian Banking system as of 2014 – 26% of credit exposure was Energy related ($16bn).

As a whole, Nigerian banks are overexposed to Oil and Gas and will need to reduce their sector allocation – 26% of credit vs. 11% sector contribution to GDP. They will need to reallocate and this creates opportunities for a variety of investors.

Our conservative estimate is that the opportunity set for USD denominated bank debt on Nigerian bank balance sheets is ~$5bn (30% of outstanding exposure of Oil and Gas Exposure).

$60BN in Local Loans 3 – 7 year Max Tenor Industry Profile

– Majority Oil and Gas Reserve Backed Lending for Upstream Activities Growth Capex/Collateral backed lending for Downstream Activities

– Downstream debt mostly in NGN with some exceptions Pricing: 9% - 11% all in for ~5 year with producing assets

– Real Estate Development Loans Collateralized Financings for marquee projects Pricing – High Single Digits

– MNC Subsidiary Debt - Mostly Consumer Goods Usually issued with Parent Guarantee Longer tenor than Oil and Gas and RE Loans Pricing : L+500 – 700 range


Private Credit: Mezzanine Debt

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Mezzanine Debt in Nigerian / SSA Context

The most established SSA mezzanine market is South Africa which has a host of local players.

The Nigerian market has now seen several local and International players emerge – in the Mezzanine space who are quite active.

Precedent setting local transactions include:

Vantage’s $20mm investment in Nigeria’s Landmark Africa Real Estate Development Project .

Convergence Partners $20mm investment in Venture Garden Nigeria - an incubator of B2B focused Technology companies

Growing in Popularity Mezzanine funding typically comprises 10% -40% of a company’s capital structure•Funding is typically provided as a term loan for 4 – 7 years•Typically a bullet repayment but can be customized to account for amortization •Typical Sizing of $5mm-$20mm – Usually Customizable•Return Targets of 15% - 20% usually combination of;•Coupon (Low to Mid double digits)•PIK Interest (where applicable)•Equity Kickers via WarrantsUsually considered Junior Debt and is subordinate to Senior Secured bank debtGaining in popularity as a result of certain features:•Avoids equity dilution•Extended availability period for drawdown•Interest holidays where possible•Prepayment without penalty after agreed time period


Private Credit – Mezzanine Debt

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Industry Profiles 4 – 7 year Max Tenor Industry Profiles

– Oil and Gas Reserve Backed Lending for Upstream Activities for smaller players Growth Capex/Collateral backed lending for Downstream Activities

– Real Estate Development Loans Collateralized Financings with equity upside for marquee projects

– Other Industries Include: B2B Technology Healthcare Education/Education Technology Hardlines Industrials Power Generation

Mezzanine finance is seen as a great non dilutive option for Family and Medium sized enterprises with hard assets and decent cash flows.

Also used as a way to allow companies to grow into larger and more sophisticated capital structures over time.

AO Advisors estimates that the Nigerian Mezzanine market will continue to grow at a double digit pace for the next 5 – 10 years as the financing gap between small and large scale capitalization continues to exhibit a great need for alternative capital.


Q+A

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Questions and Answers….

Contact information

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Economy & Finance

Investment Opportunities in Nigeria