Issue 122 • 21 September 2007

First Nigerian IPP heads for financial close, confirming bankable market’s emergence

With a first independent power project set to reach financial close in coming months, investment bulls will have more confirmation that Nigeria is the sub-Saharan market to watch for international banks and fast-emerging Lagos-based institutions, writes Kevin Godier, recently in Abuja and Lagos.

Financial closure is anticipated in the next few months for the 190MW Ibom Power scheme, Nigeria’s first independent power project (IPP). “We’re in the market for long-term debt financing right now, and should reach a close in the next few months,” said Jonathan Berman, principal at financial adviser Fieldstone Capital: “Banks will be signed up for mandated lead arranger roles in the next two weeks.”

The IPP is owned by the Akwa Ibom state government, and sponsored by AKIIPOC, the state’s investment arm. Globeleq has signed to come in as an 80% shareholder following project completion by the contractors, Group Five and GE, which is anticipated by end-2007.

To date, the project – which has taken some years to move ahead – has been equity and bridge loan-funded, mainly from the state government coffers. A little under $10m came from the Cairo-based African Export Import Bank (Afreximbank). The IPP is estimated to cost about $200m up to construction.

The shape of the debt financing has yet to be decided. “There will be some form of financing support – export credits, direct multilateral lending and [political risk insurance] PRI have all been offered,” Berman told African Energy on 17 September. “Commercial banks are now willing to lend long-term, with just PRI, if needed,” he observed. “We have seen ten-year naira-denominated facilities offered, which is quite a step forward, and might go out even further with credit enhancement. Dollar-denominated offers have carried 15-year maturities, which is also quite innovative for Nigeria.”

The financing security will hinge on a 20-year power purchase agreement (PPA) with Power Holding Company of Nigeria (PHCN). This will be paid in naira, but is 75% dollar-linked. “It has taken a while to conclude the PPA”, said Berman

The offtaker – PHCN – required a federal government guarantee of the payment obligations. Various other forms of security include a letter of credit (l/c) and debt service reserve accounts. Once financing is in place, the project will be rounded off by the completion of a transmission line, which is expected in early 2008.

Moves towards completion of the Akwa Ibom IPP are one among many signals that Nigeria has arrived as one of the more promising emerging markets – despite the political doubts surrounding President Umaru Musa Yar’Adua’s election and the continued crisis in the Niger Delta (AE 121/1).

Progress is reported on another IPP, Geometric Power’s 150MW plant being developed in Abba state, and there are more projects to come (AE 117/4).

Goldman Sachs – which has been bullish about Nigeria since at least 2005, when it compiled an influential report on the market’s prospects – recently forecast that Abuja’s sovereign rating would be upgraded in the near term; it already stands level with Turkey.

Local banks are emerging players, buoyed up by their performance on the Nigerian Stock Exchange, where an 18-month bull run has been driven by bank stocks, which provide some 80% of the market’s capitalisation.

Domestic banks have flourished following the consolidation pushed by Central Bank of Nigeria (CBN) in 2005, which generated massive doses of new liquidity and far healthier levels of competition. Share prices have soared, with the majority of banks trading at more than 20 times expected 2008 earnings.

Their increased capital strength means Nigerian banks are moving into the project syndication market. “In the past, banks lacked an enabling capital base, and hardly participated in the large debt deals such as Nigeria LNG, but they possess such capital and liquidity now that they can finance some projects single-handedly without foreign participation,” said Oceanic Bank managing director Cecilia Ibru. Intercontinental Bank chief executive Erastus Akingbola reported that his institution recently 100%-financed “two brand new aircraft”.

Private sector focus for infrastructure funding

According to First City Monument Bank (FCMB) managing director Ladi Balogun, at least ten local banks will boast a $1bn-plus capital base by end-2007. Thus, “the banking sector has the capacity to fund most infrastructure projects.”

Local bankers canvassed by African Energy were near unanimous that private sector projects were by far the most attractive to lenders.

“Nigeria’s infrastructure needs are enormous – but unless projects are put together by private sector entities, banks may not be attracted,” Akingbola observed: “Look at the telecoms sector, where lots of money has flowed in, because the banks know that private organisations would be commercial and competitive. Banks were very reluctant to lend when the parastatals were there. Now a project such as a toll road will produce cash flow, and the banks can lend.”

A build-operate-transfer road is operational, backed by private money, and five states have already agreed to use public/private partnership (PPP) models that will allow BOT-based projects to “come to fruition for a whole range of infrastructure, such as power, telecoms, waterways, aviation, marine and education,” Ibru said.

Gas and petrochemicals hold huge potential. In February, Notore Chemical Industries tapped a six-year, $222m credit facility from a local banking syndicate to increase the capacity of its fertiliser complex. Two weeks later, Eleme Petrochemical Company in Port Harcourt secured a six-year working capital facility, that included $60m from local lenders United Bank for Africa and Fidelity Bank (AE 110/15).

The LNG boom will provide further opportunities for local banks to show their mettle – like international institutions, they have been looking at both the planned Olokola LNG (OK LNG) and Brass LNG schemes, which together are likely to require over $10bn project finance, some of which will be provided by export credit agencies.

The biggest immediate project lending opportunities are in infrastructure and housing, but the power sector will soon provide local banks with some of the largest opportunities.

Well-structured public sector projects are do-able. “We are financing a government-led huge power project in the Niger Delta, one Lagos banker reported. “The contractor is indigenous and capable, and with an l/c from the CBN to back us, we can lend in naira for working capital. Without that structure, we would have been forced to think twice.”