Fitch Downgrades Diamond Bank, Sees Likely Default In $200m Eurobond

Fitch Ratings, on Friday announced a two-notch downgrade of Diamond Bank Plc’s Long-Term Issuer Default Rating (IDR) to ‘CCC’ from ‘B-‘ and Short-Term IDR to ‘C’ from ‘B’.
The move, the agency said, reflects uncertainty over the bank’s solvency and liquidity in view of very weak asset quality, highly vulnerable capital position as well as tight foreign currency (FC) liquidity ahead of an upcoming maturing $200m Eurobond in May 2019.”
Fitch obviously ignored the bank’s assurance concerning the Eurobond, even as it cited the sale of Diamond Bank’s UK subsidiary, warning that “execution may be challenging, especially considering the recent resignation of four board members.”
Reasons for this, it noted, is the fact that Diamond Bank hopes to redeem the Eurobond by negotiating the refinancing of international financial institution funding; improved cash flows from the oil loan book; and the disposal of its UK subsidiary.
Expressing doubt that these could pull through by May 2019, Fitch said the refinancing has not been agreed yet, just as the subsidiary disposal has not received the approval of UK’s Prudential Regulation Authority.
Worse still, it said, is the fact that cash flows from the troubled oil sector remain uncertain, resulting to significant execution risk, adding that although “FC supply has improved, we do not expect Diamond to be able to swap significant volumes of local currency to repay foreign currency obligations.”
The bank’s National Long-Term Rating was also downgraded to ‘B(nga)’ from ‘BB+(nga),’ adding that Diamond’s IDRs are driven by its standalone credit profile, as defined by its Viability Rating (VR).
“Diamond’s VR is highly influenced by very weak asset quality, which renders its capital position highly vulnerable to any further deterioration. The VR also reflects limited FC liquidity.”
Continuing, Fitch said the bank’s “Stage 3 loans under IFRS 9, including past due not impaired, which better captures asset quality in our view, accounted for a very large of 37% of gross loans at end-1H18, compared with a reported impaired loans ratio (under IAS39) of 13% for the same period.
“Diamond’s stage 2 loans were a further 23% of gross loans, mostly comprising restructured loans. Diamond has the highest share of problem loans (total stage 2 and stage 3 loans as a proportion of gross loans) among Nigerian rated banks. Loan loss allowance cover is very low at 19% of stage 3 loans.”
Diamond Bank’s capital buffers, the report continued is limited, given its “very weak asset quality, despite a relatively high Fitch Core Capital (FCC) ratio of 17.5% at end-1H18.
“In our view capital remains highly vulnerable given the bank’s low loan loss allowances. Higher reserve coverage would erode considerably the bank’s capital base. Unreserved stage 3 loans were 110% of FCC at end-1H18.
“Diamond has a small buffer over its 15% regulatory total capital adequacy ratio requirement (Total CAR at 16.3% at end-9M18),” noting that Diamond has received the approval from the Central Bank of Nigeria (CBN) to obtain a national banking licence.
The new license, which is subject to the completion of the sale of the UK subsidiary, it continued, lowers Diamond Bank’s minimum total capital requirements to 10%
“Diamond’s FC liquidity improved in 2017, in line with easing FC liquidity conditions in Nigeria. However, FC liquidity remains tight, as Diamond’s FC loans/customer deposits ratio reached 180% at end-1H18. The bank has a number of large bullet repayments due in the short term, including its US$200m Eurobond maturing in May 2019, US$100m from Afrexim due in March 2019, and USD70 million from the International Finance Corporation due in July 2019. The bank had about USD300m of liquid assets held as unrestricted cash and cash equivalents and loans to foreign banks at end-1H18.
Diamond’s Long-Term IDR also considers governance shortfalls following the resignation of four members of the board in October 2018, including the chairman (only appointed in 2018) and three non-executive directors, raising questions around effective oversight and ongoing operational capability of the bank. It may also create difficulties in refinancing its obligations with existing lenders.
Diamond’s senior unsecured debt was downgraded to ‘CCC’/’RR4’, reflecting the thinking “that average recoveries are a plausible outcome for senior bondholders in the event of a default, albeit this is sensitive to changes in assumptions.”