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Friday, March 31, 2023

Nigerian Firms Binge on Debt as Commercial Paper Issuance Soars

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After tapping the bond market at a record shattering pace since the start of 2020, Corporate Nigeria is becoming dangerously drunk on debt.

The total debt (long and short) of the largest listed non-financial companies from oil and gas to manufacturing, hospitality, and other conglomerates stood at N2.30 trillion as at December 2020, from N1.93 trillion as at December 2019, according to data gathered by MoneyCentral.

Their combined finance cost or interest expense reduced by 4.82 percent to N199.18 billion in December 2020 from N209.15 billion the previous year.

In 2020, Nigerian companies who are credit worthy took advantage of the low risk-free rate and interest rates to tap the debt market to raise funds with a view to strengthening working capital and funding future expansion plans.

Prior to 2019 participation of local corporates in the domestic bond markets were weak due to the crowding out effect of the government in the domestic market at high yields.

However, in the third quarter of 2019, the decision of the central bank to bar individuals and local firms from investing in its open market operations (OMO) market sent net treasury yields crashing.

“We had so much liquidity in the system due to the dovish tone of the central bank. In short, there was record issuance of commercial papers by companies in 2020,” said Gbolahun Ologunro, equity research analysts at Cordros Capital Securities Limited.

Amid the coronavirus pandemic that helped tip the country into a second recession in less than six years, Dangote Cement, the most capitalized company in the country, MTN Nigeria, the largest telecommunication firm, Nigerian Breweries, the largest brewer, and six other firms raised the sum of N478.4 billion from commercial paper issuances in 2020, according to information from major bond listings.

In the corporate finance parlance, it is cheaper to borrow than to raise equity because the borrowing enjoys a tax shield.

A breakdown of the debt numbers by sector shows consumer goods firms collectively incurred N1.18 trillion in debt in 2020, which represents a 3.15 percent increase from 2019’s N1.14 trillion.

A lot of consumer goods firms had deleveraged their balance sheet by raising capital via the rights issue to lower a few years ago, a proactive strategy that mitigates the negative effects of an economic downturn on their earnings.

Interestingly, these firms’ operating income can cover their finance costs as the industry average times coverage ratio stood at 2.88 times, which is higher than the generally international benchmark of 1.50.

The sub sector is reeling from spiraling inflation, a weak consumer purchasing power, devaluation of the currency, and high cost of doing business.

The three largest producers of the building materials-Dangote Cement, BUA Cement, and Lafarge Africa- saw their combined debt surge by 34 percent to N337.661 billion from N251.68 billion the previous year.

While Lafarge Africa saw a sharp reduction in debt on the back of deleveraging strategy as it spun off its beleaguered South Africa operations, related party transaction has ballooned BUA Cement’s obligations.

As a result of the sharp drop in crude oil price elicited by the coronavirus pandemic that hit global demand and disagreement between Russia and Saudi over output cut, the two largest upstream oil and gas firms- Oando Oils and Seplat Corporation Development Company-incurred total debt of N535.32 billion in 2020, which is an 18.10 percent increase from 2019’s N453.25 billion.

There is light at the end of the tunnel for indigenous oil majors as the recent rebound in the price of the commodity since January, gradual reopening of the economy, and acceleration in vaccine roll-out will help add impetus to the cash flows needed to honour obligations.

Companies Ramp up Borrowing as Yields start to rise

Most companies are ramping up borrowing because yields on fixed income securities have been rising steadily since the start of this year as the party is over for equities.

Analysts expect equities to continue on a downward trend as there is strong demand for higher yields and the need to attract foreign interest in Nigeria’s securities amid the dollar shortage.

The full-year earnings have not been particularly exciting so far and liquidity is expected to taper off in the second quarter (Q2)-2021 (N300 billion of OMO maturities are expected, in contrast to N1.6tn in Q1-2021), according to analysts at United Capital Limited.

“In all, the party may be over for stocks as investors gear up for the return of high-yielding debt papers,” said the analysts.

MTN Nigeria has announced the issuance of its Series III (180-day tenor) and Series IV (270-day tenor) Commercial Paper under its N200 billion Commercial Paper Issuance Programme.

In May 2020, Dangote Cement Successfully issued ₦100 billion series 15 and 16, and in September it raised N50 billion series 17 and 18.

In April 2020, the cement maker successfully completed the issuance of ₦100 billion series 1 fixed rate 5-year bond at a rate of 12.5 percent.

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