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Corporate Debt Surges Over N2trn as Rate Hikes Balloon Finance Cost

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As the central bank pushes interest rates higher in its campaign against inflation, firms are starting to pay more interest on outstanding debt, as they are carrying trillions of Naira of debt in their books.

This is because banks now have higher lending rates and most of them are even repricing existing loans in response to the higher interest rate environment.

It will be recalled that companies took advantage of a low yield environment  in 2019 up till the first half of 2021 to tap the debt market as they sought to bolster their working capital and retire existing borrowing.

As of the first six months of 2022, non-financial corporate businesses held up to N2.7 trillion of long term liabilities  in their balance sheet, from 2021’s N2.34 trillion, according to data compiled by MoneyCentral.

Their combined finance costs or (the interest they pay on money borrowed) spiked by 57.32 percent to N233.25 billion in June 2022 from 148.27 billion the previous year.

“Borrowers are now faced with higher cost of borrowing, especially small and medium scale enterprises, which have less bargaining power and which are vulnerable to loan repricing of banks due to their limited bargaining capacity in negotiating loan terms with lenders,” said Abiola Rasaq, former economist at United Bank for Africa Plc.

“It is a new reality which may undermine the profitability of some companies, depending on their extent of leverage and ability to pass the increase in financing cost to finance consumers of their products, in the form of higher prices, especially at a time when consumers’ wallets is notable pressured, with the paradox of stagnant or declining income levels and inflationary erosion of purchasing power,” said Rasaq.

The Central Bank of Nigeria, CBN raised the monetary policy rate (MPR), which measures interest rate, from 13 percent to 14 percent.

The monetary policy rate (MPR) is the baseline interest rate in an economy, every other interest rate used within an economy is built on it.The new interest rate comes barely two months after the apex bank raised the interest rate to 13 per cent.

The consumer price index (CPI), which measures the rate of change in good and service prices, increased to 19.64 percent in July 2022, the highest since 2005.

The Nigeria 10 year government bond has a 12.796 percent yield, according to data from World Government Bonds.

In a high interest rate environment, valuations are suppressed because of rising cost of debt used in the calculation of the weighted cost of capital (WAAC), which is the discount rate used in estimating future cash flow stream.

 It is worth noting that MoneyCentral findings shows firms are not exposed to financial risk because the reopening of the economy paved the way for them to have enough operating earnings to cover interest expense and report profit growth, however, their ability to meet obligations are deteriorating.

The median interest coverage ratio for Nigerian companies stood at 9 as at June 2022, substantially lower than 2021’s 16.65, according to data from MoneyCentral. The figure is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues. Analysts typically prefer a coverage ratio of 3 or higher.

Dangote Cement, the largest producer of the building material, saw finance cost surge by 147.87 percent to N75.23 billion as at June 2022. Total debt in the balance sheet stood at N634.41 billion, which is 9.76 percent higher than 2021’s N577.75 billion.

The most capitalised firm in Africa’s largest economy has completed the issuance of N116 billion series 2 fixed rate senior unsecured bonds under its N300 billion multi-instrument issuance programme.Last June, the cement producer had issued N50 billion series 1 fixed rate senior unsecured bonds.

MTN Nigeria, the largest telecommunications firm in Nigeria, saw interest income spike by 41.19 percent to N90.74 billion in June 2022. Total debt increased by 30.96 percent to N646.11 billion in June 2022 from N493.36 billion in June 2021.

The leading telecommunication firm is seeking approval from the Securities and Exchange Commission to raise another N200 billion via bond issuance for network expansion.

Flour Mills of Nigeria Plc’s finance cost was up 79.08 percent to N8.15 billion in the period under review from N4.55 billion the previous year. Total debt surged by 98.01 percent to N294.69 billion in June 2022 from N148.82 billion the previous year.

Findings by MoneyCentral shows that firms are unperturbed by the Russia and Ukraine war and macroeconomic uncertainties as they raced to the fixed income market in the first six months of the year.

For instance, commercial paper issuances hit N487.0 billion in half-year (HI) 2022, and that is 30.11 percent higher than 2021’s N374.30 billion at an average rate of 11.30 percent, according to data gathered by Afrinvest Securities.

However, there are indications the high interest rate environment and uncertainties surrounding the 2023 elections might force corporates from putting a brake on borrowing.

“I think the demand for loans may slow down on the back of high rates, as the new cost of debt may undermine the attractiveness and profitability of some expansive new projects,” said an analyst who does not want his name mentioned.

“Interestingly, banks are also likely to slow down the supply as we approach election circle, with increasing political and macroeconomic uncertainties,” said the analyst.

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