11 March 2013

Nigeria: Investors Struggle to Raise Funds for Acquisition of Power Assets

Indications have emerged that some investors that won the bids for 15 of the successor companies carved out of the Power Holding Company of Nigeria (PHCN) are facing difficulties raising funds required to pay for the generation and distribution companies, THISDAY has learnt.

The National Council on Privatisation (NCP) at the signing of transaction documents with 14 preferred bidders for the 15 PHCN successor companies on February 21, had given the investors 15 working days to pay 25 per cent of the bid price for the electricity firms and to pay the balance of 75 per cent within six months at a date agreed to by both sides to close the transactions.

Documents signed at the February meeting with the investors included the Vesting Contract Agreement between the Nigerian Bulk Electricity Trading Company Plc (NBET) and the distribution companies, and the Power Purchase Agreement between NBET and the generation companies.

However, the bidders had sought for an extension of the deadline on the premise that the Bureau of Public Enterprises (BPE) did not send the transaction documents immediately after they were executed with the NCP.

On this basis, the bidders were given six extra days by the BPE, thus extending the deadline from March 15 to March 21 for the payment of the mandatory 25 per cent bid price.

Irrespective of the extension granted by BPE, investigations by THISDAY have shown that most of the preferred bidders are encountering challenges raising the funds to pay for the electricity assets, because the banks are insisting they must raise equity to match the loans they are seeking from the banks.

Sources conversant with the transactions disclosed that the consortiums, most of which are fronted by Nigerian businessmen, are having difficulties raising funds because their foreign partners for the power utilities are merely technical partners who are unwilling to put down equity for the deals.

Should the bidders fail to pay the 25 per cent by the deadline, they stand the risk of losing the bid bonds submitted to the BPE.

In all, the bidders had submitted $335,854,986.15 as bid guarantees for the power assets, which will be called in should they fail to meet the payment terms.

Save for Amperion Consortium and NEDC/KEPCO, which have respectively paid 25 per cent for the 414MW Geregu power station and Ikeja Distribution Company long before the March 21 deadline, other bidders are finding it difficult to meet the terms stipulated by the banks that have become risk averse since the banking crisis in 2009.

Amperion comprises Shanghai Municipal Electric Power Company Ltd/SGCC, Forte Oil Plc and BSG Power Ltd, while NEDC/KEPCO is backed by local energy firm Sahara Energy.

But despite NEDC/KEPCO's part payment of $32.5 million last week for Ikeja Disco, the company would still have to raise several millions of dollars more for its acquisition of the 1,320MW Egbin power station in Lagos.

NCP, penultimate week, had approved NEDC/KEPCO's 70 per cent acquisition of the Egbin plant for $407.3 million.

An industry source said that Egbin power station and Ikeja Distribution Company combined could set the consortium back well over $700 million, which would have to be funded mainly by the local partner in the group, Sahara Energy.

However, Transnational Company of Nigeria Plc (Transcorp), which won the bid for Ughelli power station, THISDAY was made to understand, has elected to go to the capital market to raise funds through a rights issue for the power plant alongside other projects under its portfolio.

Its officials confirmed to THISDAY at the weekend that even though the company intends to raise funds from the banks - most likely through a syndicate led by United Bank for Africa Plc - to pay for the acquisition of the Ughelli power plant, in the medium to long-term, Transcorp intends to raise cheaper funds from the equities market for the rehabilitation and modernisation of the electricity plant.

The company said the long-term prognosis for Ughelli, a thermal power plant, is very good due to its proximity to gas sources in the Niger Delta, as well as the quality of its partnerships with firms such as General Electric (GE), with which it signed a MoU for the supply of new electricity turbines.

Speaking on the caution being exercised by the banks to fund the electricity acquisitions, the managing director of one of Nigeria's Tier 1 banks, who preferred not to be named, acknowledged that most of the banks might have been excited at the outset to fund the acquisitions, but are now reviewing the transactions for inherent risks.

"The banks are just beginning to understand the power transactions and the risks involved. They are therefore insisting that labour issues have to be resolved, the relevant vending contracts must be in place with the bulk electricity trader, and the bidders must be able to provide some equity before raising debt for the utilities they intend to acquire," he said.

He explained that the banking industry has the capacity to fund the transactions but believes that the bidders should first put down their own money in the form of equity for the acquisitions before raising debt for capital expenditure, to avoid over-leveraging.

On the high interest rate regime, he said bidders with other assets or subsidiary businesses with the cashflow capable of servicing the debt raised from the banks would naturally attract lower interest rates than those that do not have fallback options.

"Interest rates in the industry are layered and we fix our rates on a risk-based pricing model; so the higher the risk, the higher the rate of interest a borrower will be made to pay and vice versa," he said.

The banker said despite his reservations, his bank is in discussions to fund one or two of bidders with their own cash to fund the transactions and the cashflow to service the loan.

The bidders for the distribution companies (Discos) are: Ikeja Disco - NEDC/KEPCO; Eko Disco - West Power and Gas; Abuja Disco - Kann Consortium Utility Company Ltd; Benin Disco - Vigeo Power Consortium; Enugu Disco - Interstate Electrics Ltd; Ibadan Disco - Integrated Energy Distribution and Marketing Ltd; Jos Disco: Aura Energy Ltd; Kano Disco - Sahelian Power Ltd; Port Harcourt Disco - 4Power Consortium; and Yola Disco - Integrated Energy Distribution and Marketing Ltd.

Bidders for the generation companies (Gencos) are: Shiroro Hydro Power Plc - North-South Power Ltd; Kainji Hydro Power Plc - Mainstream Energy Solutions; Sapele Power Plc - CMEC/EURAFRIC Energy Ltd; Geregu Power Plc - Amperion Power Distribution Limited; and Ughelli Power Plc -Transcorp/Woodrock/Sumbion/Medea/PSL/ Thomassen.

The Federal Government expects to realise $1.26 billion from the sale of 10 discos, while the sale of five gencos is expected to fetch $1.06 billion.

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