Asset Management Corporation of Nigeria (AMCON): Capital Injections

AMCON’s operations followed earlier interventions by the CBN intended to stabilize the financial sector. These interventions included capital injections into nine banks totaling ₦667 billion in 2009 and a blanket guarantee for interbank lending until December 2011 (CBN 2010a). AMCON was set up in 2010 to provide additional support (Cerruti and Neyens 2016). Out of nine banks that received support from the CBN in 2009, eight benefited from AMCON’s capital injections. Wema Bank, which had converted to a regional chapter, did not require additional support (CBN 2010b; CBN 2011a). AMCON’s mandate was broad and encompassed both the role of a public AMC and a capital injection vehicle (Cerruti and Neyens 2016). As an AMC, AMCON’s operations included the acquisition and resolution of eligible banking sector assets, such as nonperforming loans or other designated assets (Makanjuola 2016; see Ungersboeck and Runkel 2021).

A first draft of the AMCON Act was forwarded to the Senate in November 2004 as a part of the measures taken to strengthen the financial sector. At the time, the proposal encountered strong pushback from opponents of the banking consolidation agenda and did not gain the necessary traction. The idea was revived in 2009 following a special examination of Nigerian banks, focusing policymakers’ attention on the fragility of the domestic banking sector. A first public hearing on the bill was held at the House of Representatives on January 28, 2010. After a second reading, the House enacted the bill on March 10, 2010. The Nigerian Senate passed the bill on May 5, 2010. President Goodluck Jonathan signed the AMCON Act into law on July 19, 2010 (Makanjuola 2016). Among other functions,^FOther functions specified in the act included: acquire eligible bank assets, purchase or invest in eligible equities, manage or dispose of eligible bank assets, issue and redeem bonds and debt securities for the consideration of assets, and attempt to recognize maximum value on the resolution of acquired bank assets (AMCON Act, sec. 5). Ungersboeck and Runkel (2021) discuss these powers in detail. the AMCON Act empowered the agency to “purchase or invest in eligible equities”(AMCON Act 2010, sec. 5).

AMCON was fully owned by the federal government, with its ₦10 billion paid-in capital split evenly between the Ministry of Finance and the CBN (Makanjuola 2016). The cash helped cover AMCON’s initial operating costs (Cerruti and Neyens 2016).

The AMCON Act provided the authority to allow AMCON to support the five intervened banks in their acquisition deals by returning them to zero NAV (Makanjuola 2016). However, the bridge bank solution implemented to rescue the remaining three failing banks required the triggering of Sections 38(1; c) and 39 of the NDIC Act of 2006 (Makanjuola 2016). Section 38 (1; c) established the guidelines for the management and restructuring of failing financial institutions and designated the NDIC, with the consultation of the CBN, the ability to arrange the transfer of deposit liabilities by another insured institution (NDIC Act 2006, sec. 38). Section 39 provided the NDIC the authority to establish bridge banks (NDIC Act 2006, sec. 39).

The communication strategy during the intervention was primarily focused on removing the uncertainty surrounding the transition of the three failed banks to AMCON-owned bridge banks. The strategy was executed jointly by the NDIC and CBN (Makanjuola 2016). The announcements were centered on August 6, 2011, the first day the bridge banks operated as fully licensed banks (Makanjuola 2016). The communication strategy was laid out in a report issued to the NDIC (Makanjuola 2016). The plan highlighted the importance of a public announcement by the NDIC confirming that “it would continue to insure all depositors migrating to the Bridge Banks” (Makanjuola 2016). At the same time, a press statement by the CBN was planned to provide “a full faith solvency guarantee and credit assurance for all bridge banks” (Makanjuola 2016). Finally, the communication plan ensured more specific communication with “overseas regulators, foreign creditors [and] rating agencies” (Makanjuola 2016).

AMCON’s board of directors consisted of four executive directors and six nonexecutive members (AMCON Act 2010, sec. 10). The Nigerian Senate approved the 10 nominees on November 3, 2010. The board was led by Mustafa Chike-Obi as AMCON’s CEO (Makanjuola 2016). The CBN had considerable power over the board, as it nominated all four executive directors, including the CEO, as well as two nonexecutive members, for a total of six nominations (Makanjuola 2016). The Ministry of Finance nominated three nonexecutive members, including the chairman of the board, while the last member was nominated by the NDIC (Cerruti and Neyens 2016; Makanjuola 2016). All directors were nominated for five-year terms with a possible reappointment to a second five-year term (Makanjuola 2016). The AMCON Act further specified that board members should have at least “10 years [of] cognate financial experience at a senior management level, . . . have no conflict of interest with AMCON’s business, and disclose debt obligations and interest” (AMCON Act 2010; Cerruti and Neyens 2016; Makanjuola 2016).

The AMCON-IC met on six occasions between May and August 2010. As many as 30 people attended meetings (Makanjuola 2016, 96, 100). During the first meeting, participants included management consultants and legal and financial advisors from the Central Bank of Nigeria, Nigeria Deposit Insurance Corporation, Deutsche Bank, Stanbic IBTC Bank Plc, Chapel Hill Advisory Partners Limited, Olaniwun Ajayi LP, Kola Awodein & Company, and PricewaterhouseCoopers. Subsequent meetings saw the addition of participants representing various Nigerian and international institutions including the Ministry of Finance, the Debt Management Office (DMO), the [Nigerian] Securities and Exchange Commission (SEC), and the International Monetary Fund (IMF) (Makanjuola 2016). The work plan devised by the committee included, among other items, staff recruitment, securing office locations, determining a valuation methodology for NPLs, and exploring funding options for AMCON. The draft bill establishing AMCON was modeled after Ireland’s National Asset Management Agency and Malaysia’s Danaharta. These agencies were mandated to acquire NPLs during the GFC and the Asian Financial Crisis, respectively (Makanjuola 2016).

For the five banks that were able to sign a TIA before the September 30, 2011, deadline imposed by the CBN, the injection occurred after an agreement with a potential acquirer had been signed and shortly before the conclusion of the merger deal (Makanjuola 2016). These injections were timed in such a manner that the intervened institutions had zero NAVs at the time of the acquisitions. For the three banks that failed to find an acquirer and did thus not make satisfactory progress toward a recapitalization before the deadline, the injections occurred in early August 2011, as the banks’ boards of directors were taken over by the NDIC and their assets and liabilities transferred to bridge banks (Makanjuola 2016).

The definition of eligible financial institution (EFI) was provided in the guidelines issued to AMCON by the CBN and included banks licensed by the CBN to undertake the business of banking in Nigeria as well as banks or financial institutions whose licenses had been revoked (AMCON Guidelines No. 1 2010). The guidelines focus on AMCON’s role as an asset management corporation. While participation in the asset acquisition program was strongly incentivized under the guidelines, participation in the capital injection program was dictated by a bank’s ability to achieve the 10% CAR position required by the CBN deadline (AMCON Guidelines No. 1, 7). Sixteen of the 24 EFIs were sufficiently capitalized, five banks were undercapitalized but able to arrange an acquisition, and three banks were undercapitalized and had to be acquired by AMCON.

In total, AMCON injected ₦2.3 trillion into eight banks (AMCON 2012). This sum was determined by calculating how much debt each bank would need to reach a net asset value of zero (Makanjuola 2016, tables 6.4 and 6.7).

The RCF was a ₦1.5 trillion sinking fund financed through contributions by Nigerian financial institutions and the Central Bank of Nigeria. It was intended to fund AMCON’s loan acquisition and recapitalization activities (Makanjuola 2016).

The bonds were issued in five series between December 31, 2010, and December 28, 2011. Figure 4 depicts AMCON’s bond issuances. While AMCON managed to retire about one-third of its bonds by 2014, the remainder was refinanced by the CBN. The arrangement provided that the CBN invested ₦3.6 trillion in AMCON bonds in order to refinance the agency’s exposure (Mazen 2013). The bonds were guaranteed by the Nigerian government and qualified as eligible investments for the CBN and pension funds. They could also be traded on the Nigerian Stock Exchange (AMCON 2012). To address their liquidity needs, banks used the bonds to access the CBN discount window, where the bonds served as collateral (CBN 2015).

In 2015, the CBN reported that “AMCON redeemed the Series 1, 2, 3 and 4 Bonds […] held by banks, valued at ₦1.04 trillion, [using its] internally-generated funds and the outstanding balance in the Banking Sector Resolution Cost Sinking Fund.” A further ₦3.8 trillion of bonds held by the CBN were restructured into a 10-year bond with a 6% coupon (CBN 2015).

Makanjuola (2016) explains that bidders would not invest in a bank with a negative net asset value. Therefore, AMCON injected bonds sufficient to increase a bank’s NAV to zero (Makanjuola 2016, tables 6.4 and 6.7). As such, the amount required to float a bank’s NAV acted both as an upper and lower bound on the size of AMCON’s injections.

The equity issued to AMCON in consideration for the zero-coupon bonds was ordinary common shares. In the case of the acquisition of Oceanic Bank by Ecobank Transnational Inc. (ETI), AMCON and Oceanic Bank legacy shareholders received ETI shares in consideration for their equity in Oceanic. After Oceanic was acquired by ETI, AMCON and Oceanic’s other shareholders were issued ordinary shares with total value of ₦38.5 billion and preference shares with value of ₦16.5 billion.

Makanjuola (2016) writes that the five intervened banks had zero intrinsic value, which meant that shares were priced at ₦0. Due to the (lack of) value, dividends were also not paid.

In the case of the five intervened banks, shareholders received new equity in the merged entity. They experienced losses only to the extent that their shares were diluted following AMCON’s injections and the bank’s acquisition by a third party. The impact on shareholder value varied for each case. Details on the value of stock held by legacy shareholders are unavailable. Shareholders of the failed banks that were resolved through the bridge bank solution were wiped out as the banks were fully acquired by AMCON. In each case, AMCON fully absorbed the bank’s negative equity.

No documents suggest other conditions to which banks were subject as a result of AMCON’s capital injections.

The authorities did not further intervene in the management of the five banks that were able to find an acquirer (Makanjuola 2016). The boards of the failing banks were replaced and overseen by the NDIC.

The IMF has criticized AMCON for its lack of an explicit exit strategy. The Fund recognized the agency’s contribution in restoring stability in the banking sector. However, it voiced concerns regarding the absence of a sunset provision for AMCON’s activities. In a 2013 report, the Fund recommends that a “credible exit strategy [should be] devised to ensure a smooth winding up of its operations by end-2017” (IMF 2013). An explicit sunset date is considered “important to minimize fiscal risks and avoid potential moral hazard behavior by the banks” (IMF 2013). The Fund reiterates its criticism in a 2019 report, stating that “an exit strategy for the state-backed asset management company (AMCON) is urgently needed.” The Fund recommends “that AMCON stops the purchase of distressed assets, formally sets a sunset to its existence, earmarks its cash flows to buy back bonds, sets annual disposal targets, implements a plan to divest AMCON’s interests in companies and banks, improves its legal power to recover assets and is gradually phased out” (IMF 2019).

The AMCON Act was amended in 2015 and 2019. These amendments were meant to extend AMCON’s power as a debt restructuring and collection agency. They were focused on facilitating AMCON’s exit strategy related to its loan acquisition activities. The legal framework related to its role as a recapitalization vehicle remained unchanged (AMCON Amendment Act 2015; Berkeley Legal 2019).