Bloomberg, on Monday, reported New York-based private-equity firm- Milost Global Incorporated as planning to invest as much as $1bn as equity and debt capital into Nigeria’s Unity Bank Plc, which is struggling to build buffers after a slowdown, citing two people familiar with the matter.
A breakdown shows that Milost offered to invest $700m in equity and $300m in five-year bonds that can be converted into shares in the bank, said one of the people, who asked not to be identified as talks are confidential.
The private-equity firm will get an initial stake of about 30% of the bank quoted on the Nigerian Stock Exchange (NSE) for its first equity investment of $250 million, Bloomberg learnt.
This is expected to make Milost the bank’s new core investor, going by the N1.42 per share price on the NSE, which may require creation of new shares added to the 11.689bn outstanding.
Details of the transaction, which is still subject to a due diligence as well as regulatory approvals, shows that the first part of which may be completed in the second quarter, with the remaining cash to be drawn down over a period of four years, provided Unity Bank has sufficient shares to issue to Milost, one of the people said.
Some small- and mid-sized Nigerian banks are still battling to their rebuild capital levels after a slump in oil prices triggered a foreign-currency shortage and contraction in the country’s economy in 2016, making it difficult for businesses to repay loans.
Unity Bank, which was formed out of the merger of nine banks between December 2005 and March 2006, said in April last year that it is in talks to sell its non-performing loans to avoid penalties after missing a deadline set by regulators on its recapitalization plans.
An investment in Unity Bank will be Milost’s third in a publicly traded Nigerian company since it agreed to pump $350m into oil-services company Japaul Oil & Maritime Services Plc in February and to provide a $250m financing facility to Resort Savings & Loans Plc. Several calls to the numbers listed on Milost’s website have gone unanswered.
The firm is targeting companies that trade at less than half of their intrinsic value using a facility combining debt and equity that it calls the Milost Equity Subscription Agreement, it said in an emailed statement on Monday.
Milost buys shares of a company at a minimum 50 percent premium to its market value, and then pegs this price over the next 90 days. If the stock fails to exceed this threshold, the target company will pay the difference to Milost in the form of extra stock, and a penalty of 10 percent to 20 percent of the discount that the share is trading at over a five-day period, it said.
“The Milost Equity Subscription Agreement is a growth instrument that creates and builds confidence in the stock of the companies in which it invests,” the company said. The targeted company cannot draw down the full committed facility in one tranche and is only allowed to use it from time-to-time over a three- to five-year period, with Milost eyeing a seven- to nine-year horizon for an exit, it said.
Milost is taking a bet on Unity Bank as the Nigerian economy shows signs of recovering from a recession after three straight quarters of expansion in gross domestic product, which the International Monetary Fund estimates will grow 2.1% this year.
Net income at Unity Bank slid almost 54 percent to N2.18bn ($6.1 million) in the 12 months through December 2016, with assets of N493bn, according to the company’s most recent annual report. Its NPLs stood at 48% in 2016, when it reported its second straight year of negative capital adequacy ratios, the report showed. The stock has gained 10% this year, giving Unity Bank a market value of N15.8bn.
Nigeria’s banking regulator allows lenders to count certain classes of debt and equity among the buffers that they need to set aside to survive market turmoil without causing risk to the financial system. Capital adequacy ratios across the banking industry worsened to 11.51 percent in June from 14.78 percent a year earlier, according to the central bank.