AMCON UPDATE

AMCON-Background
Ø The CBN N620bn bail-out of eight banks in 2009 was intended to be a
short term solution. The Asset Management Company was designed to
offer a permanent solution to present and future banking crisis and was
modeled after previous efforts in countries like Malaysia, South Korea and
Indonesia.
Ø The Asset Management Corporation of Nigeria (AMCON) was set up to
takeover toxic assets of the rescued banks by the Central Bank of Nigeria
(CBN) and convert them to equity.
Ø AMCON has been established as a corporation with an Authorized Share
Capital of N10billion, with the Central Bank of Nigeria (CBN) and the
Ministry of Finance (MOF) subscribing to the Share Capital.
Ø The AMCON was established to soak up bad loans and help capitalize the
rescued financial institutions in a bid to restore lending in the banking
system.
Ø It is expected that AMCON will fill the remaining capital deficiency in the
banks by assuming those loans either as equity or as preferred shares and
take them over from the central bank.
Ø Part of banks negative capital is the debt, or the loans that CBN has
advanced to banks through the rescue program last year.
 AMCON-How will it work?
Ø AMCON is expected to have an intended life of 10 years.
Ø CBN will have regulatory oversight over AMCON.
Ø AMCON is expected to absorb N2.2 trillion of bad loans ($14.6 billion) at a
discount from rescued banks and margin loans from the wider banking sector.
This is more than a previous forecast of $10 billion by Central Bank of
Nigeria.
Ø Rescued banks would require further funds to get them to the accepted
minimum capital adequacy levels even after the corporation had absorbed
non-performing loans and returned shareholders funds to zero.
Ø AMCON will be at liberty to maintain a portfolio of assets beyond listed
equity in accordance with parameters set by the CBN such that it maximizes
its ability to finance AMCON bond obligations.
Ø Participating banks will indemnify AMCON against losses arising from invalid
collateral and the bank will obliged to repurchase the tainted collateral in
such an event.
Ø Independent firms will be engaged to manage the portfolio of assets.
 AMCON-How will it work? contd
Ø Half of the total (bad loans) was margin loans and the other half was non-
performing loans, of which 10 to 20 percent were unsecured.
Ø AMCON intends to value non-performing loans backed by shares at a
premium of around 60 percent to recent prices. Unsecured loans are billed
to be valued at five percent of principal.
Ø AMCON has no intention of selling any of the shares it buys from
distressed banks in the immediate future.
Ø AMCON would refrain from exercising voting rights attached to equities
acquired on account of realizing collateral from loans purchased.
Ø AMCON is expected to earn revenue from interest in restructured loans,
NPL recoveries, return on seized assets it manages and sale of NPLs /
assets to third parties.
Ø When AMCON decides to sell, it will be announced and publicized to
ensure fairness and transparency. The current thinking is that AMCON will
be holding assets it acquires for at least two years.
Ø AMCON is expected to reach agreements with the selling institutions
regarding pricing of non-performing loans by November 15, this year and
aims to settle these transactions on or before December 30.
AMCON-How will it work? contd
Ø AMCON would value non-performing loans backed by shares of listed
companies at an implied premium of approximately 60 per cent on the 60-
day average of recent prices, ending November 15, 2010 (the assumption
is that the market has determined where these institutions should be
trading). The implication is that the loans will be bought over by AMCON
at highly discounted rate that is well below their actual prices in the stock
exchange as at the time CBN took over management of the affected banks

Ø AMCON would also acquire other NPLs backed by other forms of

collaterals based on the current market valuation of the collateral, while
unsecured loans would be valued at five per cent of the principal value.

Ø Banks would exchange their NPLs for cash or AMCON securities which
may be discountable on terms agreed by the CBN and will count
towards liquidity ratio computation.
 Funding for AMCON
Ø AMCON would sell at least five tranches of bonds to fund the initial stages of
its operations. The bonds will be fully tradable.

Ø AMCON securities would be guaranteed by FGN. This means they will carry a
risk-weighting of zero, improving the banks capital adequacy ratio.

Ø AMCON will issue its first bond before December 30, 2010. The first sale will
be zero coupon three-year bonds, which will be refinanced with a subsequent
seven-year issue.

Ø Refinancing of the maturing bonds would be done using various alternatives

such as public bond issue to investors in the domestic and international
markets.

Ø AMCON is expected to be funded through a N50bn annual contribution from

the CBN for a period of 10 years. The deposit money banks will also make an
annual contribution of 30 basis points of their total assets to a sinking fund. A
cap of N500bn would be set for CBN contribution.

Ø Any further shortfall on the redeeming AMCON bonds over and above the
earmarked N1.5trillion would be met by the Federal Government.

Ø Surpluses would be distributed on a pro-rata basis to the contributing banks.

 Commentary/Opinion

Ø The success of AMCON (and the banking sector) would greatly depend on
good governance, accountability and transparency. AMCON would need
competent officials to apply appropriate due diligence in the auditing of
the rescued banks toxic assets. AMCON should also place a limit on the
size of non-performing loans it would be taking up from the onset.

Ø CBN must also ensure that corporate governance is enthroned both within
AMCON and the rescued banks to avoid a reoccurrence of future banking
crisis. Every genuine measure to sanitize the banking industry should be
clearly defined and vigorously enforced. Anything short of that will
amount to a cosmetic exercise. AMCON must constantly put in focus the
imperatives of its mandate and pursue them with zeal and sincerity of
purpose.