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Wednesday, June 7, 2023

Caverton’s Balance Sheet Squeezed by High Debt Costs

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The balance sheet of Caverton Offshore Support Group Plc is not looking good as the leading provider of marine and aviation logistics services to local and international oil and gas companies lacks the capacity to pay its interest obligation.

The median interest coverage ratio for the company stood at 0.10 at the end of 2022, substantially higher than the pre-pandemic level of 0.0044 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.

The deteriorating financial health of the firms coincided with the rising borrowing costs as the central bank ramps up its inflation-fighting efforts with more interest rates.

And perhaps more worrisome is that policymakers will not pause hiking interest rates as price instability heightens due to insecurity in the farm producing regions, Russia and Ukraine war and currency volatility.

The CBN hiked the monetary policy rate (MPR) for the sixth-consecutive time over the last 12 months to 18 percent.

Headline inflation rate accelerated to 22.04 percent year on year (YoY) in March 2023, on the back of disruption in food supply and increases in import costs.

Analysts say Caverton has not recovered from the negative impact of  Covid-19 pandemic continues, which caused significant reduction in activities by International and Local Oil and Gas companies who are the major clients of Caverton.

There has been a sharp drop at the top line as sales fell by 15.91 percent to N29.22 billion as at December 2022 as the company posted back to back net losses of N5.16 billion and N4.34 billion in 2022 and 2021 financial years respectively.

It is also reeling from receding cash flow, which combined with recurring loses means it will not be paying dividends to its shareholders who have invested money in the entity with a view of generating return on their investments.

A cursory look at the books shows there exist negative cash flows from operating activity of N5.80 billion, and the company may have to embark on working capital management or raise further capital from its shareholders or tap the debt market.

If the company choses or opt for debt financing, it will be borrowing at much higher interest rates as a poor balance sheet discourages creditors who fear of a possible bankruptcy.

Debt to equity ratio increased to 268 percent in 2022 from 188.69 percent the previous year, which means the company finances its operations with debt.

Total debt in the balance sheet stood at N32.64 billion as at March 2022, while interest expense has hit N5.26 billion.

Caverton is one of Nigeria’s leading oil services companies providing solutions for a range of multinational companies across aviation and marine services.

Caverton Marine is one of the fastest growing indigenous shipping companies commenced operations in 1999 while Caverton Helicopters, a helicopter charter, sales and Maintenance Company was established in 2002.

Both companies were consolidated to form Caverton Offshore Support Group Plc on June 2, 2008.

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