Financing structures in support of the sector: survey responses

261. Five banks responded to the survey questionnaire, outlining key features of structures supporting the oil services sector. Their approaches are discussed below.

D.1 United Bank for Africa plc (UBA)

This bank, one of the big four banks in the country, has a special facility (total size not given) that comprises term loans, short-term loans (average length not given), note issuance, bonds and guarantees. It requires collateral in

the form of mortgages, debentures on borrowers’ assets and cash. Customers are debited for security perfection. Over the years, the record indicates that repayment is easier with multinational companies than the indigenous ones. Due diligence is practised on each loan application and credit analyses are made by bank staff before approval is granted.

262. UBA has encountered performance-risk problems with borrowers, in some cases occasioned by factors such as technical incompetence, ethnic conflict in the Niger Delta and industrial disharmony, and financial risks arising from the inability of borrowers to repay. For many indigenous companies which lack adequate capital, repayment problems have been caused by delays in receiving payment from their oil major customers. Procedures for payment by oil majors are slow and take an average of 65 days.

263. It is the opinion of UBA that the oil majors should be ready and willing to agree to irrevocable domiciliation of payments with their contractors’ financiers, especially the competent and credible indigenous ones with good performance track records. In order to facilitate easier access to bank financing for indigenous contractors UBA is of the view that the Government through its regulatory agencies must insist on having the finances of indigenous oil services companies audited by competent audit firms with good track records and integrity. In addition, NNPC should be granted a sufficient degree of financial autonomy to

enable it run the oil business efficiently and effectively. UBA has participated in structured financing deals involving substantial foreign- currency-denominated syndicated loan facilities to big players in the industry for the financing of multimillion dollar projects. Details were not provided.

Table 13

Term and sources of financing available from banks

Tenor Sources Uses by operators

i. Short- term ii. Long- term

Banker’s acceptances, over- drafts, commercial papers, invoice discounting

(factoring/forfaiting), letters of credit, etc.

Owner’s equity plus term loan (2-3 year maturities), capital market funds, leasing and project finance.

To fund working capital and other operating expenditure

To fund acquisition of fixed assets and equipment

264. UBA is of the view that the ‘only way to ensure optimum performance of local operators and maximum return for them is that a robust regulatory framework not inhibitive to growth and

development must be put in place by the government targeted toward financial and accounting stewardship of indigenous oil services firms.’ This is because indigenous oil services firms find it difficult to access bank loans ‘because they are not reliable in terms of management competence, integrity, technical competence and unreliable financial reporting.’ Without a doubt, this corresponds to the findings of the survey, especially with regard to a significant number of the small registered local indigenous companies, some 80 per cent of the total number.

D.2 First Bank plc (FB)

265. FB has an oil and gas contract finance facility which is self-liquidating as it is tied to each particular individual contract. The facility finances 70 per cent of the contract value; the tenor depends on the duration of the contract but is usually 90 to 365 days. The facility is for companies servicing oil majors, and the security demanded is the domiciliation of contract proceeds with FB. Experience with operating the facility shows that most oil majors pay their contractors between 45 and 60 days after the contract has been executed and invoices submitted.

266. Loan appraisal commences when the customer submits an application accompanied by all the required documentation, including contract paper, company profile, audited accounts, evidence of domiciliation, etc. A relationship manager undertakes the due diligence and review procedures for the approval of the Group’s head in respect of requests for between N3 million and N5 million. Requests for between 5 million 10 million are forwarded to the line Executive Director while those above 10 million go to Credit Risk Management for review, and approval must be granted by all the directors.

267. The monitoring and review procedures conducted by the relationship manager (RM) include personal verification and attestation as to the genuineness and validity of the domiciliation of contract proceeds and contract documents. Invoices submitted must be confirmed by the relationship manager, and suppliers under the

contractor are paid directly by the Bank by means of bank cheques. Relationship managers and other designated bank staff make visits to the operations sites and offices of the operator. For imported machinery and equipment, the Bank opens a letter of credit, and insurance on the goods must be obtained through First Bank’s insurance brokers.

268. The Bank has adequate measures in place to mitigate the following risks:

. Performance:

- Proven track record/evidence of execution of similar contracts by customer

- Evidence of the specialized skills required for the job

- Close monitoring of the transaction by the relationship manager from inception to time of payment

. Contract:

- Verification of the existence of the contract with the oil company

. Payment:

- Proven financial strength of the company

- Obtaining letter of domiciliation from the customer and confirmation that the Bank is recorded in the oil company’s system as beneficiary of the contract proceeds

. Diversion risk:

- Disbursement may be by direct payment

to suppliers by bank cheque

- Establishment of L/C through the Bank where imports are involved

- Relationship manager to ensure that funds are utilized for the purpose for which they have been disbursed

. Community Disturbance:

- This is considered outside the control of

the Bank. No indication was given as to what measures it takes to protect its funds.

269. FB is of the view that the oil majors should be obliged to make advance payment to indigenous services providers; this will significantly alleviate their cash-flow problems. Such advance payments can be backed by bank guarantees. Other policy measures suggested include the prompt release of cash calls by the

Government. NAPIMS and NNPC should strengthen and make transparent their review of the contract-award system. The Government should also set up a fund for banks to disburse as loans to indigenous oil services companies at cheaper rates.

D.3 Gulf Bank plc

270. Gulf Bank currently has an oil and gas financing facility worth 8 billion niara ($60 million at current exchange rates) which is dedicated solely to the financing of local contractors over a 180-day term. Borrowers are required to provide debentures over their assets, and legal and/or chattel mortgages. Cash flows from completed projects and other sources are listed as sources of repayment. As with the two previous banks, appraisal and monitoring procedures include the conduct by bank staff of site inspections, the preparation of status reports, and direct bank disbursements to suppliers. 271. The following risk-mitigation measures are in place:

(i) Non-payment: ensure that a domiciliation agreement with the contractor is in effect; (ii) Performance: ensure that the project in

question is viable and that the contractor has a proven track record in executing similar jobs;

iii) Maintenance: ensure that there is adequate insurance cover;

(iv) Diversion: ensure that the contract agreement contains provisions to protect the interests of financiers and the Bank.

The Bank has participated in a structured financing deal for a power-generation project, and is of the view that such structures are a superior vehicle for the financing of energy- related projects. It believes that the Government should formulate and impose sanctions on loan defaulters.

D.4 Diamond Bank

272. Diamond Bank did not provide the same kind of information as the other banks, as it deemed such information confidential. However information obtained from the International Finance Corporation (IFC) about an oil services

credit facility for local contractors sponsored by IFC, Shell Nigeria and Diamond Bank is provided below. Diamond Bank is the administrator of the facility.

273. This facility for local contractors was initiated by IFC in mid-2001. It is a credit line to provide financing for local oil services contractors. It involves the establishment of a $30 million revolving credit facility by IFC, Shell and Diamond Bank. IFC investment in the facility is a revolving loan of up to $15 million for its account. The loans for individual transactions would range from $50,000 to $1.5 million. The loan amount will be a proportion of the contract amount, ranging from 70 to 90 per cent.

274. The facility focuses on the oil services sector in Nigeria and provides competitively priced term funding to small- and medium-sized local contractors delivering services to the Shell Petroleum Development Company Joint Venture (SPDC JV), primarily in the Niger Delta. Diamond Bank, which has an existing credit line with IFC, is already familiar with the IFC requirements for financial intermediaries. These requirements include attending IFC sponsored or approved training courses, developing an environmental management system, and submitting an annual environmental performance report to IFC. As the administrator of the facility, Diamond Bank requires that all contracts are carried out and operated in compliance with the applicable environmental and health and safety procedures.

275. By playing a leading role in putting together the facility and financing half of the required funding facility, IFC hopes to play a catalytic role in mobilizing additional term- funding, which is not readily available to small oil services contractors operating in the Niger Delta. The facility would also enable targeted contractors to access less expensive US dollar financing and strengthen their financial positions by reducing their borrowing costs. In parallel, the SME department of IFC and the Africa Development Facility (APDF) have put together an estimated $210,000 capacity-building programme to support contractors in developing their businesses.

276. One of the major developmental benefits of the project would be its positive effect on small businesses lacking access to long-term credit. The facility would help to support the growth of targeted local contractors and, as a result, make a small contribution to the relief of unemployment. Funding under the facility would also lead to technology transfers and increased skills training, which would provide longer-term development gains and movement up the value chain. This would also enable local contractors to compete more effectively with foreign companies for certain contracts which are not currently accessible to them. Ultimately the project would establish a strong base of local services companies, which would produce all- round benefits from oil production for the economy in general.

277. The financiers hope that if the project is successful it can potentially be expanded in size to include other operations in Nigeria and serve as a model for other countries. It should also strengthen the capacity and skills of the local financial sector. Other oil developers have already expressed an interest in learning more about this approach.

D.5 FSB International

278. FSB International operates a very active energy-financing facility dubbed ENSEC (Financial Solutions for the Energy Sector). Some of ENSEC’s major undertakings show the volume of syndicated facilities it has participated in for various energy projects:

1. Shell Company: $50 million syndicated financing arranged by Citibank with FSB as underwriter.

2. Nigeria LNG Limited: $20 million Nigerian commercial facility which FSB participated in as Nigerian lead arranger.

3. ELF: $25 million syndicated term-loan facility arranged by Citibank and GTB, with FSB underwriting.

4. Integrated Logistic Services (Intels): $10 million contracts-financing facility arranged by Afreximbank, with FSB as guarantor.

5. Vitol: $20 million notes-discounting facility arranged by Afreximbank with FSB as guarantor.

It lists the following critical success factors for financing local contractors:

- Prompt accounts-receivable payment by the oil majors

- Proper ring-fencing of accounts receivable to ensure repayment from oil majors

- Professional management and organizational structure

- Established performance track record

D.6 Other Nigerian banks

279. Other Nigerian banks are also involved in oil services finance. Afribank, for example, has its “Oil Services Contractors Advances Revolving Scheme” (OSCAR), used to provide working-capital finance, finance for the procurement of capital goods, and project finance.