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Monday, March 27, 2023

Corporates Hit by Soaring Inflation Amid N4.5trn Bond Boom

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…borrowing costs surge 43.32% in 2022

Corporate Nigeria is carrying trillions of Naira in debt on their books as an aggressive monetary policy by the central bank forces them to pay more interest on money borrowed from financial institutions.

As at December 2022, non-financial corporate businesses held N4.51 trillion in debt on their books, which is 25.13 percent higher than 2021’s N3.60 trillion, according to data gathered by MoneyCentral.

Their combined finance costs surged by 43.32 percent to N825 billion in December 2022 from N576.75 billion the previous year, according to Data from MoneyCentral.

“I think many of them may have taken the debt in late 2021 and 2022 on a race to take advantage of the low interest rate environment. I guess some of them may be drawing down in the later part of 2022, thus reflecting the growth in debt size,” said Rasaq Abiola, former analyst at United Bank for Africa (UBA) Plc.

Between 2019 and 2021, a low interest rate spurred companies to take on money debt to finance their short term working capital needs and reduce existing obligations as central banks slashed monetary policy rate to shield their economies from the coronavirus pestilence.

However, starting from the first quarter of 2022 the central bank has been hiking the benchmark interest rate as it seeks to tame rising inflation brought on by the Russia and Ukraine war that saw a sharp rise in commodities prices and grains.

Of course, hitherto the global political tensions, Nigeria inflation rate had been rising on the bank of insecurity in the food producing regions which lifted food prices and devaluation of the currency.

The hiking cycle led to elevated bond yields and a high interest rate environment and stubborn inflation undermines profit margins, makes it much more difficult to raise debt capital, and forces firms to lay off, a recipe for a recession.

Nigeria’s inflation rate increased to 21.8% in January 2023 from 21.34% in the prior month, the highest increase since September 2005.

The Apex Bank has raised its benchmark lending rate by 100 basis points (bps) to 17.5 percent.

Nigeria 10-year bond yield was 14.23 percent on Wednesday March 8, according to over-the-counter interbank yield quotes for this government bond maturity.

Price and yield are inversely related and as the price of a bond goes up, its yield goes down.

In spite of the global geopolitical tensions and challenging operating and macroeconomic environment, the debt capital markets remained attractive in 2022.

In 2022, a total of N734 billion was raised across 19 corporate issuances vs N541 billion issuances in 2021, according to data from Chapel Hill Denham Limited.

Analysts at Chapel Hill Denham said given hawkish monetary stance and aggressive domestic borrowing by the Federal Government in 2023, they expect benchmark yield to remain range bound at the 14.50 percent-15.00 percent levels.

With a strong operating income that covers interest expense on loans or debt, firms have a healthy balance sheet and there are no threats to their going concerns.

MTN Nigeria, the largest telecommunication company, saw total debts in its balance sheet jump 39.81 percent to N689.67 billion in December 2022, and the increase in debt was driven by the N150 billion commercial paper and the N115 billion bond issuance during the year.

This raised the leverage ratio of the telco firm (net-debt to EBITDA) slightly to 0.32x (0.76x if lease liabilities are included in debt) in FY-22 from 0.26x (0.79x with lease liabilities) in FY-21, according to data gathered by MoneyCentral.

“Well, I think there may be some cool-off in the debt market for now as rising interest rates discourage debt offerings. Nonetheless, a few companies would still explore the debt market, including seeking commercial papers, which is short-term and may provide some sort of bridge finance pending when there is clarity in the rate environment,” said Rasaq.

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