The risky business that put IPO disaster CAB Payments on the map

In early September, the Central Bank of Nigeria held a press conference in Lagos to announce that it would take action against rogue currency traders.

According to reports, Folashodun Adebisi Shonubi, who at the time was CBN’s acting governor, singled out one operator:

“We have reason to believe that Crown Agents have been working with international agencies who rather than bring the money through the normal system, pass through them and they will then sell to Nigerian companies rather than doing the proper thing. They can expect to hear from us shortly, and they will not be the only ones.”

Who or what is Crown Agents? The name is an echo of Crown Agents Bank, the main operating subsidiary of London-listed currency trader CAB Payments. But CAB said it had “not been contacted, at any level, by the Central Bank of Nigeria regarding any investigation.” The company denied any wrongdoing.

Nigeria’s famously uncommunicative central bank would offer no more clarity. A CBN spokesman said by text that the bank may not be able to verify the remarks attributed to Adebisi Shonubi and didn’t respond further requests for comment.

It’s a curious episode because Nigeria is a key market for CAB, the year’s biggest and most notorious London IPO. The emerging-markets currency specialist warned on profits less than four months after listing, blaming “a number of changes to the market conditions in some of its key currency corridors, on top of the ongoing uncertainties surrounding the [Nigerian] naira, which are impacting both volumes and margins”. *

Dollar-to-naira trading became CAB’s biggest market in 2021 after Nigeria devalued its currency to counteract the impact of falling oil prices. The west African country has long tolerated multiple foreign exchange rates, with official and unofficial market-determined prices available alongside the official dollar-pegged value.

CAB is not authorised by the CBN to trade naira and it has no presence on the ground. Its main Nigerian business is offshore, via what’s known as the unofficial parallel market. The company brokers transactions between developed-market customers such as international development agencies and locally licensed liquidity providers that can deliver the cash to client accounts, priced according to supply and demand.

Parallel forex markets in Nigeria are long established and partly legalised through the licensing of local bureau de change operators, though their exact regulatory status changes often.

As part of its 2021 intervention, the CBN cut foreign exchange supply to the bureaus de change, squeezing liquidity and giving an advantage to offshore brokers such as CAB.

Dollar-to-naira exchange was a £2mn business for CAB in 2020. By 2022 it had swelled to £26mn, or nearly a third of group FX revenue. CAB’s estimated fees on naira trading (known as the take rate) soared from 0.60 per cent in 2020 to 3.65 per cent, according to research from JPMorgan, the IPO’s sole sponsor and joint global co-ordinator.

CAB told us:

As a UK-regulated bank, Crown Agents Bank’s (CAB) operations are underpinned by extremely strong risk and compliance procedures. Its business in Nigeria complies with, and operates within, all the relevant regulations.

Parallel markets are often seen as a necessary evil to improve foreign currency availability, particularly in economies that are reliant on oil exports. But no central bank will ever publicly endorse the trade.

Having multiple exchange rates is systemically inflationary, negative for foreign direct investment, and deleterious to policy credibility. Money bleeds from the official channels, so it weakens the nation’s current account. And since buyers willing to pay a premium are those who can’t access the official window, unofficial exchange helps finance criminal activities including contraband imports and tax evasion.

In June, shortly after the inauguration of Bola Tinubu as president and the arrest of former CBN governor Godwin Emefiele, Nigeria loosened its currency peg. Tinubu’s predecessor, Muhammadu Buhari, had persisted with currency controls, ignoring widespread allegations that government cronies were exploiting the exchange rate arbitrage. Tinubu promised sweeping financial reforms and in February was elected by a landslide.

It was against this backdrop that CAB’s owner, the private equity fund Helios Investment Partners, ran a dual-track process to sell or float the company. No suitable buyers emerged so CAB formally announced its IPO plans in June, joining the premium segment of London’s main market a month later. Helios sold 40 per cent of its stake in CAB at IPO to raise nearly £300mn.

It’s unusual for a mainstream international financial organisation to trade parallel markets. Transfers are unregulated by definition and are at constant risk of being shut down. Were these risks made clear to prospective investors?

The Times this week quoted Oliver Brown, investment director at investment group RC Brown, a CAB shareholder, on the subject:

My initial thought was, we’re all grown up and we all have our eyes open to investments but it does appear that there should have been more disclosure that the company operates in, to put it diplomatically, parallel markets. There has been more than an element of the advisers turning a blind eye to that. There’s only so much you can put in a risk document but the fact that they have been operating in a market where it appears other major competitors are not, these parallel markets that others would not touch, that is worthy of a risk disclosure.

The CAB prospectus mentions offshore parallel markets only in its section on recent developments in Nigeria, and even then only in the passive voice:

Its risk factors offer more general statements, saying that CAB “takes into account applicable law and regulations”, with an international sales policy that’s framed on guidance from local lawyers “and, in some cases, its discussions with local regulators”.

The targets CAB set at IPO were based around naira profitability returning to pre-2021 levels, a point management reiterated at maiden results in September. Group CEO Bhairav Trivedi and David Mountain, chief product officer, also talked at length about how naira margins had stabilised but volumes were weak because the central bank was still trying to find the optimal level of control.

“Historically, Nigeria was our largest corridor and that’s the kind of natural state of affairs,” Mountain told analysts on the conference call. “It’s a big economy. It’s in our heart of hearts. We’re good at it. We’ve been there a long time.”

Yet among currency traders, CAB is considered a relative newcomer. The bank can trace its history back to 1833 but only launched a forex platform in 2017, a year after being bought by Helios for an undisclosed amount.

Before the takeover, CAB was a conservatively run, small scale and barely profitable middleman for disbursing foreign aid. Its most valuable asset was a UK licence to act as a correspondent bank, meaning it gathers foreign currency deposits from institutions and digital wallet providers based outside the UK. These depositors, known as respondents, then handle cross-border money transfers to recipient accounts where CAB has no licence to operate.

Correspondent banking has been in long-term decline. Mainstream lenders chose to pull out of frontier markets, partly on cost but also because money laundering and terrorist financing regulations were becoming more onerous. Money moves in several hops through a network of continental, regional and local respondents, meaning every correspondent bank transfer has multiple potential points of failure.

CAB aims to simplify transfers by forming direct relationships, with Trivedi saying on the September conference call that the UK banking licence had been central to gaining the trust of its partner network. “We are a bank,” he said. “So banks innately trust other banks as opposed to trusting specialist players that may not necessarily be a bank.”

It’s notable however that few Africa-focused FX specialist correspondent banks have emerged over the past decade.

Barclays’ initiation note on CAB identifies just one direct competitor, the Nasdaq-listed financial group StoneX. Its global payments division has been sending money from developed markets to Africa since the 1980s and has a customer base that includes major market banks.

CAB’s core customer base is less established and more diverse:

StoneX said:

StoneX operates its payments business in compliance with local regulatory requirements in each market it services. Since “offshore parallel currency exchange” typically refers to unregulated markets, StoneX is not involved in these activities.

Floated as a fintech, CAB’s pre-flotation marketing leaned heavily on payments technologies including Segovia, a mobile payments gateway bought in 2019.

Four months and one catastrophic profit warning later, CAB has been recast as a high-stakes FX trader whose revenue growth relies on regulatory arbitrage and taking risks the competition won’t.

UK authorities now need to consider whether CAB management and its advisers did enough to highlight its exposure to unregulated market-making during an IPO process that, the way some meeting attendees describe it, brings to mind the confession scene from The Big Short:

Further reading:
— Lessons to learn from the CAB Payments debacle (FTAV)
— Revisiting the CABastrophe’s risk factor disclosures (FTAV)

* We asked whether a sudden downturn in the profitability of Central African franc and West African franc trading, as flagged in CAB’s September profit warning, was also related to parallel exchange rates. CAB said it does not trade in parallel markets for these currencies and only “buys the CFA franc with local authorised banks.”