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Monday, June 5, 2023

Nigerian Firms Dash for Cash in Liquidity Push Ahead of Elections

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Nigerian companies are increasingly maxing out credit lines and resorting to commercial paper and bond issuances, as they seek to grab cash amid an uncertain 2023 electoral cycle, rising bond yields and an economy still growing below trend.

“A lot of firms tap into short-term finance to continue the purchase of raw materials. It is a hedging strategy to edge against supply chain disruption and foreign exchange risk,” said Gbolahan Ologunro, equity research analyst at Cordros Securities.  

“We will have a liquidity crisis if they are not able to convert those raw materials into finished products,” said Ologunro.

Commercial paper issuances hit N487.0 billion in half-year (H1) 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.

The average cash ratio of the largest companies stood at 0.43 percent in June 2022 from 0.44 percent, according to data gathered by MoneyCentral.

The cash ratio is a liquidity measure that shows a company’s ability to cover its short-term obligations using only cash and cash equivalents. The ratio is more conservative than other liquidity ratios because it only considers a company’s most liquid resources.

A calculation greater than 1 means a company has more cash on hand than current debts, while a calculation less than 1 means a company has more short-term debt than cash.

It is noteworthy that the combined total current liabilities in the books of firms stood at N5.50 trillion as at June 2021, which is 4.07 times cash and cash and cash equivalent.

However, cash and cash equivalents are not the only source of meeting obligations on current liabilities, rather inventories are also current assets, especially for fast moving consumer goods (FMCG) firms, who are able to quickly convert inventories into cash to meet current obligations.

“Yes, that may be true for some companies and some are smart to have lines of credit with banks as a measure to bridge such liquidity gaps when they arise. However, some companies’ position may reflect their cash flow management strategy of leveraging payables to fund their operations while maintaining a very low cash conversion cycle,” Abiola Rasaq, former economist at United Bank for Africa.

“Hence, whilst on the surface high current liabilities against lower current assets may be a sign of liquidity crisis, it is important to learn the strategy of the company,” said Abiola.

MTN Nigeria said last week it has obtained regulatory approval from the Securities and Exchange Commission (SEC) to issue a $233.7 million (N100 billion) Series I bond.

Data gathered by MoneyCentral shows that non-financial corporate businesses held up to N2.7 trillion of long term liabilities in their balance sheet in the first half, as firms took advantage of the low yield environment between 2019 to 2021, but the high interest rates buoyed by central bank’s hawkish tone means they might put a brake on borrowing since they are likely to pay more to service those debts.

While earnings in different sectors for listed firms are showing signs of coming through the pandemic, they are not out through the woods yet.

This is because bellwether firms have burned cash so as to ramp up the purchase of raw materials as they had anticipated continuous rise in price of the grains brought on by the war between Russia and Ukraine and unfavorable change in foreign exchange.

Analysts say the liquidity challenges is a major concern given how much debt has been raised and how much liabilities are in the balance-sheet, but they added that firms will meet obligations to short term suppliers in so far as they are able to produce and sell those products.

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