Rising Interest Rates Will Quickly Put Pressure on These Firms

The Central Bank of Nigeria (CBN)  elected to raise the benchmark interest rate by 100 basis points to 16.65 percent last week (November 22).

However, such a decision taken to ensure price stability will put pressure on some firms who are carrying huge debt in their books, and these entities have not generated enough operating earnings to cover rising interest expenses.

For instance, International Breweries’ interest coverage ratio of 0.20 is lower than 2, which is the internationally accepted benchmark. In short, the brewers’ operating income of N1.46 billion in the nine months is lower than N7.10 billion finance cost.

The interest coverage ratio measures the ability of a company to pay the interest on its outstanding debt.

Flour Mills of Nigeria Plc interest coverage ratio of 1.36 is also lower than benchmark number 2 as the largest miller by market capitalisation saw interest expense spike by 139.31 percent in the period under review.

UAC of Nigeria Plc interest coverage ratio of 0.30 means operating income of N758.45 million is not enough to absorb N2.54 billion interest expense.

Ardova Nigeria Plc has a negative ratio, which means the downstream oil and gas giant who operates in a sector that suffers from lack of transformation policy posted operating loss. The company’s finance costs surged by 275.98 percent to N3.28 billion as at September 2022.

Ellah Lakes Nigeria Plc has not generated revenue or earnings since it was incorporated, which raises concerns about its ability to service the debt in its books.

Oando Nigeria Plc, an oil and gas giant, posted an operating loss of N74.79 billion as at December 2020, which cast doubt over its ability to reduce its huge debt.

Corporate borrowing cost has been climbing as interest rate rises, and there are concerns that spiraling interest expense could reduce profit.

Of course, a high interest rate environment balloons the cost of debt used in the calculation of weighted average cost of capital (WAAC), and a very high WACC undermines asset prices as investors dump stocks for fear of receding profit and lower dividend and switch to safe haven assets.

The largest firms in Nigeria incurred N3.71 trillion total debt (long and short term), which is 29.72 percent higher than 2021’s N2.86 trillion, according to data gathered by MoneyCentral.

86 percent of the largest and most liquid firms are impervious to a high interest rate environment as they have sufficient earnings to weather the storm.

The median interest coverage ratio for Nigerian companies stood at 11 at the end of September, which is however lower than 2021’s of 15, according to data from MoneyCentral.

The Nigeria 10 year government bond has a 14.48% yield, according to data from World Government Bonds.