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Saturday, March 25, 2023

C and I Leasing High Leverage Ratio Validates Debt to Equity Swap

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C and I Leasing Plc has a higher risk to shareholders as its operations are being funded more by borrowed money, which laid bare the board of directors’ decision to opt for a debt to equity swap with a view to strengthening the balance sheet.

There is more debt in the capital structure (balance sheet) of the only listed leasing company in Nigeria as debt to equity ratio hit 262.25 percent as of June 2021, according to MoneyCentral calculations.

A debt to equity ratio of 2.62 means the company uses N2.62 in debt for every N1 of equity, or its debt level is 262 percent of its equity.

While the ratio depends on industry average, a debt-to-equity ratio increase means a reduction in the value of owners’ stake in a business as a proportion of its assets.

Notably, the higher a company’s operations are funded by borrowed money, the likelihood that it could easily capitulate to bankruptcy during hard times or a recession.

A comparison analysis shows debt to equity ratio was 261.10 percent in 2020, albeit it is lower than the 341.77 percent in 2017.

The company’s total debt (long and short) stood at N36.66 billion as at September 2021, which is 4.91 percent higher than 2020’s N34.82 billion.

A further breakdown shows there was N10.15 billion worth of commercial notes or paper in the books, while borrowing was N26.57 billion as at June 2021.

Little wonder shareholders said the firm could not manage to pay for the obligation, and they threw their support for a scheme of debt to equity swap.

C&I Leasing Plc shareholders had unanimously approved the conversion of a $10m loan to equity for Neoma Africa Fund (formerly Aureos African Fund).

Owners had also approved the conversion of the $10m unsecured variable coupon redeemable convertible loan stock in registered units of N4.75 or the dollar equivalent units into 987,500,000 ordinary shares of the company.

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