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Nigerian Companies Borrowing Costs Fall Ahead of MPC Meeting

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Nigerian companies’ balance sheets are looking better, which validates their abilities to pay interest on debts even as market participants expect the central bank to hike interest rates to tame rising inflation.

The median interest coverage ratio for companies stood at 4.52 at the first quarter of 2022, however it is lower than the 8.10 recorded in 2021, according to data compiled by 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.

Interestingly, the combined interest expense or finance cost which these entities pay on money borrowed from banks was down 18.17 percent to N83.20 billion as at March 2o22.

The improved financial health among firms comes as the Monetary Policy Committee of the Central Bank of Nigeria (CBN) is expected to hold its third meeting of the year on the 23rd and 24th of May 2022.

Analysts at Cordros Securities in a note to clients say they do not rule out the possibility of a 50 basis point hike in the Monetary Policy Rate (MPC) given the hawkish rendition among global central banks and the indirect impact of the Russian/Ukraine crisis on domestic inflationary pressure.

The central bank policymakers have held the MPR at 11.50 percent, stating the need to attract foreign direct investment and price stability as the major reasons for their dovish stance.

When interest rates rise, it makes it more expensive for companies to raise capital. Making it more costly to raise capital can put a damper on growth and earnings. Of course, risky assets are beaten down due to selloff of shares as investors are most likely to  move their money to save haven assets.

Company balance sheets are healthy as executives took advantage of cheap debt to refinance during the Covid-19 crisis, which puts them in an advantageous position to weather rising interest rates.

Total debts (long and short term)  in the balance sheet of the largest quoted firms stood at N1.86 trillion as at March 2022, and that is 6.81 percent higher than 2021’s N1.74 trillion, according to data gathered by MoneyCentral.

MTN Nigeria Communications (MTNN) Plc, Dangote Cement Plc and 14 others raised N339.46 billion on commercial papers (CPs) in 2021.

Commercial papers are short-term debt securities typically issued by credit worthy corporations looking to raise funds from the public to meet working capital requirements, as a viable alternative to bank credit.

In simple terms, companies borrow money from the public by issuing short-term promissory notes, usually unsecured, with the promise of repayment at the date of maturity.

In April 2020, Dangote Cement successfully completed the issuance of N100 billion series 1 fixed rate 5-year bond at a rate of 12.5 percent, according to information on its website.

The largest producer of the building material and most capitalized firm in Nigeria has issued an aggregate N450 billion in commercial papers since 2018.

Early last year, BUA Cement issued N115 billion series 1 fixed rate senior unsecured bond under its N200 billion bond issuance programme, which became the largest in the Nigerian debt market.

A gradual recovery in the economy, rally in crude oil price, and price adjustments that strengthened sales led to strong growth in operating income and cash flow which covered interest expense.

The combined total operating profit of bellwether firms increased by 40.60 percent to N366.95 billion in the period under review from N260.30 billion the previous year.

Their combined sales spiked by 35.68 percent to N2.21 trillion in March 2022 from N1.63 trillion in March 2021.

The reason for this is the strong growth in the operating profit that most of the quoted companies have recorded so far, according to Ayodele Akinwunmi, equity research analysts at FSDH Merchant Bank.

“I expect this trend to continue in the near full all things being equal,” said Akinwunmi

Nigerian residents spent N108.47 trillion on household consumption in 2021 in nominal terms, according to recent data from the National Bureau of Statistics (NBS). The figure is higher than the N97.72tn recorded in 2020, showing an increase of 11 per cent amid double-digit inflation.

The Nigerian economy grew by 3.98 percent year on year (yoy) in the last quarter of 2021, according to the statistics body.

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