A. Background

1. AMCON was established as a vehicle for resolving insolvent banks. The AMCON bill was passed in July 2010. The objective was to detoxify the banking system through purchase of bad assets, non-performing loans, and liquidity injection in troubled banks. Its mandate includes: (i) assisting Eligible Financial Institutions (EFIs) to efficiently dispose of Eligible Bank Assets (EBAs); (ii) efficiently manage and dispose of EBAs or other acquired assets; and (iii) obtain the best achievable financial returns on EBAs. To achieve these mandates, AMCON is empowered with a wide range of functions that include issuing bonds and other debt instruments; maintaining a portfolio of diverse assets including equities, fixed income bonds and real estate; providing equity capital; borrowing money in domestic or foreign currencies; and entering into financial derivative contracts. It currently employs around 400 staff.

2. AMCON played a pivotal role in resolving the banking sector during the 2008/2009 crisis in Nigeria. During the crisis, ten banks accounting for a third of total banking assets were either insolvent or undercapitalized. In response, AMCON bought a total amount of N 1.23 trillion of the banking sector’s NPLs in 2010. By September 2011, the full stock of NPLs was bought by AMCON from all intervened banks, accounting for N2 trillion worth of NPLs and around 10.5 percent of total assets. The bad loans were bought through three-year-zero coupon bonds that represented a third of the entire outstanding bonds issued in the market. In addition, AMCON had purchased the three bridge banks established to take over three insolvent banks, with a view to resell those banks to private investors. Two of those banks were sold in 2015 while the third was sold in 2017.

3. The funding of AMCON is shared between the public and private sectors. The Federal Government provided the initial capital of N10 billion. In 2015, AMCON’s act was amended to establish the Banking Sector Resolution Cost Fund (RCF), a sinking fund held at the central bank. Under the RCF, effectively introduced since 2011 through an MoU between the CBN and banks but with slightly different terms, the CBN provides an annual contribution of N50 billion for up to 10 years while Banks pay a flat premium of 50 basis points of their total assets.

4. Although established only to address issues of the 2009 banking crisis with a 10-year lifespan, AMCON’s balance sheet continues to grow. By 2019, AMCON’s total assets exceeded N1.7 trillion while its liabilities reached around N5.5 trillion. The CBN remains the main creditor (and owner) of AMCON holding around N5.3 trillion of AMCON bonds by end-2018 (including the N1.3 trillion bonds issued to acquire Polaris bank). Currently, AMCON holds 12,000 loans of which 350 loans represent 85 percent of AMCON’s total exposure. Latest financial results reveal a large negative net worth of AMCON in 2017, exceeding NGN 3.9 trillion due to large accumulated losses.

5. Cash flows from the RCF represent the bulk of AMCON’s income. Proceeds from the RCF, amounting to N234 billion in 2018, represented more than 70.5 percent of AMCON’s gross income in 2017, followed by 20 percent from asset recovery. The remaining cash flow is generated through reinvestment income and asset disposal, including the sale of AMCON owned banks.

B. Current Challenges and Implications for the Real Economy

6. AMCON’s status as temporary facility with a 10-year lifespan is not reflected in its funding arrangements, raising financial stability challenges. Having an AMC that exists indefinitely and constantly acquiring bad assets from banks promotes moral hazard and careless behavior. This includes weak credit underwriting standards, bad governance, and excessive risk taking. Moreover, banks have large incentives to off-load bad assets from their balance sheets in return for government guaranteed, liquid assets that would also boost their regulatory capital. Despite this, AMCON continues to use its funding resources to acquire assets and bail-out banks— including the recent purchase of Skye Bank (transformed into Polaris bridge bank) in September 2018— rather than retiring its own outstanding debt and winding down its portfolio.

7. The shift from AMCON’s role in resolving troubled banks during the crisis to becoming a market player is contributing to further inefficiencies and complicating its asset recovery task. AMCON’s increased equity holding, through the use of equity-for-debt swaps with its debtors, created misalignment of incentives as it is less likely to vigorously enforce its creditor rights when it is a co-owner of a distressed company. Around 80 percent of AMCON’s recoveries have been a result of either forfeiture or taking over businesses. It also holds equities in companies and runs corporates in a wide range of sectors. This further complicates its efforts in winding down its activities as it is not structured to run businesses, nor does it have the expertise to do so. Furthermore, many of its co-owned companies are in tightly regulated industries or sensitive to political pressures (e.g., aviation, agriculture, and oil and gas) which further complicates recovery efforts.

8. AMCON disclosure practices and oversight can be improved. AMCON reports to the CBN and MoF on quarterly basis and its act requires full publication of audited financial statements within six months following the financial year. However, while AMCON publishes its financial statements in the National Gazette, those statements are not available on AMCON’s website except for a summary of the 2015 results. Moreover, the CBN’s regulatory framework for AMCON could be improved, including by reviewing AMCON’s business strategy, and assessing its risk profile and ability to honor its bond obligations.

9. The close linkages between AMCON and the rest of the financial sector may pose a source of systemic risk. AMCON’s funding, through the RCF, relies on central bank contributions and the size of banking sector. Its bonds — amounting to around 3.5 percent of GDP — are also fully guaranteed by the federal government. Nevertheless, the resulting contingent liabilities are not disclosed nor accounted for in the fiscal accounts of the federal government. The CBN’s ownership and funding of AMCON exposes its balance sheet to the credit risk in AMCON’s balance sheet.

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AMCON’s Sectoral Linkages

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A004

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10. AMCON is also not isolated from macroeconomic developments and the real sector. AMCON’s performance is largely correlated with economic growth and monetary developments due to its activities in the real sector and money markets. AMCON holds substantial equities and run large corporates in various industries including the Oil & Gas, Aviation, automobile, and agriculture. Obligors’ ability to pay back debt tends to worsen during tighter business conditions, e.g., the recession in 2016, which affected recovery rates and increased delinquencies in restructured loans. Cash streams from the RCA, AMCON’s main source of funding and debt repayment, is also a function of banking assets, which changes based on economic conditions.

C. Recommendations

11. It is important that AMCON immediately build and execute an exit strategy. It was created specifically for resolving stressed banks during the 2008/2009 crisis, and its mandate should be limited to this purpose. Immediate priority is to:

• Earmark AMCON’s cash flows for buying back bonds. Bail-out pressures are already emerging in few banks. It is therefore important that the accumulated funds are clearly earmarked for paying outstanding bonds.

• Immediate closing of the window for the acquisition of troubled loans. AMCON should no longer purchase distressed assets, as was the recent case for Polaris bank. AMCON’s continued acceptance of new loans leaves it exposed to pressures to engage in more debt-for-equity swaps with ailing industries and financially challenged public entities.

• Setting annual disposal targets. AMCON should liquidate its loans and the absence of disposal targets is increasing the “warehousing” of acquired loans and the risk associated with it. It is therefore critical that AMCON sets annual targets for disposal of bad loans that strike an appropriate balance between ambition and realism with emphasis on frontloading the disposal in the first period of AMCON’s remaining life. Experience in other countries suggests that a rapid offloading of problem loans is associated with lower overall resolution cost. AMCON should also explore the feasibility of delegating part of its portfolio to private AMCs, which will help accelerate the winding down of its portfolio. This would also be supported by a new resolution framework that provides powers to write down capital and resolve non-viable banks expeditiously.

• Set a firm closing date for AMCON. Its lifespan has been extended for too long. AMCs in many countries only lasted for seven years, e.g., Malaysia and Indonesia. The 2023 sunset of AMCON, which was aligned with the maturity date of AMCON’s bonds, appears unlikely as AMCON continues growing its balance sheet including the recent issuance of 25-year bonds in 2018. It is strongly recommended to set an explicit and ambitious closing date for AMCON. The closing date should be formally included in AMCON’s act to ensure commitment. In addition, an arrangement would have to be set up for how the residual assets will be dealt with, including whom they will be transferred to.

• Quickly set and implement plans for divesting AMCON’s interests in companies and banks. This includes a plan for quickly selling the newly acquired Polaris bridge bank. The plan should also include other corporates that AMCON own or co-own such as Oil and Gas companies and Airlines.

• Reinforcement of disclosure practices. In line with the provisions in the AMCON act, AMCON should disclose its financial statements within six months of the end of the fiscal year. Financial statements should also be published on AMCON’s website.

12. Pending AMCON’s closing, the legal environment should be significantly strengthened to empower AMCON’s collection power and recovery strategy. Through its act, AMCON already has more power than banks in seizing assets of distressed obligors and having access to debtor assets beyond collateral (including directors’ assets). However, legal challenges remain large with more than 3000 cases currently disputed in court. The legal process is complex and lengthy and should be enhanced. AMCON’s staff should also have adequate legal protection to exercise the needed actions during their asset recovery efforts. Proposed enhancement measures include (i) reversing the burden of proof such that it is the party alleging the wrongdoing that has to show bad faith rather than the relevant authority providing that the act or omission was done in good faith; (ii) raising the threshold for commencing legal action to that of gross negligence or willful misconduct; (iii) expanding the legal protection for AMCON to include its staff; and (iv) indemnifying AMCON’s staff for defending legal action taken against them personally if they had taken the action in good faith. Importantly, these legal changes should be pursued in parallel to the winding down process and de-linked from the dissolution of AMCON.

13. CBN’s ownership in AMCON should be discontinued. The involvement of banks in the funding of AMCON, as a resolution vehicle, is appropriate as the cost of resolution should be borne by the private sector to limit moral hazard. The central bank funding and ownership in AMCON, however, should be stopped or, at least transferred to the fiscal authority, to avoid conflicts with the CBN’s mandate of supervising AMCON and the banking sector.

14. AMCON should be classified as a general government unit. The MoF and CBN are currently the shareholders of AMCON, which implies they have the ultimate control of its operations as they appoint its board of directors while its bonds are fully guaranteed by the government and held by the CBN. Consequently, and in line with best international practices, all AMCON’s assets and liabilities should be classified under general government, implying that its bonds should also be recognized as public sector government domestic debt.