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The total debt on the books of Nigeria’s listed companies who had restructured their repayment plans in anticipation of rising interest rates surged to record levels as they continue to seek their working capital requirements.
As of December 2023, the non-financial corporate businesses held over N7.34 trillion in debt on their books, which is 42.49 percent higher than 2022’s N5.15 trillion, according to data gathered by MoneyCentral.
The increase in debt levels in companies reflects the proactive measures of mid and large cap corporates to frontload their debt capital need in anticipation of an increase in lending rate and overall cost of capital going forward, according to Rasaq Abiola, former head of investor relations at United Bank for Africa (UBA).
“Of course, interest expense is rising as lenders reprice interest rate on loans to reflect the prevailing interest rate environment,” said Abiola.
Last year, a couple of bellwether firms were proactive to have taped the debt market to raise funds and strengthened their balance sheet amid sluggish economic growth.
For instance, MTN closed a N72 billion 266day commercial paper at a yield of 16 percent in November 2023, that’s some good discount to even the on-the-run sovereign treasuries/OMO bills of around 20 percent.
Issuances of commercial papers by firms rose sharply year-on-year (YTD) by 57.80 percent to N786.59 billion in June 2023 from N498.50 billion as at June 2022, according to data gathered by Afrinvest Securities.
Of course, the number of issuances followed the same growth trajectory as it moved to 104 in June 2023 from 55.
“The short-dated nature of CPs provided comfort for issuers to refinance and raise new capital while navigating uncertainty in the period,” said analysts at Afrinvest Securities Limited.
Financial obligations have been skyrocketing on the back of rising interest rates as the central bank has continued to cling to aggressive tightening policy as it seeks to curb a red-hot inflation.
Higher borrowing costs that balloon or bloat the cost of debt used in calculating the overall cost of capital fan bankruptcy risk especially when a company no longer has strong earnings to absorb interest payment.
Spiraling finance costs and foreign exchange revaluation losses due the abrupt devaluation of the currency have tipped some entities over the edge.
On February 27, 2024, Nigeria’s Monetary Policy Committee (MPC) made a bold move, increasing the monetary policy rate by a substantial 400 basis points to 22.75 percent.
Headline Inflation rate for January 2024 was 29.90 percent from 28.92 percent in December 2023.
Analysts say rising yields will make it harder for smaller companies to refinance and it will be harder for them to make debt payments since there is weak consumer demand and imported inflation.
The Nigeria 10 year government bond has a 18.412 percent yield, according to data from World Government Bonds.
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