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Interest Expense Falls for Nigeria Firms Who Refinanced to Lock in Low Yields

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Nigeria’s non-financial firms have enough cash to make interest payments on their debts that have reduced on the back of a low yield environment buoyed by the central bank’s dovish stance.

Many blue chip companies took advantage of the low yield environment over the past 2 years to raise funds to retire existing debt and strengthen working capital while pursuing aggressive expansion plans.

And the slowdown in finance cost has supported profit growth and the ability to fulfil obligations means companies are not susceptible to bankruptcy or seizing to exist in the foreseeable future.

The ratio of a firms’ interest expense to earnings before interest and tax-the so-called interest coverage ratio-has significantly improved across all non-bank financial firms, according to data gathered by MoneyCentral.

The median interest coverage ratio is the highest in the real consumer goods, cement and conglomerates, and healthcare sectors. Consumer goods look to be less vulnerable to bankruptcy risk, with nearly all of them sporting an interest coverage ratio of 920 times operating income. That means those companies are earning more than 920 times the cost of their interest payments.

Most consumer goods firms had gone to the market a few years ago to raise rights issues to reduce debt in their balance sheet, and some do not have borrowings in their books or need not pay interest.

“They are enjoying the low interest rates of last year, but you may not see much more borrowing this year because rates are rising,” said Gbolahan Ologunro, equity research analysts at Cordros Securities Limited.

The combined finance cost of the companies reduced by 5.02 percent to N277.50 billion in September 2021 from N292.16 billion as at September 2020, according to data gathered by MoneyCentral.

Combined operating profit or earnings before interest and tax stood at N1.30 trillion in September 2021, which is 52.18 percent higher than last year’s N858.63 billion.

Of course, there has been a rally in bond yields since the start of the year as investors dumped equity for safe haven assets that had been beaten in the last two years due to the decision of the central bank to bar institutions from buying new issues of its Open Market Operations (OMO).

Nigeria 10-year bond yield was 11.92 percent on Friday November 12, according to over-the-counter interbank yield quotes for this government bond maturity.

Analysts are of the view that the reopening of the economy helped propel sales that is enough to absorb interest expense.

 The Nigerian economy grew by 5.01 percent year on year (yoy) in the second quarter (Q2 2021), according to the latest data from the National Bureau of Statistics (NBS).

The cumulative total borrowings or debt of non-financial firms stood at N2.87 trillion in September 2021, which is 4.46 percent lower than 2020’s N3.12 trillion, according to data gathered by MoneyCentral.

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