Nigeria: Mezzanine financing concerns

Banji Adenusi

Recent mezzanine financing in Nigeria continues to adapt globally accepted structures to meet local conditions, especially in view of the recent economic reality. A key concern for foreign lenders relates to the structure of the transaction. This has taken the dimension of junior secured loans subordinated to senior lenders, in which the obligations of the borrower group to repay is passed through special purpose vehicles (SPVs) set up to warehouse the assets of the borrower group, with the SPV maintaining back-to-back service contracts with the borrower group.

Two asset financing and expansion transactions in the oil-servicing sector recently adopted this structure. In both instances, assets were split between two SPVs, with the mezzanine lender acquiring a subordinated claim to the assets of the first SPV, and a first ranking claim to the assets and receivables of the second SPV. What is most interesting (although usual from an international standpoint) is the common thread running through these transactions – the insistence by the lenders on the inclusion of cross-default and cross-acceleration provisions in the financing agreements in relation to the borrower's other financings, creating a domino effect on the borrower's obligations. Counterparties often negotiate these provisions, including the instances that trigger the operation of the clauses, along with the restructuring conditions. From the lender's perspective, these provisions are designed to mitigate the broad spectrum default events that a transaction might be exposed to, with a view to expanding the scope under which a mezzanine lender can accelerate outstanding repayments. The borrower's inability to meet its financial obligations to its other financiers raises credible concerns about its ability to meet obligations to the mezzanine lender, with the implication that rather than wait for a payment default under its facility to the borrower, it would exercise the right to sit with the senior lenders as creditors of the borrower.

In limiting the scale of the cross-default and cross-acceleration provisions, the lenders agreed to limit their operation to the financial indebtedness of the borrower group, to the senior lenders in the transaction, a substantial default, as well as actual acceleration of the senior debt. While it took some doing, the trade-off was an increase in penalty interest rates. In essence, these provisions are a matter of commercial expediency, and the borrower should be well acquainted with their implications.

Banji Adenusi

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