In what could be seen as a stamp of confidence in its credit rating, Diamond Bank Plc has secured a $70 million seven-year convertible subordinated loan from the International Finance Corporation (IFC) and Africa Capitalisation Fund Limited (ACF) to fund its customer business and expansion plans.
ACF is a specialised IFC-fund set up by IFC Asset Management Company to assist banks in Africa in raising capital to fund growth.
The facility qualifies as Tier 2 capital and was agreed after due diligence by IFC. Essentially, since the facility is convertible, it gives IFC the option to convert the debts into equity at a pre-agreed price per share within agreed timelines in the future.
The bank believes that the injection of Tier 2 capital will help it achieve a lower weighted average cost of capital and boost its capital adequacy ratio (CAR), while providing a veritable source of funding for its customer business and expansion plans.
The agreement on the loan was signed Wednesday by the Group Managing Director of the bank, Dr. Alex Oti, and Country Director, IFC, Mr. Solomon Adegbie-Quaynor.
Commenting, Oti enthused that the investment reinforced IFC's confidence in the bank.
According to him, "This is another stamp of authority on the bank and its management as the IFC truly believes in the growth potential of the bank to seek to become a core shareholder in it. This speaks to the existence of excellent corporate governance culture in Diamond Bank."
Oti noted that the subordinated nature of the facility also conveyed the kind of confidence the corporation has in the bank.
He described subordinated debt as clean unsecured debt, which ranks below other debt and have lower priority in the hierarchy of repayments - below senior debt, taxes and other financial obligations.
"They stand in contrast to senior debt, which are secured against the assets of the borrower and repaid first in the hierarchy of obligations of the borrower. Consequently, lenders are generally more willing to issue senior debt than subordinated facilities," he added.
Oti stated that "the fundamentals of the bank and its future competitiveness and profitability are sufficiently strong to warrant an international prudent investor like IFC to make such investment," pointing out that "this is the first subordinated Tier 2 instrument in the Nigerian banking space."
The chief executive expressed optimism that the facility would go a long way in helping the bank's retail banking growth strategy across the country and West Africa, as well as strengthen its ability to grow its micro, small and medium enterprises (MSME) banking business.
In his remarks, Adegbie-Quaynor reiterated that the IFC has a lot of confidence in the management of Diamond Bank. He said the investment was a demonstration of the corporation's confidence in the bank.
Adegbie-Quaynor explained: "It is not only IFC that is providing this funding, there is also the IFC private equity arm which is called the Asset Management Company.
"And wherever that Asset Management Company goes in, they are looking at what they see as the growth potential. They are different from the IFC.
"We focus on development, while they focus on growth and for them to have the confidence to invest $20 million, it also demonstrates that they have seen the prospect behind this management team."
He added that the IFC is looking forward to unlocking the partnership in the areas of co-financing projects in infrastructure on a broader scale.
In a statement by the bank, it added "Diamond Bank considers the dollar denominated investment appropriate for its medium and long-term funding strategy, given the high naira interest rates regime, dearth of such long-term financing in the Nigerian financial markets and the depressed domestic equities market which would have made local borrowing and equity issuance a lot more expensive.
"Moreover, the bank's current capital structure is optimised with the issue of debt capital rather than equity. Injecting Tier 2 capital into the balance sheet will help the bank achieve a lower weighted average cost of capital and boost its capital adequacy ratio (CAR), while providing a veritable source of funding for the customer business and expansion plans."