Nigerian Firms Can Service Debt as Interest Coverage Ratio Rises

Nigerian largest firms are not susceptible to financial risk as they have enough earnings to cover interest payment on debt, which gives them the leeway to borrow more in the future.

According to the analysis of 25 NGX firms that have declared results so far excluding banking and finance companies, the aggregate interest coverage ratio for 2021 increased to 15.12 from 5.52, according to MoneyCentral calculations.

The interest coverage ratio is calculated by dividing earnings before interest and tax (EBIT) with the interest payment in a given period. A higher ratio is desirable since it implies a better ability to service the debt and also a greater comfort in borrowing more in the future.

An uptick in business activity buoyed by reopening of the economy and relaxation of social distancing measures combined with hike in the price of products helped underpinned companies’ cash flows needed to meet future financial obligations.

During an economic downturn, interest coverage deteriorates as earnings are beaten down to the extent, they are insufficient to pay interest on money borrowed.

The Nigerian economy expanded by 3.98 percent year on year (yoy) in the fourth quarter (Q4) -2021 and 3.4o year yoy in FY-2021, according to data from the National Bureau of Statistics (NBS).

Analysis of the Q4 2021 GDP report showed the manufacturing sector real GDP closed the year positive, rising by 3.35 percent y/y in 2021 from a contraction of 2.75 percent (y/y) in 2020, according to the NBS.

The cumulative operating profit of these firms spiked by 44.5o percent to N1.83 trillion in December 2021 from N1.26 trillion as at December 2020.

In 2020, companies took advantage of the unorthodox policies of the Central Bank of Nigeria (CBN) to raise funds from the local debt market and reduce refinancing risk.

However, the gradual rise in bond yields mid-2021 slowed down on borrowings, and a possible rate hike by the central bank will not bloat interest payment.

Nigerian firms debt (both long- and short-term liabilities) was N2.70 trillion as at December 2021, which is 48.81 percent higher than 2020’s N1.81 trillion, according to data gathered by MoneyCentral.

“The interest rate was favorable to them in 2020 but they did not borrow that much in 2021 as bond yields began to go up,” said Ayodeji Ebo, analyst at Chapel Hill Denham Limited.

“They are already locked in and not too affected by whatever happens to interest rates because they have raised long term bonds,” he adds.

Presco Nigeria Plc, one of the largest Agric firms in the country, had proposed up to N30 billion Series 1 Bond Issue.

The Nigeria 10-year government bond has a 10.422 percent yield, according to data from World Government Bonds.

The largest cement makers (Dangote Cement, BUA Cement, and Lafarge Africa) collectively incurred N766.14 billion in total debt as per balance sheet, which is 4.79 percent higher than 2020’s N762.49 billion.

Between April 2020 and May 2021, Dangote had completed a total of N150 billion bond, yet it remains relatively ungeared with a Net Debt to EBITDA of 1.16x vs. MENA average of 2.98x, providing an exceptional leverage opportunity for further expansion, and thus, capture market share across its regions of operation.

MTN Nigeria’s total debt’s total debt was down 5.35 percent to N493.26 billion in December 2021 from N521.11 billion the previous year.

The telecoms giant saw operating profit increase by 37.03 percent to N584.74 billion, as it maintains the largest share of mobile subscribers in Nigeria.

The most capitalized and liquid consumer goods firms saw total debt rise by 9.34 percent to N521.83 billion in December 2021 from N477.23 billion as at December 2020.

Seplat Energy, the largest listed upstream oil and gas firm in Africa’s largest economy saw total debt increase by 18.84 percent to N315.91 billion as at December 2020.

The oil and gas giant turned a profit in 2021 and rising crude oil price since the start of last year has been adding impetus to cash flow giving it the leeway to meet financial obligations and drill more oil. The Ukraine-Russia war that is responsible for oil prices exceeding $100 a barrel means the future is bright.

Analysts say rising inflation could prompt the central bank to hike interest rates that would discourage Nigerian firms debt from ballooning  to fund future expansion plans.

Central Bank Rate is 11.50% (last modification in September 2020).