NNPC Ltd Project Gazelle Funding Limited Explainer
1-. Nigeria needs forex to settle her FX obligations including an outstanding obligation of over $7b; thus, the NNPC arranged a $3.3b emergency loan from AFRIEXIMBANK (AFEX) on behalf of the Federal Government of Nigeria.
2-. The loan structure involves the NNPC Limited receiving cash today via an SPV called Project Gazelle Funding Limited, sponsored by the NNPC Limited. The NNPC promises to repay AFEX with crude oil, equivalent to the principal borrowed plus an interest element of 11.85% APY.
3-. The NNPC Limited borrowing is backed by its future sales of crude oil.
3.1 As collateral, Nigeria will deliver to AFEX 90,000 barrels of crude a day from 2024 until 2029, making a total of 164.25 million barrels valued at about $12.8b; this translates to three times the loan size of $3.3b
4-. However, of the proceeds of the 90,000 barrels delivered by NNPC forward sales, up to 90% of excess cash (“Price Balance”) will be released back to NNPC Limited via the Central Bank of Nigeria. At the same time, 10% will go towards the prepayment of the facility.
5-. What is happening here is a domiciliation of sales proceeds. You can borrow from a bank by pledging to deposit all your sales from your customers with that bank; that domiciliation of the sales is collateral as the bank has your sales from your customers in their vaults.
6-. Similarly, NNPC Limited is domiciliating their sales proceeds with AFEX, which are worth $12.8b over 5 years.
7-. On timescales, in one week, NNPC will get an initial $2.2b loan disbursement but would only have put down 450,000 barrels with an estimated value of $36m (using $80 per barrel x 90,000 barrels).
8-. So, if we flip it, AFEX is only getting a sales “collateral” of $36m for releasing $2.2b. Look at the $12.8b as the total transaction size; what NNPC is paying back is $3.3b borrowed plus 11.85% APY excluding fees.
9-. However, the sales will be domiciled with AFEX, who will take their 10% to settle their obligations and pass on 90% to NNPC/CBN. This domiciliation was the essential collateral the syndicate financers needed for the total package.
10-. The risk is that Nigeria does not deliver these oil barrels and then incurs a penalty of 2% per annum.
Pros? Nigeria gets $2.2 billion immediately. Those $ funds are needed today.
11-. Will it boost the value of the naira? It depends on how quickly and strategically its dispensed, but overall Nigeria needs more than $3.3b to stabilize the forex market.
12-. Cons? the loan is expensive, 11.85% for 5 years. However, this reflects Nigeria’s increased risk rating, especially the risk of oil cargo delivery.
