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Thursday, May 26, 2022

Nigeria’s Most Indebted Corporates Signal China’ Evergrande Crisis

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China’s property developer Evergrande’s debt crisis that sent shockwaves across the world’s second biggest economy is an eye opener for Nigeria’s policy makers and shareholders to pay more attention to the financial health of companies.

Evergrande has gained notoriety for defaulting on its obligations as it has a total of $300 billion liabilities in the balance sheet, and perhaps more worrisome is that the company could be liquidated or cease to exist in the foreseeable future.

Some Nigerian firms had embarked on aggressive expansion plans that could land them in hot water as the proportion of debt in their capital structure significantly outstrips equity, and poor macroeconomic conditions and the coronavirus pandemic crisis have undermined cashflows that could have been used to service interest payment on borrowings.

Their leverage which as measured by debt to equity ratio, is worrisomely high, raising concerns about the sustainability of debt load.

Some are technically insolvent as total liabilities exceed assets, as they have been recording recurring losses over the past few years.

The debt-to-equity (D/E) ratio compares a company’s total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using. Higher-leverage ratios tend to indicate a company or stock with higher risk to shareholders.

International Breweries has a debt to equity ratio of 100.13 percent as at June 2021, according to MoneyCentral calculations. This means that debt is 1.01 times total borrowing. However, there has been a marked improvement in leverage as the brewer had issued rights issues to reduce its debt.

Notore Industries Chemical Industries Plc’s total long-term debt (short and long term), is 2.58 times equity, which translates to a debt to equity ratio of 258 percent for the period ended June 2021.

The company’s sales have been swallowed by operating expenses, which led to an inevitable loss of N15.84 billion.

Medview Airline Plc, the only listed airline in Africa’s largest economy, has a total debt loan of N1.80 billion and it is technically insolvent with negative shareholders fund of N2.67 billion as at December 2019.

Of course, Medview Airline could be in a more precarious situation as planes were grounded during the lockdown period imposed by the government to curb the spread of the coronavirus pandemic in 2020.

C and L leasing Plc’s has a debt to equity ratio of 268 percent as at June 2021, but it is not under any threat of bankruptcy.

Analysts say the shareholders should go beyond the surface and check out the integrity of the company and the assurance that is being provided by the auditor.

“They should carry out the expectations of stakeholders. The financial journalist is expected to do more of market intelligence stories to enable investors to make informed decisions,” said one analyst who doesn’t want his name mentioned.

Bellwether companies such as MTN Nigeria, BUA Cement, and Dangote Cement who had raised capital to capital expenditure plans and refinance existing loans have strong free cash flows to meet their obligations.

The majority of bellwether firms have a favorable time interest coverage ratio that indicates they have enough operating income to cover up interest expense.

Nigerian companies had taken advantage of a low interest rate environment to raise debt to bolster working capital and consolidate their position in the market.

They have a combined total borrowing of N2.81 trillion in June 2021, which is 2.63 percent higher than 2020’s N2.73 trillion, according to data gathered by MoneyCentral.

However, there has been an uptick in bond yields since the start of the year that could make refinancing more expensive.

The Nigeria 10 years government bond has a 12.089 percent yield as at October 21, according to data from World Government Bonds.

The Nigeria 10 years government bond reached a maximum yield of 15.856 percent (4 December 2018) and a minimum yield of 4.048 percent as at November 3, 2020.

Bond prices and yields move in opposite directions.

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