Between 1961 to 2018, according to reports, about 65 airlines failed in Nigeria alone. While in the united states, about 300 airlines were said to have failed during the same period. Myriad reasons have been adduced for the failures.
According to a study by CH aviation, airlines in Nigeria have an average lifespan of 10 years.
Poor corporate governance structure is one notorious reason attributed to these failures especially in developing markets, of which Nigeria is part of.
A simple contextual explanation of what poor corporate governance is, refers to a situation, where decisions taken on behalf of a company, do not pass through the laid down due process. This laid down due process allows members of the company to determine whether the decision about to be taken on behalf of the company, is good or bad for the company.
Experts in the industry and stakeholders have complained about how airlines fail unnecessarily due to this phenomenon. What can the be done to ensure good corporate governance structures in Nigeria? Creditors who extend credit facilities to a company are in the right position to stem the tide of endemic poor corporate governance through a unique form of financing which can be referred to as mezzanine financing.
Mezzanine financing is a form of credit facility which is a combination of debt financing and equity financing in whatever proportion the creditor deems fit. It can be structured as 80 percent debt with 20 precent equity. It simply allows a creditor to have a seat at the table.
As a young boy of about 15 years old staying with my parents years ago, I shared a room with my two younger brothers. My mom had this attitude of always barging into our room just to see what we were doing behind closed doors. Of course, as teenagers, we felt she was just a busy body who can’t mind her business. So, one day, I and my brothers got a lock and attached it to the door from behind so our mom wouldn’t be able to barge in like before. In her usual manner, she tried to come in only to discover the door was locked.
Well she almost broke down the door, and called our dad, who then told us to open the door. Upon opening the door, I angrily asked her why she was always poking “that her nose into our business”. She simply replied that we were her business and whatever we do affects her, so she must keep an eye on us so we don’t engage in activities that could be detrimental to our development behind closed doors. Of course, as kids, we didn’t understand what she was trying to say back then. But then, just like with the airlines, our mom and dad were our bank. After all they were responsible for our shelter, feeding, schooling and what have you. In a sense, they had the right to know what is going on behind closed doors.
This is the same approach that banks must adopt whenever they want to extend credit facilities towards a capital-intensive industry like aviation, most especially in emerging aviation markets. When banks are extending credit facilities to airlines and other aviation businesses, they must take the pain to know what goes on behind those closed-door boardroom meetings; because whatever affects the airlines, affect the banks and their ability to recoup the capital invested with the agreed interest on it.
If the funds are mismanaged, there’s no way a bank would get its money back. And due to the nature of the industry and how capital intensive it is, the credit facilities extended, could run into hundreds of millions of dollars.
A one well known way to be privy to what goes on behind closed door is by having a seat at the board table; through some form of equity. Generally, Mezzanine financing is a well-known avenue that affords the creditors a hybrid advantage and protection of being a creditor and a small-time investor at the same time. In emerging markets, banks have always been under an immense pressure to maximize returns to investors, this has led to a phenomenon where putting proper structures in place is slaughtered on the altar of profits. Even top Nigerian industrialist Femi Otedola complained about this.
Banks and financial institutions in Nigeria are even more lackadaisical about due diligence, and putting proper structures in place, due to the fact that they have the magnanimous asset management company of Nigeria to buy up the bad debts. Creditors in the emerging markets should adopt the mezzanine financing approach. It is however important to note that just like my brothers and i, the borrowers may not like that form of financing as they may see it as poke nosing into their affairs. But how will I fund you to the tune of hundreds of millions of dollars, but then can’t even see to it that you use the funds judiciously? If I were a banker, and I’m to extend credit facilities running into millions of dollars to your company, I would want a seat at the table to know what goes on behind closed doors. so whenever the CEO of the company is taking too much unnecessary coffee on the pockets of the company, I would shout.
Written by Tolulope olusegun, a lawyer with the Chilef Toye Coker & Son