We were asked to give our recommendations on how to revive the struggling company Union Bank as at 2020.
My classmates’ came up with different financial strategies on how to resuscitate the organisation.
The first suggestion was for the company to sell her investment securities which, as at the end of December 31st, 2010, was ₦373,579bn. The funds should then be channelled into the business. The idea was rebutted. He stated that the company was not having liquidity issues as the company had enough funds to meet her short-term obligations. What they needed was Capital. The capital of the bank was not sufficient to run the business. Selling the securities will only reduce the assets of the bank and that amount cannot be stated as capital.
It was recommended that when looking at a company’s balance sheet, the review should be done from the right-hand side to the left-hand side. i.e., the shareholder’s capital and liabilities before the assets. The reason being that the right-hand side provides the finances used in purchasing the assets.
Another course mate took a short at it. This time he said the firm should use the share premium in reducing the negative retained earnings. This was again debunked.
A shared premium account is an account that warehouses the credited difference in price between the shares paid by investors at a premium and the par value of the shares. The funds in this account can only be used to issue bonus shares or pay for share issue costs. This cannot be used to offset the negative retained earnings.
We had another suggestion: The company should raise capital to shore up its shareholder’s fund. The lecturer asked. As a potential investor, will you give your funds to a bank who is struggling to operate? The bank needed the sum of One Hundred and Forty Billion Naira(140Bn) to continue to be in business.
The class was confused on how to proceed with this discussion. The lecturer finally provided his solution to the struggling bank.
The bank had in their custody loans due to their customers to the tune of ₦ 225,647Bn. He suggested that senior managers in the bank approach their high-net-worth individuals to convert their deposits into equity. He believed these customers were left with no choice, as their deposits might not be recouped if the bank went under. He stated that the NDIC will only be able to refund the sum of ₦500,000 to the customers. Once this is done, all existing shareholders will have to forfeit some of their shares in other for them to be able to re-issue them to new investors. The new investors would then buy these shares at either a premium or discount. This is all dependent on the value that both parties place on the organisation
Eventually, the bank went ahead with the share capital reduction exercise. It was done in the ratio of 3:16. The bank was also fortunate to have new investors. A private equity firm invested in the bank.
Union Bank was finally able to shore up her capital to the tune of ₦283billion.