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DMO restructures N576bn bank loans of 23 States into FGN Bonds

By on November 5, 2015

As part of efforts by the federal government to save states from their financial crises, the Debt Management Office ( DMO) has restructured the N575.516 billion bank loans owed by  23 states into Federal Government of Nigeria (FGN) Bonds.

The Director General of DMO, Dr. Abraham Nwankwo, who disclosed this in Lagos on Tuesday, said the move was part of the short term stabilisation package approved by President Muhammadu Buhari to bail out states who had been unable to meet their financial obligations.

Nwankwo, who spoke at the quarterly forum of the Association of Issuing Houses of Nigeria (AIHN), said President Buhari had in early July approved the sharing of the special revenue of N2.1 billion among governments, lending of between N250 billion and N300 billion by the Central Bank of Nigeria (CBN) to the states on long term, single digit interest terms.

Also, the president approved the implementation by DMO to restructure state loans from banks into FGN bonds.

He said in line with that approval, the N575.516 billion state loans from commercial banks had been restructured into FGN bonds.

According to him, states’ commercial banks loans were about N700 billion, noting that these loans were secured with statutory allocations and internally generated revenue, which had now become inadequate to meet debt service obligations for many states and leaving little or nothing to pay salaries and meet other recurrent obligations.

However, he explained that the short term restructuring option would be to re-finance the  commercial bank loans with bonds of up to 20 years.

“This makes the repayment schedules of the loans much friendlier to current cash flow of the states and hence free up resources for paying salaries and other recurrent obligations,” Nwankwo said.

He said restructuring, which involved 15 banks, had been executed for 23 states in two phases — on August 17 and September 16.

“The restructuring was effected using a re-opening of FGN issued on July 18, 2014 and maturing on July 18, 2034. The pricing was based on the yield to date of the bank at a 30-day average, resulting in a transaction yield of 14.83 per cent,” Nwankwo said.

Highlighting the benefits of the restructuring, the DMO boss said the debt service burden after the elongation of tenor and reduction in interest rate had dropped substantially ranging from about 55 per cent for some states to about 97 per cent for others.

“Interest rate savings ranges between three per cent and nine per cent. The savings, particularly with regard to the restoration of fiscal stability to the states by enabling them resume meeting their contractual obligations.  Debt service of the bonds has been structured in the same way it would have been, if the states had accessed the market directly – with appropriate arrangement between the  federal government and each state concerned, on the collection and remittance of debt service obligations, but over a longer period,” he said.

He added that in terms of debt stock, the restructuring option with FGN Bonds amounted to a replacement of the existing loans to be refinanced with the new debt (the bonds) and therefore, would not result into any increase in the country’s total public debt stock.

“It, therefore, cannot worsen the debt sustainability situation but would rather improve it marginally by reducing debt service/revenue ratio,” he stated.

Speaking on the benefits to the banking system, Nwankwo said short-term sub-sovereign loans faced by non-performance had been replaced with long-term sovereign, high quality loans.

“It has enhanced liquidity and no asset-liability mismatch because FGN Bonds have a reliable secondary market. Improved space to lend to the private sector as they give their bond holdings that could be exchanged for cash in the secondary market. In essence, that Nigerian has an adequately functioning bond market provided an environment for a creation of solution to a fiscal problem,” he said.

However, Nwankwo said the restructuring of states loans could contribute to short term fiscal stabilisation.

He called for the diversification and industrialisation of the nation’s economy and advised states to depend on IGR and see FAAC as exceptional flows.