By L. Fubara Anga

Lenders financing large infrastructure projects have to deal with and mitigate the various risks associated with such projects. These include the risk that the project will not be completed or that the project may not generate sufficient revenue to amortise the debt. The ease at which lenders can deal with these varies from country to country. We examine below options available in Nigeria to lenders in this regard.

Enforcement of Security Over Shares

One of the essential remedies which a lender may resort to is the right to enforce its security over the shares of the project sponsor and take over the project. This is usually applied as a last resort as lenders are not in the business of running their customers’ businesses.

Whilst Nigerian company law permits the creation of a charge or lien over shares, legal ownership of shares is vested in the person in whose name the share certificate is issued and whose name is entered in the company’s register of members. For this reason, in practice a share certificate may be issued in the names of the lender and the project sponsors. Alternatively, the lender and project sponsors may execute an undated share transfer agreement so that a share certificate can be issued in the name of the lender solely and the lender entered in the register of members upon an event of default by the project company. Since most projects are owned by private companies, the lender will require the prior consent of the board of directors. If there are pre-emption rights, the lender will also require the shareholders to waive such rights before a transfer can be registered.

There is the risk that by taking control of the company the lender may be regarded as a shadow director and may be obliged to account for actions taken by the directors. It is therefore advisable that directors appointed by such lenders maintain a degree of independence.

Appointment of a Receiver

Where a lender’s fixed charge over the project assets has become enforceable, it may apply to court for the appointment of a receiver to run and manage the project company on its behalf. The lender may appoint a receiver itself if the security instrument empowers it to do so.

There is an ever present risk that by the time the lender’s security interests have become enforceable and a receiver is appointed, the assets of the project company not covered by a fixed charge would have been dissipated. In practice therefore, lenders also take a floating charge over such assets. One of the peculiarities of the Nigerian floating charge is that even before the floating charge becomes enforceable, the court can appoint a receiver if the court is of the opinion that the assets are in jeopardy. Assets are deemed to be in jeopardy where events have occurred or are about to occur which make it unreasonable for the borrower to maintain freedom to deal in the assets.

If other creditors commence recovery actions against the project company, any judgment in their favour may be executed against the assets in receivership. The lender cannot exercise total control over the enforcement of its security as there is no provision under Nigerian law for the ranking of claims in receivership.

Maintenance of Debt-service Reserve Accounts

Nigerian companies can maintain onshore debt-service reserve accounts either onshore or offshore. Where loan repayments are to be made in foreign exchange obtained from the official market, payments will have to be made to the lenders as and when due based on the terms of repayment in the finance agreements.

The Central Bank of Nigeria (CBN) supplies a limited amount of foreign currency weekly to fund the requirements of foreign exchange transactions. Sometimes, a project company may be unable to obtain from the official market all the foreign exchange that it requires to service its debts. In a recent project financing, the project company had to obtain a commitment from the CBN to make available the required foreign exchange for its loan repayment obligations as they arose subject to the project company providing the equivalent amount in naira. This arrangement is not usually granted as a matter of course but was possible largely due to the perception of the importance and significance of the particular project for national development.

Assignment of Insurances

There is no restriction to the assignment of insurance contracts to project lenders. However, Nigerian project companies can only enter into insurance contracts with foreign insurers provided that the risk being insured is not a domestic risk which has to be covered by a Nigeria insurer, and provided the prior approval of the insurance regulatory body, the National Insurance Commission (NAICOM), is obtained.

Stamp Duty Implications

In Nigeria, stamp duty varies from document to document and can be as high as 0.375% (mortgages) or as low as 0.009% (insurance policies). In practice, it is not unusual for lenders to stamp their security agreements for a fraction of the loan amount. However, this means that such lenders will only be secured for the amount stamped and the security will be void against the liquidator and creditors of the borrower in respect of the loan balance.