By Michael K. Bielonwu Esq., MCIArb., FIDR
Many developing economies and even advanced systems have all continued to use Foreign Direct Investment (FDI) to grow their economies as it has become apparent in the present era of globalisation that no one country can do it all alone. Foreign Direct Investment, or FDI for short, is a purchase of an interest in a company by a company or an investor located outside its borders. Generally, the term is used to describe a business decision to acquire a substantial stake in a foreign business or to buy it outright to expand its operations to a new region. It is not usually used to describe a stock investment in a foreign company¹.
Securitization, in simple terms, is a system where debt assets are traded as bonds² in exchange for cash. According to Investopedia, securitization is taking an illiquid asset or group of assets and transforming it (or them) through financial engineering) into a security. The derisive phrase “securitisation food chain,” popularized by the film “Inside Job” about the 2007-2008 financial crisis, describes the process by which groups of such illiquid assets (usually debts) are packaged bought, securitized and sold to investors³. In this article, we will briefly consider how the Federal Government of Nigeria can attract foreign direct investment, using the Asset Management Corporation of Nigeria as a tool.
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There are several ways of securing foreign direct investment into an economy, one of which is through the real sector, which comprisesthe manufacturing and service industries. These include housing, agriculture, manufacturing industry, mining infrastructures and services. This sector is one of the sectors capable, if vibrant, of fast-tracking economic growth and development coupled with a high level of massive employment creation⁴. It is, without doubt, a fact that players in the financial sector, like banks, and others in the real economy sector, need liquid⁵ to remain in business. Otherwise, they go under, and the economy is the worse for it.
Therefore, a sector of the economy bogged down by several non-performing assets like debts and other illiquid assets that cannot be readily converted to cash will hardly contribute positively to the growth of that economy as it cannot be a tool for positive growth in that economy. However, we have seen instances where the government of a nation step in to inject funds into ailing sectors of the economy with growth prospects. An example in this regard is the creation of the Asset Management Corporation of Nigeria in 2010 by the National Assembly of Nigeria, primarily to salvage the ailing financial sector, which was still suffering from the impact of the 2008/2009 global financial crises. Therefore, since securitization entails a situation where illiquid assets (usually debts) are packaged, bought, securitized and sold to investors for profit, the Asset Management Corporation of Nigeria with its powers, especially under sections 5 and 6 of its enabling Act, can also re-engineer, repackage these assets and sold to foreign investors for better profitability and overall prosperity of the nation.
Since under securitization, an entity securitizing its assets is not borrowing but selling a stream of cash flows that otherwise accrue to it being a process through which an issuer creates a financial product by combining other financial assets and then marketing different tiers of the repackaged instruments to investors for the issuer’s funding. In this situation, the issuer can arrange these securities into tranches and sell them off to investors. Therefore, since foreign direct investment is the acquisition of a substantial stake in a foreign business, these illiquid assets can either be placed in tranches under management created for those purposes as a special purpose vehicle (SPV) which can be a limited liability company or trust for eventual sale to earn foreign exchange and also to create jobs as those assets which would be turned into productive use will remain in the economy.
Over the years, the Act establishing the Asset Management Corporation of Nigeria has been amended over and again primarily to better position the Corporation to achieve its primary mandate, which is to efficiently resolve the non-performing loan assets of Banks in Nigeria and related matters. Since its creation, Nigeria and the rest of the world have seen it excel in that assignment. However, the time has come for the Corporation to step up by doing more in consciously going out to use its powers to create wealth for the nation by going beyond simply buying off eligible assets to assist those ailing financial institutions and auctioning off the realised assets, but by going further to use those assets purchased to the benefit of the country by securitizing the holdings in its portfolio for the overall good of the nation through foreign direct investment by properly engaging its powers under the enabling Act to manage these assets and securitize them.
The question that readily comes to mind is, how may this be achieved? The answer is contained right inside the Asset Management Corporation of Nigeria Act. Sections 5 and 6 of the Act give the Corporation enormous powers which can be used positively for the nation’s overall good and prosperity. Section 5 (f) of the Asset Management Corporation of Nigeria Act empowers the Corporation to take all necessary steps to protect, enhance, or realise the value of eligible bank assets that the corporation has acquired, including the securitization or refinancing of portfolios of eligible bank assets. From the provision of the above cited section of the Act, it is without a doubt that the Corporation is not created to be the sole burden bearer when it comes to non-performing assets bought as eligible assets. The Corporation is also empowered to securitize acquired eligible assets and, in doing so, convert non-performing assets into performing assets.
Section 5 (e) of the same Act empowers the Corporation to perform such functions, directly related to the management or the realization of eligible bank assets that the corporation has acquired, including managing and disposing assets acquired with the proceeds derived by the Corporation from managing or disposing of eligible assets acquired by it. This means the Corporation has the final say on how assets acquired by it would be dealt with. Section 6 of the Act empowers the Corporation to transact in Naira and any currency it deems fit in realising its aim. The Corporation may even set up offices in and outside Nigeria, as provided under section 6 (2) of the Act.
Section 6 (1) (d) of the Act also provides that the Corporation can borrow or raise money, with or without the guarantee of the Central Bank of Nigeria (including money in a currency other than the Naira) or secure the payment of money in any manner, including issuing debentures, debenture stocks, bonds, obligations and debt securities of any kind, and charge and secure any instrument so issued by trust deed or otherwise on the undertaking of the Corporation or on any particular property and rights, present or future, of the Corporation or in any other manner.
Further, subsection (1)(f) of the Act provides that the Corporation has the power to enter into contract options and other derivative financial instruments (including in currencies other than the Naira) for purposes which include— (i) eliminating or reducing the risk of loss arising from changes in interest rates, currency exchange rates or other factors of similar nature ; (ii) eliminating or reducing the costs of raising funds or borrowing or the cost of other transactions carried out in the ordinary course of business; or (iii) increasing return on investment. Therefore, a combined reading of sections 5 and 6 of the Act depicts a body with substantial powers to bind itself to a business transaction without the interference or intervention of a third party. The mere fact that the Corporation has the ability not just to acquire eligible assets but also to manage such assets clearly shows that the Corporation can engage the needed professional assistant to reposition any asset under its portfolio before offloading such assets, thereby enabling it the opportunity to put any acquired asset in an attractive position good enough to attract foreign direct investment. This is because subsections (1) (u) and (v) empower the Corporation to engage on a competitive basis, from time to time, such consultants and advisers and other service providers as are necessary or expedient for the performance of its functions; and (v) do all such other things as the Board considers incidental to or conducive to the attainment of any of the Corporation’s functions under the Act⁶.
Therefore, from the look of things, the Asset Management Corporation of Nigeria has the power and the ability to turn into a gold mine the litany of non-performing assets acquired as eligible assets from a host of financial institutions in Nigeria that the Federal Government of Nigeria bailed out through the Corporation. The Corporation can tranche these assets through securitization.
Asset Management Corporation of Nigeria Act;
Black’s Law Dictionary, Ninth Edition;