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Soaring Borrowing Costs Heap Pressure on Indebted Nigerian Firms

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Higher inflation exacerbated by Russia Invasion of Ukraine that forced the central bank to raise its benchmark interest rate incessantly is threatening to balloon the costs of serving corporate bank loans amid rising borrowing costs.

The latest rate hike from the Apex bank will make business debt more expensive, which in turn will be a drain on cash flow, while contemporaneously  casting a pall on future profit growth.

Already, the finance costs or interest expense is a huge burden for the largest firms, but their operating incomes still cover interest expenses.

Analysts are of the view that rising borrowing costs may erode profitability if the regulator continues to adopt an aggressive tightening stance.

The interest expense of bellwether firms rose by 52.29 percent to N350.24 billion as at September 2022, according to data gathered by MoneyCentral.

Total debt (long and short term) in their balance sheet stood at N3.71 trillion in September 2022, which is 29.72 percent higher than 2021’s N2.86 trillion.

The median interest coverage ratio for Nigerian companies stood at 7.71 in 2022, which is lower than 13.03, according to data from MoneyCentral.

The figure is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues. Analysts typically prefer a coverage ratio of 3 or higher.

There are concerns that a continuous hike in the interest rate by the central bank further shrinks the interest coverage ratio below the threshold.

The central bank, through the Monetary Policy Committee (MPC), has increased interest rates to 15.5 per cent, the highest in 20 years.

The inflation rate in Nigeria continued on an upward trend as it surged to 20.77% in September 2022, up from 20.52% recorded in August.

The Nigeria 10 year government bond has a 14.80 % yield, according to World Government Bond.

That compares with a yield of 4.80 percent as at October 22, 2020, before the pandemic snaked out of China and roiled the global economy.

A major concern is a business lending market that may quickly dry up as banks pull back on loans to conserve capital and limit risk, and an increasingly smaller percentage of business owners meet stricter credit requirements.

Of course, firms took advantage of a low interest rate environment a few years ago to borrow for the purposes of refinancing existing loans, fund future expansion plans, and strengthen their balance sheet.

Dangote Cement Plc, Shelter Afrique Limited, Presco Plc, Ardova Plc, Access Bank Plc, and Eat and Go SPV Plc collectively issued corporate bonds worth N246.28 billion.

Dangote Cement, the biggest producer of the building material and most capitalised firm, has N1.46 trillion debt in its balance sheet as finance cost spiked by 147.87 percent to N75.23 billion as at September 2022.

In the first months of the year, the cement maker completed the issuance of N116 billion series 2 fixed rate senior unsecured bonds under its N300 billion multi-instrument issuance programme.

MTN Nigeria saw total borrowing rise by 37.63 percent to N678.85 billion in September 2022 from N493.85 billion the previous year. Interest increased by 39.21 percent to N145.71 billion as at September 2022.

The largest telco firm in Nigeria plans to issue up to N100 billion series 1 bond under its new N200 billion bond issuance programme. It has received approval to launch the series 1 (Tranche A) 4-Year Fixed Rate Bond and series 1 (Tranche B) 10-Year Fixed Rate Bond under the programme.

Flour Mills of Nigeria (FMN) Plc saw total debt surge by 210.10 percent to N461.51 billion in September 2022 from N148.82 billion as at September 2021. Finance costs 139.31 percent to N22.32 billion in the period under review from N9.32 billion the previous year.

International Breweries Plc interest expense surged by 273.33 percent to N7.10 billion in September 2022 from N1.90 billion the previous year; total debt was down 34.26 percent to N115.31 billion as the brewer had raised capital via a rights issue to reduce debt.

BUA Cement Plc finance cost spiked by 245.25 percent to N2.84 billion in the period under review from N824.11 million the previous year. Total debt was up 95.57 percent to N163.30 billion as at September 2022.

Some consumer goods firms are lowly geared (low amount of debt to equity), which means they are not exposed to financial risk.

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