Investors overlook Nigeria’s $9bn potential liabilities from sovereign legal disputes
by LOLADE AKINMURELE & DIPO OLADEHINDE
June 13, 2018 | 12:30 pm| | | Start Conversation
A look at the yield spread between Frontier market debt and the 10-year US treasury, shows Frontier-focused bondholders already demanding a premium for risky assets and are unlikely to be substantially fazed by legal rows involving a sovereign, at least for now.
Nigeria’s pending legal cases, according to a Eurobond prospectus for a $1.5 billion debt issued back in 2017, could cost the country as much as $9.3 billion in potential lawsuits.
Yields on the $1.5 bn Eurobond maturing 2027 has increased 40 basis points since issuance, rising from 6.5 percent to 6.9 percent as of June 8, according to the most recent data provided by the Debt Management Office (DMO).
Assuming the country is required to take up the cost of those lawsuits, which comes to 19.7 percent of the $47 billion that Africa’s largest oil producer has sitting in its external reserves, it can afford to, but that is unlikely to happen, according to sources familiar with the matter.
“It shouldn’t come as a surprise to foreign investors that a third world country has some pending legal cases, and when you realise the total is about 20 percent of Nigeria’s external reserves, the less worry it elicits,” the source said.
“It’s only when a sovereign defaults on a bond repayment that it is punished by investors.”
One such scenario of how investors punish bond defaulters was the Argentine example in 2001 and more recently, Mozambique, which defaulted on $727 million of Eurobonds in January 2017.
A chief investment manager at one blue-chip investment firm in South Africa told BusinessDay that “Investors will worry more about oil prices and production than these disputes, when it comes to pricing Nigeria risk,” the source who didn’t want to be named said.
Oil prices have more than doubled from 2016’s low of $38 per barrel – a period that saw government finances slashed by more than 50 percent and contributed to the country’s first economic recession.
Brent crude, Nigeria’s benchmark grade traded at $76 per barrel Tuesday, according to Bloomberg data.
Production has also been stable since militants ceased blowing up pipelines, touching a two-year high of 1.8 million barrels in May, according to OPEC data.
Wale Okunrinboye, head of research at Lagos-based Sigma Pensions says the production shut-ins by Shell that could see Nigeria’s overall production fall to a year low in July, is not in the same ball park with the crisis of 2016 and is nothing for investors to fret about.
Shipments of Nigeria’s Bonny Light have been subject to force majeure for a month, following a leak on the pipeline.
“We have to wait and see what happens,” Okunrinboye said. “But it’s the usual theft that has been happening in Nigeria for donkey years and not the full scale disruption of 2016 when militants deliberately damaged pipelines for personal vendetta.”
“While oil prices remain supportive, all eyes are turning to the Federal Reserve meeting to see what happens in terms of rate direction and that could impact risk appetite for Nigeria,” Okunrinboye added.
The US Fed is scheduled to meet today with expectations titling towards a policy rate hike, with hawkish forecasts stoked by the May jobs report that showed the economy added 223,000 jobs, beating economists’ estimates by 34,000. Legal experts are however not overly convinced that the legal rows hold no water.
Despite noting that “the government will be exhausting all of the appeal options to its highest level on all the cases,”Ayodele Oni, energy partner at Bloomfield Law field also said “The government might be compelled to pay the awards when the international government starts talking about it which will become embarrassing for the government,” Oni told BusinessDay.
“The court cases will hurt the government more, as it will send negative signals to foreign investors about its inability to honour contract,” Oni said by Phone.
Only last Tuesday, US-based gas processor, Process and Industrial Development Limited (P&ID) obtained a default judgement affirming a $6.59 billion arbitral award against the Federal Government, plus $2.3 billion in interest after a dispute that arose over a natural gas supply and processing agreement in January 2010.
The judgement was awarded against Nigeria because the FG failed to even appear in court to mount a defence.
Other cases brought against Nigeria mentioned in the Eurobond prospectus include; Interstella vs NITEL
In June 2012, a Federal High Court sitting in Umuahia, Abia state ordered the Central Bank of Nigeria (CBN) to pay Interstella Communications Ltd a total of $286 million, including accrued interest. The high court ordered the CBN to debit the accounts of the Federal Government in order to pay the same to Interstella Communications.
Interstella Communications, a Nigerian internet gateway operator, had instituted a legal action against Nigerian Telecommunications Limited (NITEL) since June 2007 in order to seek legal redress for a breach of contract.
The company won a judgement against NITEL six years ago when the judge ordered NITEL to pay the sum of N1.944 billion per annum accruable to the plaintiffs as revenue from their investment on 36 E1 switch port beginning from 2002.
The court also directed NITEL to pay 30 percent interest until date of judgement and thereafter at 25 per cent until date the liquidation of judgement debt hereby granted.
NITEL appealed the ruling; however the 2017 court order given by Justice M.G Umar of the Federal High Court was challenged by the then Attorney-General of the Federation and Minister of Justice on the allegation that it was obtained without the knowledge of the Attorney-General. The matter is presently pending at the Supreme Court of Nigeria.
Dispute with Korea National Oil Corporation
In March 2017, Supreme Court ruled in favour of Korea National Oil Corporation (KNOC) that the decision of the Federal Government to re-award Oil Prospecting License (OPL) 321 and 323 to Owel Petroleum Consortium was illegal.
The dispute commenced in 2009, when KNOC filled an action against the Federal Government entities at the Federal High Court of Nigeria. In the suit leading to the Court of Appeal and the Supreme Court, the Federal High Court upheld all KNOC’s claims against the Federal Government and had held that the decision of the President contained in a letter of January 8, 2009, purportedly revoking KNOC’s interests in the OPLs was illegal.
The Federal High Court, therefore, voided and quashed the revocation on grounds that the decision of the late former President Yaradua revoking KNOCs interest in the OPLs was illegal, procedurally unfair, unreasonable and against the legitimate expectation of KNOC.
Dissatisfied with the decision of the Federal High Court, Owel Petroleum Services Limited went to the Court of Appeal.
OWEL was not an original party to the suit but joined after the commencement of the action at the lower court as the Court of Appeal in agreement with the Federal High Court ruled that the President’s revocation of KNOC’s interests in OPLs 321 and 323 was wrong as the President has no power to void the allocation of the OPLs.
The Court of Appeal also held that the Side Letter granting KNOC a discount on the signature bonus in consideration for a $6billion investment by KNOC in strategic downstream project was invalid.
Dissatisfied with the decision of the Court of Appeal, KNOC, OWEL and the Federal Government entities, filed separate appeals to the Supreme Court challenging some findings of the Court of Appeal, primary of which were, the decision of the Court of Appeal on the technical issue as to the mode of commencement of the suit and more substantive issues such as the legality of the Side Letter and the revocation of KNOC’s interests in the OPLs.
Dispute with Continental Transfert Technique Ltd
Another case in court is a case between Continental Transfert Technique Ltd and the federal government as a District of Columbia federal judge last year banned Nigeria’s government from invoking a broad sweep of evidence to fight a pending effort to enforce a $276 million arbitral award turned judgment against the country, after Nigeria missed a deadline to share information about its U.S. assets.
The case goes back to 2008, when Continental sued the country over the underlying award. The company had won a contract from Nigeria’s government in 1999 to create computer-readable cards for noncitizen residents, akin to the U.S. green card. The company was supposed to get paid by splitting the proceeds of card sales 50-50 with Nigeria’s government, but that changed as the contract was amended.
Continental said sales of the card came in far below Nigerian government projections, and the company filed for London arbitration against the country in November 2007 with the International Dispute Resolution Centre in proceedings under Nigerian law. It won an award for N30 billion ($255 million as at that time). A federal judge confirmed the award in U.S. dollars, and the judgment totalled $276 million as of 2013.
Continental Transfert has been trying to depose Nigerian officials about their government’s U.S. assets since 2014. It asked the court earlier last year to sanction Nigeria by limiting its right to raise defences, but the country has resisted, saying its fundamental rights couldn’t simply be stripped away.
Dispute with Enron Nigeria Power Holding Ltd
An award of $21.24 million (N6.5 billion) was ruled in favour of ENRON Nigeria Power Holding (ENPH) Limited, which signed an agreement with the Lagos State government for the construction of power projects in the state.
The federal government guaranteed the agreement and has now been held liable after Lagos was accused of breaching it. The award in favour of ENRON, which has been affirmed by both high and appeal courts in the United States, has been awaiting settlement for more than a year and 26 days, since April 26, 2017.
On 19 July 2013, Enron Nigeria Power Holding, Ltd. (“Enron”) petitioned the United States District Court for the District of Columbia to confirm and enforce an arbitral award against the Federal Republic of Nigeria, issued by the International Chamber of Commerce International Court of Arbitration for $11.2 million with simple interest at the rate of 2 per cent plus legal costs and additional expenses of $870,000.
Dispute between NNPC and the 1993 Production Sharing Contract contractor parties
The Federal Government has remained docile over the need to review the Production Sharing Contract (PSC) signed about 25 years ago between the Nigerian National Petroleum Corporation (NNPC) and International Oil Companies (IOCs).
While losses of over $21 billion have already been recorded since threshold for review of the contract was reached in 2000, experts are expecting the losses to triple as the price of crude oil increases and more deepwater projects come on board.
The disputes are currently the subject of four separate arbitral proceedings which the contractor parties Nigeria Agip Exploration Limited, Shell Nigeria Exploration and Production Company (SNEPCO), Esso Exploration and Production Nigeria Limited (Esso) and Statoil (Nigeria) Limited (“Statoil”)) have instituted against the NNPC.
The four arbitral tribunals have issued awards. However, the NNPC applied to the Federal High Court, Abuja challenging the arbitration proceedings on the basis that the exclusive jurisdiction to determine tax disputes lies with the Federal High Court of Nigeria pursuant to Section 251 of the Constitution.
The arbitral award in the Esso case was set aside by the Federal High Court on 22 May 2012, while the court is yet to determine the cases involving NAE, SNEPCO and Statoil. Esso appealed the judgment of the Federal High Court and on 22 July 2016, the Court of Appeal partly decided in favour of NNPC. The damages granted against NNPC were set aside but the Court of Appeal restricted the NNPC from further over-lifting of crude oil.
Also, Esso and SNEPCO also applied to the United States District Court for the Southern District of New York for the recognition of the arbitral award. Whilst parties have agreed to stay proceedings involving Esso, the proceeding involving SNEPCO is still on-going.
LR Avionics versus Federal Republic of Nigeria
Also another case is the one between the Federal government of Nigeria and Israeli military consultancy firm, LR Avionics Technologies Ltd who commenced arbitration proceedings against Nigeria government, seeking redress for breach of a contract it entered into with the Ministry of Defence for the supply of six SU-27 Fighter Aircrafts for the Nigerian Air Force on 22 October 2002.
A subsequent dispute arose on 31 January 2012, and Babajide Ogundipe, a Nigerian barrister, was appointed as Sole Arbitrator on the dispute by the then Chief Judge of the Federal High Court of Nigeria. On 8 February 2013, the Arbitrator awarded $5 million to L R Avionics Technologies Ltd as damages for breach of the contract, together with costs of N4.71 million. The award did not carry interest.
An attempt to get this award set aside by way of an application filed at the Federal High Court Abuja on 17 March, 2013 was unsuccessful, however on 30 June, 2014 the Federal High Court granted leave to recognise and enforce the award in the same manner as a judgment and entered judgment ordering the Nigerian Government and the Attorney General, to pay the sums awarded together with interest at the prevailing bank rate from 11 March, 2013.
The Nigerian Government did not comply with the order of the Federal High Court, so L R Avionics Technologies sought to enforce the award in the United Kingdom. On 4 March, 2015, it made a “without notice” application to register the award under the Arbitration Act 1996 and also to register the Nigerian judgment under the Administration of Justice Act 1920.
In January last year, the Israeli military consultancy firm intensified efforts to sell one of Nigeria’s choice properties in London to recover a debt of $5 million and a further N4.71 million awarded as costs (excluding interest), however an English Commercial Court ruled against the forced sale of the property.
Justice Stephen Males disagreed with LR Avionics Technologies Ltd., which had argued that the property in question, on Fleet Street in London, was subject to process for the enforcement of the arbitration award it won against the Nigerian government in 2013 since it was being used by a third party for commercial purposes.
The 1927-built three-storey property situated at 56-57 Fleet Street previously housed a number of sections of the Nigeria High Commission London, including its Consular services. It is currently leased to Online Integrated Solutions Ltd (OIS) for the purpose of providing visa and passport services in exchange for an annual rent of £150,000.
Hitherto, the property was the London home of the Glasgow Herald Newspaper in the days when Fleet Street was the centre of Britain’s newspaper industry.
Dispute with Global Steel Holdings Ltd
An intractable legal battle between the Government of Nigeria and Global Steel Holdings Ltd (GSHL) has inflicted untold damage on the iron ore mining company, established in 1993 to supply raw material iron ore to Ajaokuta and Delta steel companies.
In 2008, late Musa Umar Yar’Adua, former President, terminated a concession agreement between the government and the steel firm that saw the Indian company run the country’s three steel plants: National Iron Ore Mining Company (NIOMCO), Ajaokuta Steel Company and Delta Steel Company Limited.
Yar’Adua’s predecessor, Olusegun Obasanjo, signed the concession agreement, which was believed to be shrouded in secrecy and skewed in favour of the concessionaire.
But his decision to terminate the deal was thought to be hasty by some stakeholders in the steel sector who felt government could have waited to review the agreement.
Among other reasons, government accused Global Infrastructure Holding Limited of assets stripping and cannibalism. The botched agreement allowed the company to manage Itakpe iron ore mining plant and Ajaokuta for 10 years, but it had only done so for just three years when the deal was terminated.
Between 2008 and 2016, Nigeria and the GSHL were in and out of International Court of Justice at The Hague and the International Arbitration Court in London. However, in August 2016, Kayode Fayemi, Minister of Mines and Steel Development, said Nigeria and the company had agreed on an out-of-court settlement of the matter in which he explained how the two parties signed a modified agreement.
“Ajaokuta was concessioned out to private investor, but that didn’t work out well,” he was quoted as saying.
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