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Manufacturers Short Term Debt Raises Liquidity Concerns

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As interest rates rise due to an aggressive monetary policy by the central bank that seeks to squash inflation, manufacturers are shifting towards short term debts which have relatively lower rates to finance their operations.

The predilection for short tenured loans stems from the fact that firms need it to finance working capital, which has a short cash conversion cycle.

Drilling down the books of entities across sectors shows their total current liabilities exceeds cash and cash equivalent, but what becomes important is to be sure that their conversion cycle is not deteriorating.

According to calculations by MoneyCentral, average cash ratio of non-financial firms who are listed on the Nigerian Stock Exchange stood at 0.69 in December 2022 from 0.68 as at December 2021.

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.

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.  Lenders, creditors, and investors use the cash ratio to evaluate the short-term risk of a company.

There is N3.89 trillion short term debt in the balance sheet of the most liquid and capitalised manufacturers as at December 2022, and that is 14.20 percent higher than 2021’s N3.41 trillion, according to data compiled by MoneyCentral.

However, these firms collectively generated N1.20 trillion in cash and cash equivalent, which is lower than total currency liabilities or short term debt of N3.89 trillion, according to data gathered by MoneyCentral.

Short-term debt, also called current liabilities, is a firm’s financial obligations that are expected to be paid off within a year.

“Normally, longer tenured loans have higher interest, so in an environment where rate is elevated, companies often seek to lower their cost by using shorter tenured loans, which would attract relatively lower interest rates,” said an analyst who does not want his name mentioned.

“Likewise, it is easier to refinance and pay down short term loans when the interest rate starts coming down, as against locking into long tenured ones  that may have punitive fees and cost to finance,” said the analysts.

The central bank has been hiking the benchmark monetary policy (MPR) rate since the first quarter of 2022 to tame red-hot inflation worsened or exacerbated by the war between Russia and Ukraine.

And that led to elevated bond yields as firms tapped into unsecured shorter term debt to finance their payroll, inventories, and other short-term liabilities.

Nigeria 10 year bond yield was 14.23 percent on Monday March 15, according to over-the-counter interbank yield quotes for this government bond maturity, according to data from World Government Bonds. And that compares to a yield of 4 percent on November 4, 2021.

The Apex bank had raised its benchmark lending rate by 100 basis points (bps) to 17.5 percent as annual inflation rate accelerated to 21.82 percent in January 2023.

As of December 2022, N650 billion worth of commercial papers were raised by corporates, according to data from Chapel Hill Denham Limited.

“Given the hawkish monetary stance and the aggressive domestic borrowing by the federal government in 2023, we expect benchmark yields to remain range bound at the 14.50 percent-15 percent levels,” said analysts at Chapel Hill Denham.

Dangote Cement has a cash ratio of 0.271; BUA Cement Plc, 0.186; Lafarge Africa, 0.701; VitaFoam, Nestle Nigeria, 0.54; Nigerian Breweries, 0.054; International Breweries, 0.072; HoneyWell, 0.102 percent; Champions Breweries, 0.78; Dangote Sugar, 0.56; Nascon Allied 0.42; BUA Foods, 0.10.

Others are: Beta Glass, 0.61; Berger Paint, 0.33; CAP, 0.49; Fidson Healthcare, 0.11; Neitheth Pharmaceutical, 0.12; May and Baker, 0.55; Notore chemicals, 0.004.

Beleaguered firm Notore Chemicals has total current liabilities of N87.79 billion.

International Breweries cash and cash equivalent of N19.64 billion is lower than N266.10 billion total short-term debt.

Nigerian Breweries has cash and cash equivalent of N22.18 billion, and that compares with total current liabilities of N407.70 billion.

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