THE ETISALAT LOAN FIASCO: A CONSORTIUM HANDCUFFED?
The recent debt crisis involving Etisalat Nigeria has been widely and extensively documented. This piece seeks to analyse the options…
The recent debt crisis involving Etisalat Nigeria has been widely and extensively documented. This piece seeks to analyse the options available (and those not available) to the consortium of banks to whom the debt in question is owed.
It is important to note at the outset that despite its high profile nature, there are conflicting reports regarding certain aspects of the story. For example, there are differing views on the exact ownership structure of Etisalat Nigeria; the actual assets pledged to secure the loan; and the current outstanding balance of the debt. As such, the facts relied upon in this analysis are based on the author's best judgement in light of all available information at the time of writing.
An understanding of the shareholding structure of Etisalat Nigeria, the reported terms of the loan agreement, and the regulatory framework of the telecommunications sector are all crucial in order to identify the options available to the MNO’s creditors.
A brief overview of the facts is necessary in order to set the parameters for the analysis. Emerging Market Telecommunications Ltd, operator of the Etisalat network, obtained the loan from the banks in order to re-finance its existing debts and expand its network infrastructure. This expansion presumably involved purchasing additional capital assets to increase network capacity. The loan was secured with the said assets, (and likely with other assets of the company), and the shares of the largest shareholder in the company, namely, (despite conflicting reports) Mubadala Development Company, UAE (Mubadala). Mubadala holds its shares through its holding company Emerging Marketing Telecommunications BV, Netherlands. The remaining shares are held by Emirates Telecommunications (Etisalat) Group, UAE (EGUAE) and Myacinth Holdings Nigeria Ltd. (Hereinafter EGUAE/Mubadala/EMTS BV will be collectively referred to as "Mubadala")
Since the story broke a couple of months ago there has been consistent speculation regarding the manner in which the consortium can recover its debt (or as much of it as possible) and the options available to the banks to achieve this result.
The available options will be heavily shaped and guided by what the legal and regulatory framework for the telecommunications sector provides. Said framework consists of the Nigerian Communications Act, Nigerian Communications Commission (NCC) Regulations and Guidelines, and licence conditions. The Act and Regulations/Guidelines set general parameters such as preventing the transfer of licences without the approval of the regulator.
And given that the NCC has publicly stated that it will not approve any transfer of the Etisalat licence to third parties this option is a non-starter. At any rate, the price a third party would be willing to pay for such transfer (even if the spectrum licence is also included in the sale) would likely not cover up to even 30% of the outstanding debt.
Clearly the easiest and preferable option for the consortium was for Mubadala (the parent company/majority shareholder of EMTSL) to cover the loan by paying for more shares, thereby giving the company some breathing room to grow its revenues and market share. This was indeed the option proposed by the banks however Mubadala refused and instead concluded plans to fully divest its interest in the company.
The second preferential option for the banks was to take over the company (or at least the company assets secured against loan) in order to liquidate enough assets to satisfy the debt. However, in light of the warning from the NCC (and the Central Bank of Nigeria (CBN)) to the banks against such a strategy this option is also unavailable.
The only other viable solution is to find a third party purchaser of Mubadala’s shares (both its ordinary shares and preferred shares). However, both the Act and relevant Regulations are silent on such corporate restructuring and whether or not it is regulated, and if so, what the regulatory conditions are for such restructuring.
Answers to these questions can found in the conditions of the licence itself. Now, given that Etisalat's specific licence, a Universal Access Service Licence (UASL), is not publicly available, reliance has to be placed on a similar standard format licence.
A perusal of the conditions in a standard form UASL reveal that, pursuant to condition 15 (Pre-Notification of Changes in Shareholding), a licensee must seek approval of the NCC before any change in its shareholding structure in respect of ordinary shares amounting to more than 10% of its total shareholding. Given that Mubadala owns 45% of the ordinary shares in EMTSL, NCC notification and approval is thus a requirement for any planned sale of the shares by the banks to a third party.
In light of the NCC’s public statements regarding this debt, it can be assumed that this is the preferred option as it ensures that the company remains a going concern and that its circa 20 million subscribers do not suffer any undue cuts in services. The question however then becomes whether the NCC would approve of just any third party purchasing the shares.
The telecommunications sector is one of the few parts of the economy in which competition is actively regulated and by extension anti-competitive practices are equally actively discouraged and prohibited. This emphasis on ensuring that competition thrives in the sector is reiterated in the Licence conditions.
Thus, in considering any such change in shareholding structure (through a sale of Mubadala’s shares) the NCC will have particular mind to prevent the creation of “a monopoly or cross-ownership situation”; a ‘cross-ownership situation being defined as a situation when “any person or entity that owns, directly or indirectly (“Attributable Interest"), an ownership stake of more than 25% (twenty five percent) of the Licensee has, directly or indirectly, an ownership stake of more than 25% (twenty five percent) in some other Operator(s) or in any person or entity that has an Attributable Interest in any Operator”.
The NCC has proven in the past, albeit at times in a confusing manner, that it can and will exercise its powers to disapprove of mergers, acquisitions, and other corporate restructuring that it deems would have an adverse effect on competition in the sector. This is why rumours of Mike Adenuga’s Globacom Ltd considering buying the shares were likely never going to get off the ground even if the interest was real.
Another important consideration is the company’s continued use of the actual “Etisalat” name and brand. This issue is however best saved for discussion in a separate article, save to say that it is very likely that the company, when all is said and done, will no longer have the right to use the said name and brand assets meaning it will lose the goodwill associated with it. Nonetheless, this will no doubt be a factor in the valuation of the company/shares for the purpose of any acquisition.
In conclusion, there is no question that the banks will have to take some sort of 'haircut' on the loan however the amount of said loss will be dependent on whether a buyer for Mubadala’s shares can be secured, and at what value. In default of this, the banks will likely have to seek CBN intervention and assistance, however such assistance may not be forthcoming given that recent analysis has shown that the exposure from the loan is minimal for the overall banking sector.
There have been recent rumours of the consortium deciding on a strategy of freezing Mubadala’s assets in a bid to force them to stay at the negotiating table. If true, such a strategy would only be of use if Mubadala actually has any significant assets in the country; a very doubtful proposition in the author’s opinion.
The loan was taken by, and is the obligation of, EMTSL and it is well known that the extent of a shareholder’s liability to a company is limited the amount of its unpaid shareholding only. Some may argue that Mubadala is a guarantor for the loan and is therefore liable for it. As far as has been reported, the only assets pledged by Mubadala in its capacity as guarantor were its shares in the company. Thus meaning the banks can only enforce their rights against Mubadala in respect of those shares alone.
The true moral of this tale, whatever its outcome, is that when dealing with organisations operating in heavily regulated sectors, it is imperative to factor in the peculiarities of such regulation to ensure all risks are identified and accounted for in deciding whether or not to enter the transaction. As it stands, despite their contractual agreements with EMTSL for the loan, the baks are at the complete mercy of the NCC due to the heavily regulated nature of the telecommunications market.
The only saving grace for the consortium is that the NCC is desperate to ensure EMTSL continues as a going concern meaning all hands are on deck to facilitate the introduction of new capital through a sale. Furthermore, the CBN has shown indications it is also very interested in ensuring the company survives and is thus willing to provide bridge funding to assist the banks in the interim whilst a buyer is sought and a sale finalised.
Nonetheless, and despite all the huffing and puffing, it seems that the consortium of banks are truly in handcuffs in respect of this issue.
Olumide Mustapha, Esq. ACIArb BL(Hons) QSEW
Telecoms/Media/Technology Attorney
E: lumimustapha@gmail.com