Aviation
By Jude Nwauzor
The Asset Management Corporation of Nigeria (“AMCON” or “Corporation) has become aware of a recent newspaper article written by Sir Johnson Arumemi-Ikide and published in ThisDay Newspaper on September 27, 2023. In the article, Sir Johnson made several spurious claims, which are at best a misrepresentation of facts and an attempt to besmirch the integrity and reputation of AMCON in the fulfilment of its statutory mandates and objectives.
While it is not the focus of AMCON to engage in needless media squabbles, as several of the issues in the article are sub judice, considering factual inaccuracies presented in the article, AMCON considers itself duty-bound, as a public institution, to correct certain inaccurate facts alleged by Sir Johnson and put forward the proper state of play to the general public. Arik owes AMCON over N250billion. This is besides bank and trade credit to third parties in the region of over N90 billion.
PURPOSE OF AMCON
AMCON was formed in 2010 with the signing into law of Asset Management Corporation of Nigeria Act (“AMCON Act”), as an intervention agency to prevent bank failures, which could have destroyed the economy. Nigerians would recall that as a result of the global financial meltdown of 2007/2008 many Nigerian banks tottered on the brink of failure with very high levels of Non-Performing Loans (“NPLs”) which impaired capital and constrained their core role of financial intermediation. The Corporation, using bonds (debts) issued by the Central Bank of Nigeria (“CBN”), bought NPLs and invested in those banks, providing both liquidity and capital to revatilise the banking industry.
By this strategic economic decision, no bank failed, no depositors’ monies were lost and over 14,000 jobs were saved. The exercise however created a liability overhang of ₦5 trillion Naira which if not recovered will become the responsibility of the Nigerian nation, through appropriation. Consequently, the AMCON Act provided for all banks in Nigeria to contribute to a sinking fund to repay the debt.
Secondly, the AMCON Act imbued AMCON with powers to recover NPLs from the debtors. And AMCON has made significant progress in its recovery efforts towards concluding its assignment. One of these debtors happens to be Arik Air Limited (In Receivership) (“Arik”), an airline company owned by Sir Johnson Arumemi-Ikhide who is also the promoter of Rockson Nigeria Limited (a power infrastructure company), Ojemai Farms Limited and Ojemai Investment Limited, all of whose debts were transferred by various banks due to their non-performance. The total debts owed by the companies owned by Sir Johnson to AMCON, or the Nigerian nation is over ₦400 billion.
ARIK AIR LIMITED’S INDEBTEDNESS, UNDER THE MANAGEMENT OF SIR JOHNSON
Amongst several inaccurate claims, the Arik founder feigned ignorance of his debt to AMCON, stating that the Receivership was premature and claiming that his loan was performing and so on. This is absolutely untrue.
A loan is deemed an Eligible Bank Asset for AMCON purchase if the said loan is classified as non-performing by the bank, CBN or otherwise so designated by CBN. In the case of Arik, it was sold to AMCON as non-performing loan. In a letter dated October 22, 2010, from UBN to Arik, the company was informed that its loans of a staggering sum of about $474 million, which was in excess of ₦70 billion at the time (above the single obligor limit of ₦22 billion of the bank) was not performing. Nigerians need to understand that such non-performing loans contributed to the near failure of Union Bank. At the time, Arik’s total indebtedness to UBN could be used to set up three commercial banks or to acquire GSM licence. It was a significant exposure.
For the records, Arik’s loans were sold by two banks – UBN and Bank PHB (now Keystone Bank). Upon their purchase, the customer willingly agreed to restructure the total exposure of ₦85billion. It was agreed to waive ₦15billion, reducing the loan exposure to only ₦70 billion, for a tenor of nine years and interest at 12% per annum. This was via the duly accepted offer letter dated 17 August 2011 with ref: BA/LAG/C/75/11, which Arik did not contest. So, it is strange that Sir Johnson Arumemi-Ikhide is claiming that the loans were performing when the banks sold. The Corporation also purchased about N37 billion exposures of Arik from Zenith Bank.
Furthermore, in 2013, Arik was granted a Bank of Industry’s Power & Aviation Intervention Fund loan of N21billion at the rate of 3% per annum (significantly lower than the Federal Government’s own borrowing rate) for a tenure of eight years. Arik wantonly defaulted on this loan and only repaid ₦2.8 billion as at February 2017. On the ₦70billion loan, Arik paid only ₦1.7billion in five years, and zero payment on the principal. Therefore, based on CBN Prudential Guidelines, the loan was classified as “lost” and thus qualified for the strictest recovery actions.
Within the period of 2011 to 2017, the owners of Arik dribbled AMCON through a labyrinth of unending negotiations, excuses, and promises that were not kept. Despite numerous extensions of financial accommodation, debt reduction offers, and debt restructuring efforts, Arik consistently defaulted on its loans.
WHY THE RECEIVERSHIP
In addition to the gross default of Arik on the payment of its various loan obligations, the country and important governmental institutions (between November 2016 and January 2017) watched with grave concern as Arik wantonly cancelled flights, had travellers in Nigeria, South Africa, UK, and USA stranded due to its inability to fulfil flight obligations for which payments have been made by innocent Nigerians. Various safety related issues including non-payment of staff and pilots was frequent and became public information. Government feared for the safety of the airline, the lives of passengers, the jobs of over 1,500 Nigerians and the stability of the aviation industry. A shutdown within weeks was imminent. A Receiver Manager was thus appointed in line with Section 48 of the AMCON Act. The first objective was to stabilise the operations of the airline. The legality of this action has been favourably decided in court.
STATE OF AFFAIRS AT COMMENCEMENT OF THE RECEIVERSHIP
The Receivership and Management Team met a company that was financially stranded and was systematically shutting down. The Management Team met a company without adequate cash available even for a week’s effective operations.
MAINTENANCE: There was no maintenance reserve to overhaul planes and engines. Major maintenance tasks were falling due without cash in hand. The company was heavily indebted to Lufthansa Technic; its long-standing Maintenance Repair Organisation (“MRO”) and they had withdrawn their services and left Nigeria, resulting in the arrest of some of its aircrafts. Many planes were at different locations and in various states of disuse. Some of the aircraft had been robbed of vital parts.
STAFFING ISSUES: As of February 9, 2017, when Arik went into Receivership, the work environment was toxic with many disgruntled staff due to unpaid salaries. Salaries of expatriate staff and crew were unpaid, some since July 2016 (over six months). Some Nigerian Pilots had not been paid since October 2016. In addition, salaries for other local staff had been outstanding since December 2016. Staff and company pension contributions were unremitted for years. Recency training for many pilots necessary to certify pilots for flight was suspended due to lack of funds. All training schools were owed and had refused further credits. Thus, pilots were grounded, and many flights could not be properly crewed. Hotels housing expatriate crew and staff were not paid. In some cases, rents on the apartments of foreign crew/engineers were outstanding. The company was stranded.
INSURANCE AND LEASES: Apart from the suspension of operations in September 2016 due to non-payment of insurance premium, the insurance policy for the airplane fleet was due to lapse on Friday, 10 February 2017, and the Company was already owing ₦418million as arrears of unpaid premium. Health insurance for the employees had expired and was not renewed. Leases on two A-330 planes from subsidiaries of Standard Chartered were outstanding for over six months.
SERVICE PROVIDERS: Federal Aviation agencies (NCAA, NAMA, and FAAN) were owed over N22 billion. Providers of services such as ground handling, Passenger Service System, Global Distribution Services (Amadeus), etc were owed over 12 months of fees. Curiously, even internet subscription offered by a local GSM company was suspended due to overdue payments. The company was denied overflight over Sudan and Algeria necessitating costly work around. The relationship with service providers worldwide was tensed, toxic and disruptive. Governmental agencies in the UK and USA were also owed. The threat to seize planes was rife.
INTERNATIONAL OPERATIONS
LOSS MAKING: Arising from the first operational review of the airline, the Receivership Team made a wise business decision to discontinue the international operations. A substantial part of the losses in Arik generally came from its international operations and the entire international deployment strategy. The company was operating many international routes at a loss without the capital to absorb losses.
WRONG AIRCRAFT ACQUISITION: Arik acquired two A-340-500 planes (a four-engine plane with high fuel consumption) as part of its international deployment strategy. These planes carried commercial viability risks, a fact known within the industry before the purchase, and which could have been avoided with a rigorous governance structure. Total loans of $274 million was approved for those planes. Those two planes could not cover operating costs and made zero contribution to loan repayment. This was the single most consequential strategic error.
ARIK INTERNATIONAL: The international operation also justified the creation of Arik International, a foreign entity company operating from London, as a parallel headquarters of Arik. There, costs were incurred without controls from Lagos. In addition to the annual consultancy fees due to the company that had risen to $5million per annum, Arik Nigeria was responsible for all its expenses. Indeed, in many cases, receipts for purchases were not provided. At the inception of the receivership, the company was immediately placed in administration by its directors in London and all steps have been taken by men under the direction and control of Sir Johnson till date to ensure they cannot be audited by Arik Nigeria in Receivership.
RECEIVERSHIP/MANAGEMENT TEAM
It is important to mention that against the strenuous attempts to create the impression of incompetence in the media, Arik in receivership has, at all times, been led by best-in-class professionals. The Chief Executive Officer, Capt. Roy Ilegbodu is a seasoned aviator with decades of experience in airline operations, executive management, and regulation. He was supported by senior management officers from within Arik and outside Arik. To strengthen governance, a Technical Advisory Committee was empanelled, led by Dr Harold Demuren, former DG of NCAA. They exercised control over the operations of the airline. The Receiver Managers provided legal authority, oversight, and support.
STATE OF SOLVENCY
The Receiver Manager engaged PwC Nigeria, Arik’s longstanding auditors (previously appointed by Sir Johnson Arumemi-Ikhide) to conduct statutory audits of 2015 and 2016 accounting years. It was established incontrovertibly, that Arik had been technically insolvent, since 2014. In fact, as at the end of December 2016, Arik’s insolvency had reached a negative shareholder capital of ₦139 billion. Arik was effectively bankrupt.
RESOLUTION EFFORTS
After achieving the stabilization objectives and in the recognition of the private sector as the engine of growth, negotiations were opened with the shareholders of Arik in the last quarter of 2017 to the first quarter of 2018 with a view to returning the company. It is interesting to note that at this point, Sir Johnson was grateful to AMCON and the Receivership Team for keeping the company afloat. They also agreed to pay ₦65billion to AMCON and pay-off other banks. This was over 50% concession.
To support his claim of ability to pay the concession sums, Sir Johnson Arumemi-Ikhide brought a letter purportedly from CitiBank Hong Kong Reference CITIBANK/HK-5B/1417 issued in favour of AMCON. It was claimed they had funds to the value of $5 billion. Quite unfortunately, upon careful verification from CitiBank, it was discovered that the said proof of fund letter was not authentic as it did not originate from CitiBank. It was a fake document provided by Chief Johnson. The settlement failed due to non-performance.
In 2019 and 2022, Sir Johnson approached AMCON with proposals to pay a fraction of the sums due with speculative repayment sources. AMCON could not support the proposals.
INACCURATE CLAIMS OF MISMANAGEMENT OF FLEET
At the commencement of the receivership in 2017, only eight of Arik’s aircraft were operational, most of which were nearly due for engine and landing gear overhaul. There were, however, no maintenance cash reserves to pay for these major overhauls as is the best practice. The fleet availability of Arik will continue to be challenged until capital issues necessary for engine overhauls are addressed.
This capital shortfall had been an ongoing issue even before the receivership, as Arik’s erstwhile management could only fund engine overhauls through loans obtained from creditors such as financial institutions, or by deferring payments to federal aviation agencies, FIRS, Lufthansa, overflight and navigation agencies of various countries, MROs, parts sellers, staff (whose salaries were not paid and pension deductions not remitted), pilot training schools, ground handlers, fuelers, etc. This is an advanced form of spontaneous financing. It was offensive to creditors. In local parlance, it was ‘robbing Peter to pay Paul’. It was not professionally sustainable.
Due to limited working capital, AMCON approved the Receiver/Manager’s plan to sell some non-operational planes pledged to AMCON and reinvest the proceeds into Arik. However, Sir Johnson truncated this plan by frivolous court actions. Thus, the optimization of redundant fixed assets to refinance the operations of Arik was stultified by Sir Johnson’s legal machinations and unwillingness to have constructive engagement.
In addition, approximately $34 million is currently held by Boeing on Arik’s behalf. Attempts were made by the receivership to partly release the funds to fix planes and inject capital back into the airline. Boeing (aircraft manufacturers) were eager to see their planes fly and were willing to support Arik. However, Sir Johnson contacted Boeing, advising against disbursing the funds and threatened legal action if Boeing did.
WHY ARIK FAILED
In summary, the poor fortunes of the Company are down to the dominant control, mismanagement exacted by its alter ego and lack of effective corporate governance. The airline had a poor aircraft acquisition strategy (or lack of it), engaged in unbridled borrowing, created misconceived cost structures, was in a clear scheme of overtrading and international expansion projects not backed by solid capital. The company lacked a clear strategy for managing its huge FX risks and could not deal with the slowdown in the Nigerian economy. And after making mistakes, they lacked the courage to sell wrong planes and cut losses. Frozen and jaded in the mist of the crisis, it was safe to say the business was too complex for its owners.
CONCLUSION
Nigerians are assured that different resolution options are being considered on Arik, including settlement proposal from the shareholders where it is practical, and reasonable. The debt recovery process is arduous. Nevertheless, the general public is assured that while the process may take time, public funds with current exposure of over N250billion on Arik alone, shall be recovered. No amount of blackmail and media campaign by the obligor will stop us from doing our job.
- Jude Nwauzor is Head, Corporate Communications Department, AMCON.