DMO: Restructured Loans to Reduce States’ Debt Burden by 55%-97%

 Abraham Nwankwo

James Emejo in Abuja

The Director General, Debt Management Office (DMO), Mr. Abraham Nwankwo, monday said the recent restructuring of 11 state governments’ short-term bank loans into long-term Federal Government of Nigeria (FGN) Bonds would cut their monthly debt service burden by a minimum of 55 per cent and maximum of 97 per cent.

He said the renegotiated facilities would also result in interest rate savings of between three and nine per cent per annum for the affected states and help regain fiscal balance.

The 36 states of the federation had approached President Muhammadu Buhari in June to ask for a bailout that would enable them pay salary arrears to their employees and meet other pressing obligations.

In response, the president had approved the disbursement of $1.6 billion paid into the Federation Account by the Nigerian Liquefied Natural Gas (NLNG) Company to the three tiers of government; a Central Bank of Nigeria (CBN) N250 billion to N300 billion Special Intervention Fund meant solely for payment of the backlog of staff salaries; and the restructuring of their commercial loans with the banks through either bond issuance or into long tenored loans of 20 years.

Seizing on the opening, 22 states of the federation applied to DMO for their debts to be restructured into FGN Bonds.

Of the 22 states, 11 have been screened by the CBN and DMO, and FGN Bonds issued in respect of the loans of the 11 states to 14 banks.

Information obtained exclusively by THISDAY showed that Osun State issued a bond of N88.6 billion, Delta – N69.8 billion, Ogun – N55.4 billion, Imo – N37.1 billion and Ekiti – N18.8 billion.

Others are: Kwara – N15.6 billion, Edo – N11.9 billion, Benue – N10.9 billion, Oyo – N9.1 billion, Bauchi – N6.5 billion and Kogi – N0.81 billion.

Speaking with journalists in Abuja shortly after a meeting with a Kenyan delegation comprising officials from the Central Bank of Kenya and the Treasury/Debt Management Department, which was on a study tour to unravel the success story of the Nigerian domestic bond market, Nwankwo said the restructuring had been effected through the reopening of the FGN Bonds issued on July 18, 2014 and maturing on July 18, 2034.

He said the pricing was based on the yield to date of the bond at a 30-day average, resulting in a transaction yield of 14.83 per cent.
He added that more states were presently in the process of finalising their documentation and reconciliation of balances with banks so that their debts could also be restructured in the second phase of the debt restructuring programme in the next couple of weeks.

According to him, the programme is open to any state which has an unsustainable debt burden from commercial bank loans.

Besides the benefits of the initiative to the states, he said banks’ balance sheets would also improve, as weak subnational loan assets are replaced with high quality sovereign assets.

He noted that the FGN Bonds enjoy enhanced liquidity as they are traded in the secondary market, affording the banks improved space to lend to other sectors of the economy as they are free to convert their FGN Bond holdings into cash in the secondary market.

He said the commercial loan-to-FGN Bond plan was one of the salutary options for short-term fiscal stabilisation, which was put forward by the DMO to reduce the debt-service outflow of states and free resources for them to meet other obligations, particularly clearance of arrears of salaries and pensions.

As exclusively reported by THISDAY, a total of 14 banks were involved in the first phase of the plan for the restructuring of loans of N322.78 billion of 11 state governments.

He said: “The whole essence is that instead of a state having to repay its debts within 12 months with the heavy debt service burden, that will now be spread over 240 months, that is, 20 years.

“So the debt service burden would be low and there will be a space during which the states can use to meet their other obligations at the same time.

“And the bank don't lose anything because the bank is issued with an FGN Bond, which is a high quality bond that is very good for their balance sheet because it is liquid. So if a bank prefers to go the secondary market; luckily Nigeria has a developed debt secondary market for FGN Bonds, so if you want to go to the market to say you need cash immediately, you will have no problem.

“This means the assets we have created for the banks are perfect instruments for them so they don't lose anything: it's a win-win situation.”

Asked how the DMO was able to convince the states and banks to buy into the programme, he said: “Every Nigerian individual and household or company or bank and governments, all of us, is now attuned to the programme of the new administration of President Muhammadu Buhari, and of course, we appreciate that the whole essence is to move the country forward politically, economically and security wise.

“So everybody is thinking in the same way. When you see a solution to a problem, nobody needs to convince you.”

Asked if he was not worried that despite the federal government’s latest intervention for the states, some of them have continued to access additional credit facilities from the commercial banks, he said: “There’s a new spirit of transparency, accountability and probity. Everybody knows now that whatever they do has to be proper and that is the most important asset Nigerians have now.”
“I have not seen any Nigerian who says he’s not subscribing to the new momentum of getting things to work the right way. So nobody needs to convince you,” he added.

The DMO boss stressed that the debt restructuring programme is beneficial to the banking system by helping to give stability to the banks, because the risk assets they held in their books by way of the terms of loans to states, which were tending towards deterioration have now been “converted to high quality sovereign risk assets which is the best quality assets you can have in your balance sheet”.

He said: “But more importantly, it’s not only that they have sovereign assets which is relatively risk-free but assets with liquidity to the extent that we have a vibrant secondary market in Nigeria, which DMO is working with other government institutions developed over the past seven years.

“Based on that, any bank can go to the market today or tomorrow to exchange it for cash and use the cash to lend to other sectors of the economy.

“So it improves the banks’ balance sheets, they have flexibility and liquidity and therefore it’s a perfect asset for them. So from the point of view of the states and banking system and the overall economy, this is the best solution.”

Also speaking on the objectives of their visit to the country, the Assistant Director, Central Bank of Kenya, Mr. Eric Mwenda M'Marete, who led the delegation, said Kenya was keen to learning the various strategic plans that DMO Nigeria has in relation to “what we are trying to develop in Kenya and perhaps this would be a good landing place”.

“The fact that Nigeria's federal government supports the states through funding of their budget requirements, we were keen to come and learn how states and the federal government here relate in terms of debt management and administration of resources,” he explained.