UPDATE 2-Nigerian "bad bank" set to absorb $15 bln bad loans
* Bad loan pricing to be agreed by mid-November
* Approval to absorb up to 2.2 trillion naira
* Aim is to restore health of banking system (Adds quotes, details throughout)
By Nick Tattersall
LAGOS, Nov 8 (Reuters) - A Nigerian "bad bank" set up to restore the health of the banking system after a sector-wide bailout last year said on Monday it aimed to absorb 2.2 trillion naira ($15 billion) of bad loans by the end of December.
The Asset Management Company of Nigeria (AMCON), run by a former Wall Street banker, was established to soak up bad bank loans, recapitalise nine institutions rescued last year, and restore lending in sub-Saharan Africa's second-biggest economy.
"The board is pleased to announce that it has approved the purchase of all the margin loans in the banking sector and all the non-performing loans of the rescued banks, both totalling in excess of 2.2 trillion naira," AMCON said in a statement.
Last year's $4 billion bailout of nine banks deemed to be dangerously undercapitalised was the start of an unprecedented effort to sanitise the banking system in Nigeria, seen by investors as one of the world's most important frontier markets.
The central bank has been seeking new investors to recapitalise the rescued banks but uncertainty over how the bad loans on their books would be valued has slowed the process.
Foreign and local banks as well as private equity firms have expressed interest and at least four lenders are in negotiations with potential suitors, banking sources say. [ID:nLDE69S1XG]
Following its first board meeting, AMCON said it had agreed a valuation method for bad loans with the central bank and finance ministry, would agree pricing with the rescued lenders by Nov. 15, and would settle the transactions by Dec. 30.
It said non-performing loans backed by shares would be valued at approximately two times book value, while unsecured loans would be valued at 5 percent of principal.
"These transactions constitute an important first step. AMCON will be addressing the issues of recapitalisation and the purchase of non-performing loans across all banks in the near future," it said.
MINIMAL FISCAL COST
Legislation to set up AMCON dragged through parliament, but after being finally approved by the Senate last week, the board -- headed by former Goldman Sachs (GS.N) banker Mustafa Chike-Obi -- is keen to show it will move fast. [ID:nLDE6A21LU]
AMCON plans to exchange bad loans for 7-year government bonds within three months of designating an asset as eligible and then chase recovery of the non-performing loans while the bank concentrates on restoring lending. [ID:nLDE66T1F0]
There had been concerns about the impact of the bailout and its resolution on Nigeria's finances. But Nigerian banks have promised to provide up to 1 trillion naira over the next decade to help cover any debts incurred by AMCON. [ID:nLDE66K21Y]
The board said its funding model was based on "conservative estimates of recovery rates and return on managed assets" and said the government would not end up footing the bill.
"With the landmark agreement by the banks to contribute to a sinking fund, the AMCON board is satisfied that the guarantee of the government of Nigeria will not need to be invoked at the end of its expected 10-year life span," it said.
Ratings agency Fitch, which lowered its credit outlook on Nigeria to negative last month, noted costs arising from the asset management company would still leave Nigeria's debt ratios comfortably below rated peers. [ID:nN22177498] (For factbox on valuation method, click [ID:nLDE6A72FK]) (For more Reuters Africa coverage and to have your say on the top issues, visit: af.reuters.com/ ) (Additional reporting by Chijioke Ohuocha; Editing by Kenneth Barry)
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