2015 was a relatively active year for financing transactions in Nigeria's oil and gas sector. As well as facilities to fund the development of oil and gas assets, a significant number of facilities were provided to Nigerian companies to finance their acquisition of oil and gas assets. Most of the assets purchased were onshore oil and gas assets divested by international oil companies (IOCs).
Two main factors drove IOCs to dispose of their onshore oil and gas assets:
- IOCs wanted to reduce their risk exposure to onshore oil and gas operations. Risks include legal and reputational risks resulting from environmental disputes, economic losses resulting from oil theft, increased security costs and liabilities associated with maturing assets;
- the Nigerian government gave these divestments favourable regulatory treatment because they furthered the government's policy objective of increasing indigenous participation in the oil and gas sector.
Multi-sourced debt financing solutions
2015 saw international commercial lenders scale back their participations in Nigerian oil and gas financings. However, indigenous Nigerian banks and certain international financial institutions (such as Africa Finance Corporation and African Export-Import Bank) filled the funding gap.
Some international commodity traders also increased their funding participations, for the following reasons:
- the capacity of the traditional lending markets was insufficient to meet borrowers' funding needs; and
- to persuade Nigerian borrowers to sign up to crude offtake contracts, traders joined borrowers' existing lending syndicates. This marked a change to traders' more usual bilateral prepayment arrangements, under which the trader pays upfront for future agreed quantities of oil. Commercial lenders will not typically allow bilateral prepayment arrangements to be put in place alongside their syndicated loan, as it will result in a reduction in cash flow available to service the loan.
Taking and perfecting security
The need for Ministerial Consent
Under Nigerian law the holder of an oil or gas licence must obtain consent from the Minister of Petroleum Resources (Ministerial Consent) before transferring its rights or interests under the licence to a third party. Recent case law1 and regulatory guidance suggests that a transfer of the shares of the company which holds the licence, or any of its offshore holding companies, will also require Ministerial Consent.
Ministerial Consent is also likely to be necessary before creating certain types of security over oil and gas interests that give the secured party a right of sale of the underlying asset on enforcement (or example, creation of a charge or an assignment by way of security over the borrower's licence).
Payment of registration fees and stamp duty
- a Nigerian court will only admit into evidence a fully stamped security document; and
- security interests created over Nigerian assets must be registered at the companies registry to put third parties on notice of those existing security interests.
Stamp duty and registration fees apply on an ad valorem basis (i.e. the amount payable is a percentage of the secured liabilities). So, borrowers face high security perfection costs. To reduce these costs in large financing transactions, market participants have developed the practice of "upstamping".
Upstamping and associated risks
In an upstamping arrangement, the lenders agree that the borrower only needs to pay stamp duty on a fraction of the secured liabilities at financial close (for example, 10%). The lenders will only require the borrower to pay the remaining unpaid stamp duty on pre-agreed trigger events (for example, on an event of default or before an enforcement event).
Lenders face several risks from upstamping:
- the borrower may be unable to pay the outstanding stamp duty later. However, lenders can mitigate this risk by requiring the borrower to maintain an upstamping reserve account to fund the outstanding stamp duty;
- the borrower may grant a subsequent security interest over secured assets to a third party, which, if fully stamped, would rank in priority to the unstamped portion of the original security interest;
- Under Nigerian insolvency law a three-month "hardening period" applies to deferred stamp duty payments. So, if a Nigerian borrower became insolvent within three months of the date on which unpaid stamp duty was paid by or on behalf of a security provider, a liquidator could characterise the payment as a preference and disregard it.
Impact of slump in global oil prices on existing debt facilities
Many recent loan facilities provided to Nigerian companies for the acquisition, development and operation of oil and gas assets have been structured as reserve-based loans (RBLs). Under an RBL, the amount which the borrower can borrow is linked to the size and value of the borrower's reserves (known as the Borrowing Base). Given the current slump in oil prices, the oil price assumptions included in many RBL facilities no longer reflect current oil prices.
A sustained slump in oil prices has an adverse effect on an RBL borrower. Following a redetermination of the value of its reserves (which takes place semi-annually), the borrower may have to:
- make a mandatory repayment to bring the Borrowing Base into line with the adjusted valuation of its reserves; or
- bring new assets into the pool of secured assets on which the RBL facility is sized to preserve its current debt load.
In addition, a default under an RBL facility could trigger cross-defaults under a borrower's other financing arrangements, exacerbating the risk of draw-stops, accelerations or security enforcements.
2016 and beyond
In a sustained lower oil price environment, lenders and borrowers will continue to batten down the hatches. In the medium term, lenders are likely to focus on monitoring and restructuring debt facilities. Borrowers in serious financial distress may need to develop formal restructuring plans. This could include injection of new equity, requirement for additional debt funding, divestment of certain non-core assets or an enforcement by the borrower's lenders.
Lenders prepared to provide new loans to participants in Nigeria's oil and gas sector will want to mitigate the increased risks. They will inevitably focus on (a) the creditworthiness of borrowers, (b) allocating project risk among the project parties, (c) reducing the size of debt facilities, (d) increasing fees and interest costs, (e) ensuring higher equity to debt ratios, and (f) improving contractual protection (through representations, covenants, undertakings and events of default).