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NNPCL’s Afrexim deal an upfront cash loan on crude oil proceeds, but…

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The recent announcement by the Nigerian National Petroleum Company Limited (NNPCL) that it had secured a USD3.00 billion emergency crude repayment loan from the African Export-Import (AFREXIM) bank has continued to elicit reactions.

According to the NNPCL, this loan agreement is not a crude-for-refined product swap but an upfront cash loan against proceeds from a limited amount of future crude oil production. We present our views on this loan arrangement in the following sections below:

The loan arrangement means that the NNPCL is collecting its future revenue from crude oil production in advance from the AFREXIM bank. In our opinion, this arrangement shows the government is also aware of the dearth of liquidity in the FX market, requiring an urgent need for US dollar inflows to provide a short-term FX fix while it continues to fix the fundamental issues. Based on the NNPCL’s statement, we understand that (1) the disbursement will be in tranches based on the FGN’s specific needs & requirements and (2) there are no sovereign guarantees tied to the loan. When the money comes to the NNPCL, it will enable the corporation to settle its taxes and royalties to the FGN in advance, providing the CBN with US dollar liquidity needed to provide near-term respite for the local currency. In terms of repayment, the NNPCL will repay the loan from its future crude oil production, depending on the terms of the agreement with AFREXIM.

While Cordros Securities have held a standing view that Nigeria needs significant FX inflows to provide a near term support for the FX reforms the CBN embarked on since 14 June, the NNPCL’s loan arrangement came as a positive surprise to us as it was not among our expected short-term fixes. Consequently, we think this loan is a favourable short-term fix in providing near-term FX supply to support the FX market and stabilise the local currency. Nonetheless, we acknowledge that the amount is not enough to significantly support the local currency, more so that the funds will come in tranches. Thus, if not adequately managed with other measures (such as higher interest rates and additional funding support from third parties or multilateral institutions), FX pressures may likely build up again, leading to another round of local currency depreciation.

Elsewhere, Cordros Securities thinks the loan agreement may negatively impact FAAC inflows when the NNPCL starts repaying the loan. Our prognosis is hinged on (1) revenue flows from crude oil which may reduce if oil production does not improve significantly from current levels and (2) a reduction in future taxes and royalties from NNPCL as the FGN now gets them in advance. On (1), though the NNPCL is yet to publish sufficient information on the structure of the deal, we suspect that the crude oil production repayment may follow the arrangement done in January 2022 when the company secured a USD5.00 billion corporate finance commitment from the AFREXIM bank to fund major investments in Nigeria’s upstream sector. Precisely, under the agreement signed by both parties as of then, the repayment of the finance would be through a Forward Sale Arrangement (FSA), which would allow the funds provided to constitute the payment purchase of 90kb/d – 120kb/d of crude oil to be delivered to the lender over a period. Finally, given that the NNPCL received the loan with no sovereign guarantee, it implies that it would not be added to the public debt profile but sit in the NNPCL’s balance sheet.

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