Update on AMCON: Mustafa Chike-Obi Clarifies

Someone was kind enough to forward my blog post yesterday to Mustafa Chike-Obi, AMCON CEO and he said he wanted to explain some of the things I was wrong about in my post.

We had a 17 minute telephone conversation this evening (16/12/12) so this is an update to explain what I learnt after speaking to him. I also have the audited AMCON accounts which I got this evening but I havent had the chance to go through them yet. So this is basically me relaying Mr Chike-Obi’s side of the story and not an analysis of the numbers.

1. Firstly, he didn’t quite like my ‘Grand Theft AMCON’ headline. I tried to explain that it wasn’t necessarily malicious but more a play on the ‘Grand Theft Auto’ video game (he said he knows the game). But he seemed quite upset what looked like me trying to malign him and his staff. That certainly wasnt my intention and he stressed, several times, that he wasnt making any money from doing this.

So I’d like to apologise to him and any AMCON staff who felt offended or maligned by that headline. The issues at stake are far more important than calling people names and this is an issue that doesn’t need any kind of distraction.

2. Now to the meat of the matter – AMCON reported a loss of N2.37trn on Friday. Now according to Mr Chike-Obi, this amount in its entirety was what the government put in the banks to replace depositors’ funds that had simply disappeared. According to him, this money belonged to 10 million depositors. So you had N10,000 in Bank XYZ but due to mismanagement and all sorts, that money was actually no longer there.

Interestingly he did mention that N2trn of that amount belonged to various government agencies. This further reveals the almost incestuous relationship going on between government and the banks. This is also reflected in the fact that govt is the biggest borrower from the banks crowding out the private sector. I have seen stats that show something like N7 out of every N10 in circulation is govt related.

It’s also interesting that govt agencies had N2trn sitting as deposits in the banks. Of course I don’t fully know the composition of these deposits but it would be interesting to know which govt ministries/agencies/departments had these funds in the banks.

Note that this N2.37trn is gone from the point of view of AMCON. It cannot be recovered. So of the N300bn which belonged to private depositors, some of it could be yours, Dear Reader.

3. He said that without this bailout, the problem would have spread to the other banks and everyone would have lost confidence in the entire financial system. I am not a fan of bailouts and I concede that my opposition to them is based a lot on ideology. So I don’t expect to win an argument as to why banks should not have been bailed out. In my own case, I would have refunded depositors but then made sure the banks were wound down completely and made sure they disappear from the financial space. But that’s me and I am certainly not Mr Chike-Obi who had to do face the reality of the situation and deal with it.

He also mentioned that Hallmark Bank which went bust a decade ago still has outstanding items till today to resolve. So in his view it was much better to bail out the banks and allow them to continue regardless of them being zombies.

4. Now I mentioned the N1.6trn ‘acquisition costs’ that he mentioned to the public. It appears I misunderstood or misread his quote to Bloomberg. According to him this is what AMCON paid in total to acquire the loans it did. These loans come to a total value of N3.3trn so AMCON paid, according to him, 40kobo for every N1 loan it bought. Now this is a completely different proposition from what I thought.

Looking at the list of loans, it does look like AMCON paid more than 40% for the loans – the Zenon loan was bought at 64% of the face value by a rough calculation of the numbers. I will admit I havent totalled up the numbers as it has to be done manually from a PDF sheet and the document seems to have a lot of typographical errors. So perhaps some of the loans were bought for much less than 40% of their value such that when the whole portfolio is averaged out, you get the 40% he referred to. I will do this sometime this week and see what the numbers look like.

5. He was very adamant that AMCON was going to make money off these loans eventually. If they did pay 40% for the portfolio of loans they bought, then it will be very hard for them to lose money as with a little bit of aggression and diligence they should be able to recover the money from the debtors. I wish them all the best with this. Any AMCON debtor reading this – be nice and repay what you owe.

6. I also asked him about the N100bn sinking fund which the banks are supposed to contribute to as a way of repaying AMCON. He said this was an annual charge to the banks. He mentioned this was calculated as 50 basis points (0.50%) per annum of the banks’ profits (or revenues, I didn’t hear this part properly. Blame MTN). This charge will go on for 10 – 15 years. Based on this, the numbers start to make some sense – if the banks stump up N100bn every year for 15 years, we get to N1.5trn which is close enough to N1.6trn. Given that this charge is based on profits (or revenues), he fully expects to raise more than N100bn per annum in the coming years as the banks fully recover from the crisis.

This sinking fund is what will be used to finance AMCON’s activities in future making it an independent/stand alone body.

Update: Someone has been in touch to tell me that it is actually 50 basis points of the banks’ assets. Apparently the banks that were ‘clean’ during the crisis do not particularly find this funny but if we are to go by Mr Chike-Obi’s logic, then the failure of one or more banks would have pulled down even clean banks. So even if a bank didn’t receive a bailout, it got an implied bailout. I am guessing this is the logic behind a seemingly crude blanket levy on all banks.

7. He also mentioned that the government has only put in N10bn into AMCON so far (which checks out with what was reported). The rest of the money came from zero coupon bonds, of which N1.7trn is due to be repaid by the end of 2013 at interest rates of around 11%.

I asked how AMCON was planning to repay these loans and if the govt was going to have to step in make good its guarantee. He literally cut me short here and said govt was not going to be needed to come in at all. ‘We have enough cash to pay the loans’ he said. Obviously AMCON doesn’t have N1.7trn sitting somewhere so I am guessing he meant they have enough cash to refinance the loans. He also mentioned they are looking to refinance the bonds to 7 year terms. I suspect that at the time the initial bonds were sold, 2 years was the best they could obtain so they had to take it. Perhaps next year investors will be willing to take a longer term view.

So who are the investors who put up the money for these bonds? It is not immediately clear but what is clear is that the CBN is prominent as a source of funding for AMCON. Without beating about the bush, this is straightforward electronic printing of money…not the kind that disappears from NSPMC’s offices. In summary, AMCON needed money to inject into the banks to guarantee depositors funds and buy off non performing loans. The banks in question have accounts with the CBN. CBN wants to ‘invest’ in AMCON to allow it fund the banks. Well, CBN simply ‘prints’ the money and credits the accounts that need to be credited.

You as the innocent reader minding your own business simply bear whatever inflation is caused by increasing the supply of money 🙂 It’s more complicated than this in practice of course.

8. I asked about the seemingly slow pace of recovery of the loans which meant that only N85bn had been recovered so far. According to him, the plan was to recover nothing at all in the first year and then 40% in their second year. So the fact that they managed to recover N85bn means they are slightly ahead of the curve.

9. On a personal note, he was at pains to stress that he wasnt benefitting personally from all this. He went as far as saying he lived a far more comfortable life in America before moving to Nigeria to take this job complete with a smaller residence.

There’s a bigger point to be made about this. There really is no reason to trust anyone who works for the Nigerian govt. I don’t and I will advice anyone that a healthy amount of cynicism is good for you.

BUT are there people who have actually made a sacrifice to serve Nigeria? How do we move away from being cynical and at least listening to what these people have to say? I don’t have the answers to these questions but I do think there are a few good men out there. The only way to find out is to test each person. Mr Chike-Obi was very keen to explain AMCON’s side of the story and stressed there was nothing hidden about what they were doing (I didn’t ask about the rumoured sweetheart deal that Femi Otedola got recently, details of which have not been disclosed). He also extended an invitation to come and look at all their models. I plan to take up this offer when next I’m in Lagos.

I think young people, in order to be taken seriously, need to engage with these things. Some of it is mind numbingly dull and arcane even for finance professionals. But what needs to be done needs to be done. The AMCON numbers almost look as if there is a seperate economy going on somewhere in Nigeria made up of debtors and Central Bankers coming to their rescue. It is difficult to get excited about it but it is compulsory.

The audited AMCON accounts are below. A good place to start. We are all affected one way or the other by these things. Even if you don’t have money in the banks, you will be affected by whatever inflation is caused by the increased money supply.

There’s also the stink that comes from people getting bailed out for bad behaviour. He mentioned that none of the CEOs who were responsible for running their banks into the ground remains in office today. Fair enough. But what do regular people who can be put out of business by a N20 increase in the cost of diesel think about this? We need to at least begin to put in place a mechanism that ensures that this kind of thing does not happen again.

The UK and US authorities are leading the way with the recently announced G-SIFI (Global Systemically Important Financial Institutions…a fancy name for Too Big To Fail) which seeks to put in place a framework for ensuring that any bank that implodes can be safely and quickly wound down and removed from the system without requiring taxpayer bailouts.

Finally, a recent report by The Economist on the future of banking mentioned that banks in the US these days account for just 30% of lending these days. The rest of the gap is made up of all kinds of financial institutions including online peer-to-peer lenders. I think I like the look of that…the move toward a system that is less reliant on banks. In the long run this is good for everybody as the reputational damage to banks when the public see them being bailed out can never really be quantified.

AMCON_Consolidated_Financial_Full

I will be combing through the accounts in the coming week along with a couple of friends. If you find anything interesting, leave a comment below.

FF

Grand Theft AMCON? The N1.6trn Question

It was all over the papers yesterday that AMCON managed to lose N2.37trn in the course of 2011.

Here’s a summary of what I have managed to understand from various sources that covered the news yesterday

1. AMCON bought bad loans totaling N4trn from our banks. In other words this is the value it placed on the loans it bought from the banks so it is reasonable to say that the actual value of the non-performing loans should be at the very minimum 10% higher.

2. However AMCON actually spent N5.6trn in total. The difference, please sit down, was made up of what AMCON’s CEO Mustafa Chike-Obi called ‘acquisition costs’. In other words, it cost AMCON N1.6trn or 40% of the total amount to acquire these loans from the banks. More on this below

3. Where did AMCON get this money from? Well, it sold various bonds with different maturities. Now we know that N1.7trn of these bonds are zero coupon bonds due to be repaid by the end of 2013. To put it very simply, a zero coupon bond is a bond sold at a discount. Imagine you want to borrow N100m via zero coupon bond. The market then works out that the interest rate on such a bond will be 20% so you will need to repay N120m. In this case, you simply borrow the N100m but the value of the loan is shown as N120m. Say you borrow this for 2 years, in that time you don’t make any interest payments at all. At the end of the 2 years you simply repay N120m unlike other bonds where you make interest payments every quarter or year. So if AMCON got a zero coupon bond for N1.7trn then perhaps the actual cash it obtained was say N1.3trn with the N400bn being the interest to be paid off at the end.

Also note that these bonds are backstopped by the Federal Govt so if for example at the end of 2013, it is unable to repay the N1.7trn, then the govt has to step in to repay the loans on its behalf. I am not sure if a provision has been made in the 2013 budget for this possibility.

4. AMCON initially planned to buy around N1trn worth of loans but it then discovered that it actually needed to buy N4trn worth. According to Mofoluke Dosumu, AMCON’s Executive Director of Finance, this happened because the banks were not honest about the actual number of non performing loans they were holding on their books. So when AMCON started buying, they started ‘confessing’ that they actually had more. My hunch is that AMCON must have been buying these loans at very generous terms indeed. Certainly here in the UK and in America, the bailout terms were so costly for the banks that the reverse actually happened – the banks understated the amount of dodgy loans. For example, in 2009 the UK Treasury insured £282bn worth of RBS’ loans but the terms were such that RBS was to bear the first £60bn of losses on those assets before the Treasury took over. In addition RBS also paid a fee of something like £250m to be able to use this facility. Even with these terms, you will still find a lot of people who are very much annoyed at how the banks managed to get bailed out.

The AMCON method works quite differently. AMCON was set up as a bad bank and then the banks simply sold their bad loans to it at an agreed price freeing up their own balance sheet in the process.

5. From this list here, we can see the loans for N5bn and above that AMCON bought from the banks and the discount it applied. So for example Femi Otedola’s outstanding loan in the name of Zenon for N192bn was discounted to N141bn when AMCON bought it i.e. a discount of roughly 36%. If we assume this is the average discount applied to all the loans, then we can assume that the N4trn worth of loans AMCON bought were actually around N5.4trn on the books of the banks. This, need I tell you, is larger than Nigeria’s annual budget.

6. Given that AMCON initially planned to buy N1trn of loans but ended up buying N4trn, it is reasonable to assume that whatever the costs of acquiring these loans would also go up. But by the testimony of Mustafa Chike-Obi, these costs doubled to N1.6trn from what they planned. But this doesn’t make much sense does it? If Mofoluke Dosumu is saying they ended up buying 4 times the amount of loans they planned to buy, is Mustafa Chike-Obi saying they planned to spend N800bn in acquiring N1trn worth of loans?

N1.6trn is already a shocking 40% of the amount of loans that were bought so the other scenario does not even bear thinking about.

These are incredible sums to comprehend – a trillion has twelve zeroes. To put this in perspective, this N1.6trn is more than the entire capital budget in Nigeria’s budget for 2013. You will need to add up Education spending (N428bn), Defence (N349bn), Health (N298bn), Works (N184bn) and Police (N311bn) before you arrive at these ‘acquisition costs’. These are the entire amounts to be spent on those ministries for the whole of 2013 that AMCON has run up as a ‘cost’ in just one year. Sorry if I am repeating myself, but this N1.6trn is not the actual loans but merely the ‘cost’, whatever that may be, of obtaining the loan from the banks.

In a buyer’s market, where the banks were desperate to get these loans off their books and AMCON being the only buyer, I am struggling to understand how it managed to run up these costs.

7. The whole point of AMCON buying the loans was for it to then do the legwork of collecting the loans from the debtors. However, of the N4trn worth of loans it acquired from the banks, it has so for managed to recover a trifling N85bn from the debtors or 2% of the amount of loans bought.

8. Finally, since it paid N4trn for the loans, AMCON now confesses that the loans have since become worth only N3.34trn i.e. it is admitting it overpaid by almost N700bn and has since written this off as non recoverable. God knows what kind of lending Nigerian banks were doing in the run up to the crash of 2009.

 

Now there has to be something I am being clueless about here. Does anyone reading have any more information I may have missed? I am particularly interested in these acquisition costs of N1.6trn. If you prefer to let me know in confidence, please send me an email at feyi@outlook.com

Any information, factual and anecdotal will be appreciated. The comments section is all yours.

God bless Nigeria

FF

References

1. ThisDay

2. Bloomberg

3. Reuters

The ‘Problem’ That Brymo Solves

I’m a big fan of Brymo and I had been looking forward to his album, Son of A Kapenta, as soon as it was announced. Apart from liking his music, I was curious to see, like many other people, if he was going to be afflicted by the ‘Nate Dogg Disease’ – an undoubtedly talented artiste who shoots to fame by featuring on other people’s songs and albums and then when he releases his own album, it elicits a great big ‘meh’.

So I finally got the album a few days ago and I have listened to it non stop everyday for something like 3 days straight at the time of writing this post. Nothing to be worried about, it’s a pretty good album.

But I think I have also discovered why I like the guy’s music – why I was looking forward to his album. Brymo solves the ‘Fuji Problem’, at least for me.

I will confess to being a closet fan of Fuji Music for some time now. There was a time when I couldn’t get enough of Saheed Osupa and Obesere. I remember when I first moved to London many years ago and still struggling to qualify as an accountant. One afternoon on my way home from classes, the bus I was riding in broke down and I had to get down and catch another bus. As I walked to the bus stop, I spotted the Omo Rapala himself across the road sitting in a car by himself. As if in a trance, I crossed the road and went to say hello to him and even shamelessly declared myself to be a fan. He immediately seized the moment to plug his upcoming concert somewhere in South London and as soon as he said it, I recoiled immediately and took my leave. This is the Fuji Problem, at least for me – it is not easily accessible. It can be too hardcore and difficult to get into if you are not the most determined ‘crossover’ fan. As much as I might have enjoyed Obesere’s music, there was no way on earth I was going to be caught dead or alive at a live concert of his. The image of area boys going crazy and breaking bottles that immediately flashed before my eyes was enough to put paid to that.

I used to have a similar problem with Rock music. I wanted to get into it but I just couldn’t. The very things that were the signature of that genre – heavy bass guitars, head moving wildly about diseased chickens – were the things that put me off. Until Matchbox Twenty came along, at least for me. Their 2002 album, More Than You Think You Are, was the album that made Rock music ok for me. I remember listening to Unwell and thinking so a Rock band can do this? Rock music for me was no longer just Metallica or Mötley Crüe.

Casual Fuji music fans are very rare, if I can make such an assertion without conducting any research. Most crossover fans brought up on a Hip-Hop diet will go as far as Juju Music and no further. Shina Peters’ Ace album, if nothing else, made sure of that. I remember driving through Enugu with my parents in the early 90s and hearing the album blaring out of a couple of houses.

Back to my Fuji love; I have since lost touch with the genre. All I have now are the songs I remember from like a decade ago. A friend was helpful enough to help me organise a stash from Nigeria – ranging from Pasuma to Atawewe – a couple of years ago but I havent had the heart to listen to them since. Before now the halfway house between hardcore Fuji and the hip hop generation was, very debatably, King Wasiu Ayinde Marshall or whatever he calls himself these days.

I think that Brymo, at least partially, solves this problem, to the extent that it can be called a problem. Genre wise, the album is all over the place but it is testament to the talent range of the artiste more than anything else. He can do different things very easily and well. The last 3 tracks on the album for instance all sound very different but are all quite good. For those who grew up listening to R&B and who find the world of hardcore Fuji a terrifying place, Brymo handily presents a very useful option – as if he’s holding your hand and saying ‘It’s ok to enjoy Fuji music the way I do it’. Perhaps I exaggerate a little but you get the gist. In short, finally we have a ‘Fuji artiste’ who is ‘one of us’.

The song that best demonstrates this on the album is Akara. It opens with like any normal Naija Hip-Hop song and then without warning segues into a deliciously unmistakable Fuji riff. Even if you disagree, the nasal tones with which he delivers the Yoruba bits of the song are very much Fuji. But he does this skilfully – he teases and then draws you back to the reason why you are his fan in the first place i.e. Naija Hip-Hop. I like it.

As if to underscore this point, the next song on the album, If You Were Mine, is decidedly un-Fuji where he delivers veiled ‘threats’ as to the lengths he would go to spoil the woman he is in love with. But the Fuji hints are unmistakable on many other songs on the album from 1986 to my current favourite on the album, Omoge Campus, a thundering herd of trumpets and drums. Do yourself a favour; if you are going to listen to this song, turn it up really loud. With due consideration for your neighbours of course. I have had it on repeat for a day now. There’s of course Ara which served as the trailer to the album and Good Morning Omoge. All very enjoyable harmless good fun.

This ‘teasing’ continues with the version of Yoruba he delivers some of his lines in. If we imagine that the journey from Ibadan to Lekki in Lagos is a continuos dilution of the Yoruba language from the hardcore Ibadan version to the mish mash that you hear in Lekki peppered with English words and heavily accented by its English influences, then Brymo’s Yoruba sits halfway on this journey, somewhere around the Sagamu junction, figuratively speaking. On If You Were Mine he uses ‘lo’ as his verb (with an Ibadan pronunciation even) as opposed to ‘ni’ which is what you might hear in Lekki. Subtle but I found it all rather interesting.

Many months ago, I saw a conversation online between a couple of friends discussing Flavour’s music. I took the plunge and bought his N’abania album the next day. Without understanding a word of Igbo, I found myself listening to Nwata and N’abania over and over again for weeks after that. In other words, Flavour solves the Oliver De Coque problem for the Hip-Hop Generation.

As Jay-Z once said; there’s only good music and bad music out there. Nothing else. Indeed, some months ago I was walking to Wembley stadium for the Olympic Football final between Mexico and Brazil and a Mexican Mariachi band was serenading us. I immediately made a mental note to find more of such music.

So what is the point of all this grammar? I think artistes who can bridge the divide between the current music buying generation and the out of reach genres like Fuji or even the Dan Maraya Jos music I grew up listening to in Kaduna are very useful. The purists will always moan and complain but Hollywood is constantly reaching into its back catalogue and remaking old movies for a new generation (Batman? Avengers?). People like Tunji Oyelana for instance wont be with us forever. Yes you can always listen to Mo Lo Soko on YouTube if you want to, but there’s nothing wrong with updating it for a new generation – with auto-tune and techno beats even – given that the message is so timeless. Same goes for Ebenezer Obey’s music which fades deeper and deeper into history with every passing day. Ota Mi Dehin Leyin Mi can be given the Ara treatment. The danger of not doing this is that for kids born today, such music might become inaccessible to them culturally when they are in their teens and older.

All of this suggests, at least to me, that without even having to come up with new material or borrowing from the predominant US hip-hop culture, our artistes can mine the back catalogue of songs that were popular with our parents. It might even lead to divide-bridging conversations between parents and children.

I think you should buy Brymo’s Son of A Kapenta. It’s a good album. I don’t hesitate at all in recommending it.

FF

P.S If you judge me over my Fuji music love confession, then I’m afraid I will have to stop telling you things on this here blog