Tunde Oyewole and Dayo Idowu of Olajide Oyewole assess the conditions and framework for project financings in Nigeria
1. NATIONAL UPDATE
1.1 What are the main project finance trends and developments (for example, increased use of project bonds) recently seen in your jurisdiction?
In recent years, project finance trends in Nigeria have followed international trends. There have been numerous eurobond issuances by various project companies in Nigeria, in particular in the energy sector. Some of the structures adopted include straightforward financings, secured bond issues, as well as more complex structures, including forward sales.
The decline in oil prices since late 2014 has had a large impact on projects in the energy sector since the start of 2015. Most energy-related projects have been delayed or cancelled. It is expected that in 2015/2016, there will be fewer new projects in the energy industry, but an increase in restructurings and refinancing of existing projects.
It is also expected that with the new government that came into power in 2015, there will be a revitalisation of the energy sector and also a focused drive in infrastructural development.
1.2 What role have export credit agencies, multilateral agencies and international financial institutions played in supporting project finance transactions in your jurisdiction? Please include an overview of the main institutions domiciled in your jurisdiction.
Export credit agencies, multilateral agencies and international financial institutions have been active in Nigeria for a number of years. Most of these agencies provide support in the form of arranging financing, and providing lending and advisory services for projects. In addition, some of these entities provide the required guarantees to senior commercial bank lenders in respect of projects, thereby taking on some or most of the project risks.
Some of the institutions that have been active in Nigeria include, among others, the World Bank, the International Finance Corporation (IFC), the Export-Import Bank of China, and the African Development Bank.
2. SECURITY
2.1 What types of security are usually seen in project finance transactions in your jurisdiction, and are there any notable exclusions, including assets which cannot be secured?
Nigerian law recognises both consensual and non-consensual security. In the case of consensual security, the main types are: mortgages (legal and equitable), charges (fixed and floating charges), security assignments, and, pledges.
In the case of non-consensual security (security arising by operation of law), these are mainly in the form of liens.
The above describes the typical forms of security usually seen in project finance transactions in Nigeria.
There are no exclusions in terms of assets that cannot be secured. However, it is important to adopt the appropriate type of security for the relevant asset class.
2.2 Would the law of your jurisdiction enforce arrangements whereby debt is subordinated by way of a contractual agreement (including in bankruptcy or insolvency proceedings)?
Yes, Nigerian law recognises subordination arrangements. This can either be contractual subordination or trust subordination. In the case of contractual subordination, the party agreeing to be subordinated (junior creditor) agrees not to receive payment until payments due to the senior lender have been made; while in the case of trust subordination, the junior creditor agrees to hold in trust for the senior creditor and turnover all receipts to the latter.
Certain transactions are prohibited and are unenforceable in insolvency.
Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property which would be deemed in bankruptcy a fraudulent preference, would be deemed, in the event of a company being wound up, a fraudulent preference of its creditors, and accordingly would be invalid.
Any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors will be void.
A floating charge on the undertaking or property of a company created within three months of the commencement of the winding up of the company would also be invalid.
3. PERFECTION, PRIORITY AND ENFORCEMENT
3.1 How is a security interest in each type of security perfected and how is its priority established?
Perfection
A mortgage document must be stamped to be admissible as evidence in a Nigerian court. According to legislation and case law, mortgages require the consent of the governor of the relevant state in which the land is situated in order to be effective.
Further, a mortgage agreement is a registrable instrument and must be registered accordingly at the relevant land registry. Registration of the instrument has a direct impact on priority over other competing instruments and interests in the land.
In addition to registration at the land registry, if the mortgage is created by a company, it must also be registered at the Nigerian companies house, the Corporate Affairs Commission, within 90 days of its creation, otherwise, the mortgage security will be void against the liquidator or any creditor of the company. The registration of charges also has a direct effect on priority of the security interest (prior registered mortgage against subsequent security interests).
In the case of charges created by a company, stamping and registration of the charge by the Corporate Affairs Commission (CAC) are required. If it is a fixed charge over land, the prevalent view supported by case law is that the consent of the governor will also be required as well as registration of the charge at the relevant land registry of the state.
A security assignment is in essence a mortgage (ie, an assignment of title to an asset with an equity of redemption included). Typically, it is used for the creation of security over choses in action or incorporeal assets. The perfection process involves stamping and registration of the security assignment with the CAC (in the case of a charge created by a company). In addition, notice of the assignment may also be required to be given to the obligor of the underlying contract or asset. If the underlying contract or asset includes a restriction on assignment, consent of the counterparty or obligor would also be required.
A pledge is a possessory security interest and is effected by delivery of possession. There is no formal perfection process required. However, where the pledge includes a memorandum delivered together with the assets, the memorandum may need to be stamped.
Priority
In the insolvency of a project company, secured creditors rank above unsecured creditors of the project company if the security interests of the secured lenders are appropriately registered within 90 days of their creation. Priority of security interests among secured lenders will be determined by the nature of the security interest, priority of creation and priority of registration. For example, a fixed charge on any property will have priority over a floating charge affecting that property, unless the terms on which the floating charge was granted prohibited the company from granting any later charge with priority over the floating charge, and the person in whose favour that later charge was granted had actual notice of that prohibition. The priority of fixed charges will be determined by registration. A holder of a legal interest will have priority over the holder of an equitable interest. Aside from this, certain preferential creditors are preferred by law ahead of secured lenders (ie, taxes, wages and salaries, and compensation under the Workmen's Compensation Act).
3.2 Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise or defer them?
The various fees and taxes payable in order to perfect and enforce a security interest include the following:
• Governor's consent and land registration fees
The fee for obtaining the consent of the governor is specific to the state in which the mortgage is to be created. It can range from 1.5% to six percent of the mortgage sum. Once the governor's consent has been granted, the mortgage must be registered at the relevant state's land registry – and, again, this attracts a fee that varies from state to state.
• Stamp duty fees
The applicable rate is 0.375% of the sum secured, although the precise rate can only be confirmed following an assessment of the security documents by the stamp duties commissioner.
• Registration fees of the charge with CAC
In the case of a private company, the registration fee payable to the CAC for the registration of a charge is one percent of the sum secured. However, in the case of a public company, the applicable rate is two percent.
Most of the applicable legislation does not provide for deferment of fees and levies, but in practice, where the fees are high, government authorities have sometimes provided for a deferred payment over a period of time or reduction of those fees. Sometimes, this will require the provision of bank guarantees to ensure subsequent payment.
To minimise cost, it is common market practice for parties – lender(s) and borrower – to perfect the security interest to cover an agreed amount (percentage of total obligation). The lenders have the right and ability to perfect or 'up-stamp' to cover the full obligation at their discretion (ie, upon potential default occurring).
3.3 May a corporate entity, in the capacity of agent or trustee, hold security on behalf of the project lenders as the secured party?
Nigerian law recognises the concept of trusts and agency. Additionally, corporate entities that are empowered to hold property in their name by their constitution documents or enabling laws (in the case of corporations created by statute) may act as trustees, agents or secured parties holding security for and on behalf of beneficiaries under the applicable documents.
4. FOREIGN INVESTMENT AND OWNERSHIP RESTRICTIONS
4.1 What restrictions, fees and taxes exist on foreign investment in or ownership of a project?
The Nigerian Investment Promotion Commission Act CAP N117 LFN 2004 (NIPC Act) permits 100% foreign ownership of Nigerian companies and alien participation in virtually all sectors of the economy.
Both Nigerian and non-Nigerian investors are precluded from investing in sectors viewed as important to national security, such as the production of arms and ammunitions, and production of and dealing with narcotic drugs.
There are no discriminatory levies or taxes on foreigners intending to invest in Nigeria; however, they are required by law to incorporate companies domestically at the CAC. The company is then treated as a Nigerian company.
Potential foreign investors may also consider registration of their local or foreign companies as free trade zone entities if it is intended that the operations of the companies will be carried out in a free trade zone in Nigeria.
Such entities will be eligible for certain incentives, such as exemption from all federal and local taxes and levies in Nigeria (the customs territory).
In addition, a company with foreign investors must, after due incorporation at the CAC, be registered with the NIPC for the granting of a business permit and approvals for all other incentives. A business permit is essentially the permanent authorisation for the local operations of businesses with foreign investments or the subsidiary of a foreign company. Business permits may be granted only to companies with a minimum authorised capital of N10 million ($50,200).
The Certificate of Capital Importation (CCI) is an official document required to be obtained from Nigerian authorised dealers (licensed banks) which evidences the importation of capital investment (debt or equity) by a foreign investor into Nigeria. The CCI guarantees the unrestricted ability to repatriate the principal, dividends, interest or other accretions using foreign exchange obtained from the official central bank of Nigeria foreign exchange market.
For the oil and gas sector, the Petroleum Act CAP P10 LFN 2004 restricts ownership of licences and leases to Nigerian entities. In addition, the Nigerian Oil and Gas Industry Content Development Act (2010) gives important benefits to Nigerian incorporated companies and indigenous companies participating in the oil and gas sector. It states that preference must be given to Nigerian independent operators in the awarding of contracts and licences. The act goes on to specify the minimum Nigerian content in oil and gas projects.
4.2 Can a government authority block or unwind a transaction involving foreign investors after it has closed for strategic, national security or other reasons?
In addition to constitutional safeguards, the NIPC Act reiterates the guarantee preventing businesses from being nationalised or expropriated by the Nigerian government and protects investors from being coerced into relinquishing their business interests.
However, the government may acquire a company or business, if it is deemed to be in the national interest or in pursuance of public policy demands. In such a case, the government is required to pay prompt, fair and adequate compensation. Further, Nigerian law, provides guarantees targeted at particular projects and companies.
5. DOCUMENTATION FORMALITIES AND GOVERNMENT APPROVALS
5.1 Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?
The Nigerian courts have shown an inclination to accept and enforce agreements of Nigerian entities submitting themselves to the jurisdiction of foreign courts. However, the courts are prepared, in limited circumstances, to assume jurisdiction, despite the express choice of another jurisdiction by the parties.
Factors which the courts will consider in determining whether to assume jurisdiction include:
(a) the location of the evidence, the convenience in terms of accessibility and expenses between the domestic and foreign courts;
(b) the countries with which the parties are connected;
(c) whether the party seeking to stay the proceedings in Nigeria is only seeking procedural advantages; and,
(d) whether the plaintiffs would be prejudiced by having to sue in the foreign court because they would be (i) deprived of security for that claim; (ii) unable to enforce any judgment obtained; (iii) faced with a time-bar not applicable to the domestic court; or, (iv) for political, racial, religious or other reasons, unlikely to get a fair trial.
A waiver of immunity is generally enforceable in Nigeria.
5.2 Is English or New York law recognised as a valid choice of law in your jurisdiction?
Yes, English and New York law are recognised as a valid choice of law in Nigeria. However, following the Nigerian Supreme Court in Sonnar & Anor v Partnenreedri MS Nordwind & Anor (1988) NSCC pps 28-49, this is subject to the following conditions:
(a) that to be effective, the choice of law must be 'real, genuine, bona fide, and reasonable'; and,
(b) the choice of law must have some relationship to and must also be connected with the realities of the contract considered as a whole.
5.3 Would courts recognise a foreign arbitral tribunal award or court judgment? If so, what are the conditions applicable to such recognition?
Nigerian courts would recognise a foreign arbitral tribunal award or court judgment.
However, as with the case of the parties' choice of law, the Nigerian courts have demonstrated that in certain limited circumstances they will be prepared to assume jurisdiction notwithstanding the express choice of another jurisdiction by the parties. The factors that the courts will consider in determining whether to assume jurisdiction were also set out in the Sonnar case and include:
the location of the evidence, the convenience in terms of accessibility and expenses between the domestic and foreign courts;
the countries with which the parties are connected;
whether the party seeking to stay the proceedings is only seeking procedural advantages; and,
whether the plaintiffs would be prejudiced by having to sue in the foreign court because they would (i) be deprived of security for that claim; (ii) be unable to enforce any judgment obtained; (iii) be faced with a time-bar not applicable to the domestic court; or, (iv) for political, racial, religious or other reasons be unlikely to get a fair trial.
The application of these factors is entirely at the discretion of the court, and such discretionary powers must be exercised judiciously.
6. BANKRUPTCY PROCEEDINGS AND ENFORCEMENT
6.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral/security?
A secured lender is entitled to enforce its security in the insolvency of a project company, subject to applicable law. In the insolvency of a project company, secured creditors rank above unsecured creditors of the project company if the security interests of the secured lenders are appropriately registered within 90 days of their creation (where registrable under applicable law).The priority of security interests amongst secured lenders will be determined by the nature of the security interest, priority of creation and priority of registration. For example, a fixed charge on any property will have priority over a floating charge affecting that property, unless the terms on which the floating charge was granted prohibited the company from granting any later charge with priority over the floating charge and the person in whose favour the later charge was granted had actual notice of that prohibition. Priority of fixed charges will be determined by registration. A holder of a legal interest will have priority over the holder of an equitable interest. Aside from this, certain preferential creditors are preferred by law ahead of secured lenders (ie, taxes, wages and salaries, and compensation under the Workmen's Compensation Act).
Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property which would be deemed in bankruptcy a fraudulent preference, would be deemed, in the event of a company being wound up, a fraudulent preference of its creditors, and accordingly would be invalid.
Any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors will be void.
A floating charge on the undertaking or property of a company created within three months of the commencement of the winding up of the company would also be invalid.
6.2 Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the security?
Where the security agreement provides, a receiver may be appointed by the secured party, who will have powers under applicable law, including a power of sale of assets.
6.3 What processes, other than court proceedings, are available to seize the assets of the project company in an enforcement? For instance, is contractual enforcement (such as receivership) recognised?
A project lender may enforce its security under the applicable security documents without the need to present a petition for winding up the company or borrower. For mortgages and assignments, the equity of redemption may be foreclosed, and powers of sale under charges and other security instruments may be enforced. In addition, a receiver or receiver/manager may be appointed by the lender over the borrower or over particular assets.
7. FOREIGN EXCHANGE, REMITTANCES AND REPATRIATION
7.1 What, if any, are the restrictions, controls, fees and taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?
Subject to a CCI having been obtained when an initial investment or loan was imported into Nigeria, the outward remittance of funds, such as repatriation of dividends and profits, loan repayments and interest, may generally be made freely and is guaranteed under the NIPC Act.
7.2 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
Yes, under the Foreign Exchange (Monitoring and Miscellaneous) Provisions Act cap F34 Laws of the Federation of Nigeria 2004, project companies can maintain onshore foreign currency accounts into which foreign exchange can be paid.
Project companies are also not restricted in maintaining offshore accounts in other jurisdictions, save that in the case of project companies that receive income from exports, by virtue of the Pre-Shipment Inspection of Exports Act cap P25 LFN 2004 (PIEA), all exporters of goods, including petroleum products, are required to open, maintain and operate a foreign currency domiciliary account in Nigeria; and all export proceeds corresponding to the entire proceeds of the exports concerned must be paid into that account. There are no applicable exemptions under the PIEA.
In addition, the central bank of Nigeria, through a circular dated February 20 2015, has directed all holders of export proceeds to use those funds solely:
(a) to finance eligible and other trade-related transactions supported by appropriate documentation; and,
(b) to be passed to authorised dealers (banks) for eligible transactions only.
8. PUBLIC-PRIVATE PARTNERSHIPS
8.1 Is there a public-private partnership (PPP) act or similar statute authorising PPPs, and are both greenfield and brownfield PPP projects permitted?
Under the Infrastructure Concession Regulatory Commission Act 2005 (ICRCA), the Federal Government of Nigeria set up the Infrastructure Concession Regulatory Commission (ICRC) to drive PPP projects for and on behalf of the government.
The functions of the ICRC are to: take custody of every concession agreement made under the ICRCA and monitor compliance with the terms and conditions of the agreement; ensure efficient execution of any concession agreement or contract entered into by the government; ensure compliance with the ICRCA; and, perform other duties as may be directed by the president.
Certain states (for example, Lagos under its PPP Law) have also set up PPP agencies or offices, which focus primarily on the development and implementation of PPP projects within the state.
8.2 May a concessionaire grant security interest in the project to its lenders and, if so, is consent of the government or contracting authority required?
The concessioner will require the consent of the government or contracting authority for the purpose of granting security interest to its lenders, save where the concession agreement excludes such consent requirement in respect of financing for the project.
9. INSURANCE
9.1 Are there any restrictions, controls, fees or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
By virtue of the Insurance Act 2003, no person can transact an insurance or reinsurance business with a foreign insurer or reinsurer in respect of any life, asset, interest or other property in Nigeria businesses classified as domestic insurance, unless with a company registered under the Insurance Act (ie, a Nigerian insurance company).
Domestic insurance or reinsurance business includes:
(a) fire insurance and reinsurance business;
(b) motor insurance and reinsurance business;
(c) liability insurance and reinsurance;
(d) life insurance and reinsurance business;
(e) accident insurance and reinsurance business; and,
(f) any other insurance and reinsurance business as the National Insurance Commission (Nigeria) may from time to time prescribe.
The only possible exception would be in circumstances of exceptional risk in or emanating from Nigeria meaning that the risk could not be placed with an insurer or reinsurer registered under the Insurance Act. In these exceptional circumstances, the National Insurance Commission may in writing permit a party to effect such insurance or reinsurance with an insurer or reinsurers registered outside Nigeria.
Is reinsurance in the international market commonly seen on project finance transactions in your jurisdiction and are cut-through clauses permitted?
Subject to the restrictions explained in section 9.1 above, international reinsurance transactions are common in project finance transactions in Nigeria, especially since most of the project finance transactions are typically financially large and the risk cannot usually be retained totally in Nigeria.
Cut-through clauses are permitted and are commonly seen in reinsurance contracts in project finance. However, the National Insurance Commission by regulation has restricted 'direct premium payment cut-through clauses, which allow the direct payment of the premium to the reinsurer by the insured.
First published by our sister publication IFLR magazine. Take your free trial today.
Tunde Oyewole
Olajide Oyewole
Lagos
About the author
Tunde Oyewole is a partner at Olajide Oyewole, and heads the firm's advisory services group. He has over 30 years' business experience as an engineer, lawyer and tax adviser. He was part of the foundation management team that established Econet Wireless Nigeria (later known as Vmobile Nigeria), where he spent over five years as chief legal officer and chief compliance officer.
Oyewole's key areas of expertise are project finance, telecommunications and commercial litigation. He has a wealth of experience in project finance and M&A transactions and has recently advised Oando on its $1.7 billion acquisition of the Nigerian assets of ConocoPhillips. He is also advising the Lagos State of Nigeria in respect of the multi-billion dollar 'blue line' mass rail project. The firm's most important clients consider Oyewole to be their most trusted adviser, and rely on his considerable experience and business insights over and above the dry legal principles.
Dayo Idowu
Olajide Oyewole
Lagos
About the author
Dayo Idowu is a partner at Olajide Oyewole and leads the finance and projects practice.
Idowu has handled various landmark financing transactions in Nigeria, including the largest cement manufacturing plant in Africa and various financings in the oil and gas industry. Recently, he advised Oando on its $1.79 billion acquisition of the Nigerian assets of ConocoPhillips and Samsung Heavy Industries in relation to its $3 billion FPSO EPC project in Nigeria.
Idowu previously worked in the front office business of an investment bank. He has a degree in law from the University of Ibadan and a joint Masters degree in global finance from the New York University, Stern School of Business and the Hong Kong University of Science and Technology Business School. He is admitted as a solicitor in England and Wales and as a solicitor and advocate in Nigeria.
