A report by Euromoney has stated that slump in oil prices is affecting the ability of companies in the oil and gas sector to repay debts and could slow down the growth of investment banks in Nigeria.
According to the report, prior to the sharp drop in oil prices in June last year, leading local banks such as Access Bank, Zenith Bank, Diamond Bank and Guaranty Trust Bank, all issued Eurobonds in to shore up capital and support companies that have excelled as a result of the country’s oil industry. It, however, noted that some of these corporates are finding it difficult repaying their debts.
The report explained that, “In Nigeria, oil is largely subsidised by the government so companies that distribute oil to the pump usually invoice the government for the difference.
However, as government revenue has decreased because of the fall in global oil prices, the government – which has never particularly been good at paying its oil bills – has found it increasingly difficult to pay oil distributers.
“As a result, delays in government payments have had a knock-on effect as oil and gas companies in Nigeria have found it increasingly difficult to fulfil debt obligations. Restructuring debt and increasing provisions has become a priority for some Nigerian banks, which lack the ability to leverage off of the balance sheet of larger international players.” According to the report, as a result of this development, investment banking in Nigeria is slowing.
“Year to date, there has been only one Eurobond out of Nigeria, a $750 million issue by the African Finance Corporation, and one IPO by Transcorp Hotels, which listed $23 million worth of shares on the Nigerian Stock Exchange in January. M&A volumes have also been lower than expected this year with 21 deals done so far,” the report revealed.
It pointed out that while the “country’s lightning speed development in investment banking, especially in terms of ground gained by local players, won’t rumble to a complete halt but will probably remain subdued in the coming months. While larger regional and global players have been picking up the work, local players may find it a lot more difficult to operate in this climate.”