GCR Ratings has placed Dangote Industries Limited’s national scale long-term and short-term issuer ratings of AA+(NG) and A1+(NG), respectively, on Ratings Watch Negative over rising debt, which surpassed N14 trillion in the third quarter of 2024.
The figure is about 10 percent of Nigeria’s total national debt of N141 trillion in the same period.
Simultaneously, GCR also placed the national scale long-term issue rating of AA+(NG) accorded to each of Dangote Industries Funding Plc’s Series 1 Tranche A and Tranche B Bonds and Series 2 Bond on Rating Watch Negative.
The Africa focused rating agency said the Rating Watch Negative on Dangote Industries Limited (the group) and the bonds reflects the rise in debt and deterioration of the gearing metrics due to new working capital loans taken to procure crude oil for the refinery during its phased commissioning in 2024, compounded by the impact of the Naira devaluation on USD loans.
According to GCR, Group earnings were also compressed in the nine-month period to 30 September 2024, as the refinery was loss making during the commissioning phase, masking the profitability of other operating subsidiaries.
The group’s revenue which printed at N9.6 trillion or USD6.8 billion in 9M 2024 exceeded GCR forecast of total N4.7 trillion, primarily driven by the traded volumes of diesel, naphtha, aviation turbine kerosene (ATK), as well as strong cement and fertilizer sales.
However, GCR noted that the group’s earnings before interest tax depreciation and amortisation (EBITDA) margin fell below 10% compared to a five-year historical average of 33.7%, highlighting the inherently low oil refining margins and more so during the commissioning phase.
“The refinery has since ramped up capacity utilisation and has commenced the production of higher value products including PMS and polypropylene, which now support material foreign exchange earnings – over 30% of revenue.
“This notwithstanding, the expected improvement in margins could be curtailed by the ongoing tight competition which has necessitated price reductions and rebates to customers”.
GCR said in the rating note that the group gross debt (including shareholder loans) jumped above N14 trillion in 9M 2024 from N6.4 trillion, surpassing N5.4 trillion projection.
This was occasioned by the substantial increase in working capital funding for the refinery operations and the impact of Naira devaluation on foreign debt, the rating note shed light on the development.
Details from the rating note revealed that the group’s short-term debt rose to N8.2 trillion from N4.4 trillion, although refinancing risk is somewhat mitigated by the subordinated shareholder loans of N3.8 trillion that have been deferred and crude oil finance facilities that are backed by fast selling inventories.
The rating agency noted that there was a marked deterioration in the leverage metrics as of 9M 2024, with net debt to EBITDA at 18x, up from 5.6x and net interest coverage at 0.5x, down from 1.6x.
“We foresee some improvements in the metrics over the next 18 months as the refinery ramps up operations and profitability strengthens, but the earnings margin will remain weaker than pre-2024 levels”, GCR said.
DIL has substantial debt maturing over the next 18 months. GCR analysts however noted the deferment of some external loans to allow the group additional time to generate cash flows to repay debt, this portends liquidity strain.
“We expect an increasing use of short term debt given the inherent working capital intensity of refineries.
“Without sufficient refinancing arrangements in place, an excessive draw down of such short-dated loans without proportionate earnings growth could place further pressure on liquidity”.
GCR said the series 1 (Tranches A and B) and series 2 senior unsecured Bonds (cumulative N300 billion) were issued in 2022 by Dangote Industries Funding Plc, a sponsored special purpose vehicle.
“Being senior unsecured debt sponsored by DIL, the Series 1 Tranches A and B Bonds and the Series 2 Bond rank pari passu with all other senior unsecured creditors of the group.
“Therefore, the Bonds bear the same national scale long-term rating and outlook as accorded to DIL and any change in DIL’s long-term corporate rating would impact the Bonds ratings”. The Rating Watch Negative indicates the potential for a ratings downgrade in the near term if debt keeps rising without a concomitant increase in earnings.
Also, GCR hints the group rating will be downgraded if interest coverage remains below 1.25x and net debt to EBITDA remains above 5.5x. To resolve the rating watch, the group would need to demonstrate ability to profitably operate the refinery and generate sufficient earnings to repay maturing debt obligations, according to GCR Ratings.
