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Friday, August 12, 2022

Nigerian Companies Debt Pile Hits N1.75trn on Oando, Dangote, Others

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Nigerian non-financial corporate debt pile is around N1.75 trillion, and at about 1.02 percent of gross domestic product, it has never been bigger.

The pandemic poses especially big economic hazard to companies with highly leveraged balance sheets and deteriorating revenue, and the aftermath could be raising default rates and delinquencies.

The N1.75 trillion compares to Federal Government’s total debt stocks of N31 trillion, and the similarity between both parties is that they are addicted to borrowing.

Debt is cheap and tax deductible so companies are using more of it to boost earnings per share EPS. But it doesn’t magnify the value of the business.

The Nigerian government has stepped in to make borrowing easier. An accommodative policy environment has sent treasury bill yields crashing to an unprecedented levels, which paved the way for corporates to issue debt instruments.

The central bank has hiked the minimum loans to deposit ratio, a policy that forced the largest banks to redirect their focus towards growing their loans books, hence bringing down borrowing cost.

However, the difficult macroeconomic conditions could discourage firms from taking advantage of the low yield environment to tap the debt market and grow their business.

The coronavirus pandemic that disrupted business activities across the country and inherent uncertainties such as weak consumer purchasing power, decrepit infrastructure and poor government regulations means firms may find it difficult to generate returns needed to service interest on loans.

Too much loans could push a company’s total debt past earnings before interest taxation depreciation and amortization.

As it is, some companies have a highly leveraged balance sheet, and deteriorating revenues and cash flows put them in even more in a precarious debt pile.

The sudden loss of revenue faced by airlines and tourism related business, makes them more vulnerable than other sectors to Covid-19 shocks, and more worrisome is that they have very low credit ratings because they don’t have enough collateralized assets like bellwether juggernauts.

For instance, the total debt of the largest airlines, and tourism related business as at September 2020 stood at N74.15 billion, while their combined revenues have fallen by 31.26 percent to N41.12 billion, and consequently, they posted a combined net loss of N10.15 billion.

Four years ago, the consumer goods firms raised capital via rights issue and settled foreign currency loans, many thanks to the introduction of a new foreign exchange regime by the central banks that was instrumental in lifting the country out of the recession.

While the consumer goods firms are not beleaguered by debt at the moment, weak consumer income and deteriorating profit margins have soured the appetite for more debt financing needed to fund future expansion plans.

 

The oil and gas majors too are grappling with foreign currency loans, and the sudden crash in oil price due to Covid-19 induced headwinds and misunderstanding between Russia and Saudi Arabia over output cuts have forced them to cut back on dividend payment.

The hardest from the crisis is Oando Nigeria Plc, a major player in the upstream oil and gas industry

In 2014, the company borrowed money to facilitate the acquisition of ConocoPhilips for $1.5 billion, and it has not recovered from the strategic mistake as debt mounts.

Today Oando has total debt of N193.07 billion, as it has accumulated losses of N118.12 billion, which means it can’t pay dividend to shareholders.

The operators in the industrial goods sector have a collective debt of N549.74 billion as at September 2020, and some companies, through deleveraging strategy, are able to reduce obligations.

Last year, Lafarge Africa, the second largest producer of the building material in Africa, sold its South Africa’s subsidiary with a view to bolstering working capital and reducing its debt.

The strategy has paid off as Lafarge’s finance cost has reduced by 54.51 percent to N7.54 billion as at September 2020, while total debt fell by 17.15 percent to N53.44 billion in the same period.

Dangote Cement, the most capitalized company in Africa’s largest economy took advantage of a record low borrowing cost as it tapped the debt market so as to roll over existing debt and magnify working capital.

In April, the cement maker successfully completed the issuance of ₦100 billion series 1 fixed rate 5-year bond at a rate of 12.5 percent.

The following month, it completed the issuance of N100 billion series 15 and 16 Commercial Paper Notes.

That makes Dangote the largest bond and commercial issuer in Nigeria’s debt capital market.

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