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Tuesday, March 21, 2023

FX Risk Remains Low for MTN Nigeria

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Foreign exchange (FX) risk remains low for MTN Nigeria as 91.10 percent of borrowings are in local currency, which means the balance sheet will not be burdened by swelling liabilities on account of naira devaluation, according to research house Chapel Hill Denham Limited.

Foreign exchange risk arises when a company engages in financial transactions denominated in a currency other than the currency where that company is based.

The company’s credit rating remains top-notch at AAA by GCR, and we believe this will be sustained through FY-22E considering the compelling outlook.

MTNN currently has N200bn issued in corporate debt; a 7-year 13% N110bn (MTN 2028) issued in May 2021 and a 10-year 12.75% N90bn (MTN 2031) issued in October 2021.

“MTNN has a relatively low leverage, ending FY-21 with a net debt-to-EBITDA ratio of 0.3x. We note that this calculation does not capture lease liabilities. Accordingly, with lease liabilities, the leverage comes to 0.8x, still below 2.2x for Airtel Africa,” said analysts at Chapel Hill Denham.

A low leverage means there is more room for borrowing as the company is not susceptible to financial risk, but much debt in the capital structure means the firm is staring at bankruptcy in the face if it is unable to meet obligations.

The country’s currency is volatile, with the central bank being forced to devalue the currency to protect the external reserve from the vagaries of crude oil price and attract foreign direct investment.

Capital controls imposed by the regulator have forced investors to dump Naira assets in search of attractive yields in emerging markets and developed countries.

Another round of devaluation is looming because the International Monetary Fund (IMF) urged policy makers to weaken the currency and hike interest rates to fend off an inevitable  interest rate hike by the United States Feds.

Companies took advantage of a low yield environment two years ago and borrowed money from the debt market to pay back existing obligations and bolster working capital.

However, there is illiquidity in the corporate bond market, and average yield across the yield curve reversed higher, albeit faster than initially projected in the second quarter of (H1-2021).

Interestingly, the resurgence of interest rate in the fixed interest market undermined corporate issuance in 2021 as compared to 2020 debt binge when yields were low.

According to data from FMDQ, total corporate issuances in FY-2021 declined 21.1 percent year on year (y/y) to N456.5 billion, from N552.7 billion in FY-2020.

“We believe corporate issuers were cautious of rising interest rates, which stifled their appetite to raise new debt capital,” said analysts at United Capital in a recent note to clients.

“Particularly, large corporate borrowers had alternative funding sources particularly for companies affiliated with foreign parents,” said the analysts.

The average yield across the yield curve climbed to 10.2% as of Dec-2021, up 505bps YTD from 5.1 percent in full year (FY-2020). In the international debt market, the government issued $4.0 billion worth of Eurobond to finance its 2021 budget deficit.

The Nigeria 10Y Government Bond has a 11.978 percent yield as of February 4, 2022, according to data from World Government Bonds.

“Heading into 2022, investors seek to get clarity on the direction of interest rates in order to properly manage their fixed income exposures,” said analysts at United Capital.

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