Adesegun Agbebiyi
February 2018

 

The 2015/2016 global crash in the price of crude oil caused a severe shock to the Nigerian economy, reliant as it is on this commodity for most of its foreign exchange earnings. The value of the Nigerian Naira is intricately linked to crude oil revenues, and the relationship is responsible for Nigeria’s strength and stability in high oil price markets and its weakness and turbulence when the price of crude oil declines. A low oil price environment, particularly where the fall in price is precipitous, spells trouble for the Nigerian economy and introduces uncertainty into commercial transactions.

The oil price drop inevitably led to the Central Bank of Nigeria (“CBN”) devaluing the Naira by about 30% over the course of the turbulence and rates on the parallel or “black market” fell as much as 50%, at its worst. The cost of dollar-denominated debt being much lower, at about 7%, than Naira debt, which is between 20% and 25%, caused Nigerian corporates to go on a dollar-denominated debt binge during the boom years for the Nigerian economy. The devaluation of the Naira means that these corporates are now left with a large portfolio of dollar-denominated debt and higher debt repayments in Naira terms. This coupled with a difficult operating environment an increased accounts payables, has left corporates struggling to repay creditors and maintain healthy debt and financial ratios.

The creditors are equally hampered by this situation. The loans can only be restructured so often, and ultimately, prudential guidelines, regulators and banks will demand hefty provision for restructuring transactions involving what were once thought of as prime banking customers. As a result of these challenges, many Nigerian companies are left with few debt restructuring options and creditors are left with fewer options for recovering debt. The conversion of debt to equity is an option that may be considered to provide a lifeline to Nigerian companies, particularly those with good fundamentals but that are having solvency issues as a result of the devaluation of the Naira. Creditors are also impelled to consider the conversion of debt to equity as a realistic debt restructuring option when dealing with such distressed companies.

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