Etisalat and its lenders

The telecoms industry is under the weight of bank debt, largely on account of its foreign currency loans. Over the past few years many previously active telecommunications firms, especially CDMA operators and small landline operators, have closed shop or have been acquired on account of bad loans, but none is as big as Etisalat, which is under threat from a consortium of 13 banks from which it borrowed $1.2 billion four years ago. Etisalat is Nigeria’s fourth GSM mobile company in terms of size with a customer base of about 18 million subscribers and a workforce of about 2,000; several more companies depend on them as dealers and contractors.

The telecom business is largely foreign input – dependent because its infrastructure and expertise are largely sourced from abroad. This requires huge foreign currency to settle liabilities at all times. Etisalat took the loan to modernize and expand its network in 2013 and was scheduled to pay back in dollar. As at 2013 when it took the loan, macroeconomic indices looked stable, with the dollar exchanging for about N197. Three years down the line, with an economy in recession, coupled with the free float of the naira (which exchanged for as low as N500 to a dollar early this year), the company’s foreign currency risk tipped and it defaulted on the facility.

According to Etisalat, it is still in talks with the banks. Interventions from both the Central Bank of Nigeria (CBN) and the Nigerian Communications Commission (NCC) have helped to get the banks to the negotiating table with the telecoms company to work out a way out of the woods, as it were. It is a tough call for Etisalat, but also one for the banks, which have been under strong regulatory pressures to clean up their balance sheet. For many banks, they would rather sell the bad debt to the Asset Management Company of Nigeria (AMCON) and free their books or takeover and liquidate the assets of the creditor.

Etisalat fell to the vagaries of the Nigerian economy, especially with the recession of the last two years. Etisalat’s problem is one that many big Nigerian companies fall into. In 2013, with oil revenues still in upper double digits and money awash in the system, it approached local banks to syndicate a facility to expand its network, about four years after it began operation as Nigeria’s fourth GSM network. The company itself came into the industry at a time MTN, Airtel and Glo had established firmly and there were fears if it could get a place in the industry. Through push marketing, it managed to get a foothold and like everything in the business, there is no national infrastructure backbone on which to run and so needed to build one. That created the need for the loan, which it serviced until the economic crisis of the last two years. It was hard done by the foreign exchange crisis, which came out of the dollar scarcity and the subsequent crash of the naira. It now needed about almost three times the naira equivalent to repay a loan consummated when the dollar was about N197 in the parallel market.

It was a financial crisis akin to a bedlam. Banks are always taken as soulless but considering what became of the banking business in the years between 2009 and 2014 when some major banks fell under the hammer on account of unserviceable debt stock in their books, many banks are wary of big debts default because they themselves are under the searchlight of the CBN. Determined to stave off the crash, they would rather take over the company.

But the experience is that banks have not taken over a company and run it well; they rather liquidate it and cut their losses. For a long time Nigerian banks did not have the capacity to finance heavy projects until the recapitalization of 2004-2005 which gave them access to huge funds and the gumption to go into energy, telecommunications and aviation finance. Sadly, after the financial meltdown of 2008-2010 many banks are facing defaults, which has left many in difficult situations. In 2010, to stem the system collapse the federal government created AMCON to take over banks’ bad debts and prevent a collapse of the financial system.

To handle such toxic debts has therefore become a serious problem for the banks and their debtors. The argument of the banks is without question credible: loans must be recovered, however, and better to get something than nothing – in the case of the complete failure of the business. This presents a dilemma in an economy in need of more jobs, not job losses, and that is the challenge the managers of the economy need to consider. The logic of the public sector in a capitalist system is that private sector managers need neither protection nor intervention, but recent experiences have shown that progressive governments are also very concerned about the effects of a company’s collapse on the economy in terms of job losses and economic shrinkage. This was the argument of the United States government when it bailed out big companies such as the auto industry and banks in the wake of the 2008 financial crisis. Today, those companies are back in profitability and are adding jobs.

These are important lessons for a developing country like Nigeria, which needs to spur growth and not shrink it. The management of Etisalat says that their foreign partners are willing to recapitalize and need time, aside the fact that they are in a growth industry. It is the responsibility of government to ensure that there is a level-playing field but this should not be at the expense of economic losses. In the last few years some big Nigerian companies have fallen under the hammer of creditor banks – Aero, once the dominant airline and then Arik, another dominant player. Along with them has gone jobs and competition.

Only one likely trajectory can emerge from an Etisalat takeover. This is that the company will be taken over and managed on a much-smaller scale, shorn of scale economies, and possibly liquidated. If that is done and investors lose money then it could become yet another poster company for how unfriendly the Nigerian business environment is and few investors would be encouraged to take a risk in a jurisdiction where the government is not supportive and economic fundamentals run haywire. That cannot be the expected goal of a responsive federal government.