Moody's Changes Outlook to Stable on 3 Nigerian Corporates Following Sovereign Rating Action

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Thursday, December 02, 2021 / 05:58 PM / by Moody's Investors Service  / Header Image Credit: Ecographics


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Moody's Investors Service ("Moody's") affirmed the ratings of three Nigerian non-financial corporates and changed the outlook to stable from negative.

 

The rating actions follow Moody's sovereign outlook change of the Government of Nigeria's ratings on 29 November to stable from negative and affirmation of the B2 long-term foreign-currency issuer ratings. Nigeria's Ba3 local-currency and B2 foreign-currency ceilings remain unchanged.

 

Related Link: Moody's Changes Nigeria's Outlook to Stable, Affirms B2 Ratings - Dec o2, 2021

 

Moody's has subsequently affirmed the B2 corporate family rating (CFR) and changed the outlook to stable from negative on the following companies:

 

Moody's has also affirmed the national scale CFR of DCP at Aa3.ng.

 

Ratings Rationale

 

Change Of Outlook To Stable From Negative

 

The change of the outlook on the ratings of these companies to stable from negative is a direct consequence of the change in outlook on the ratings of the Nigerian sovereign to stable from negative. These companies generate a material portion of their earnings and cash flows in Nigeria and are materially exposed to Nigeria's political, legal, fiscal and regulatory environment. While DCP and IHS Holding have prudent financial policies, moderate to low leverage, strong business profiles with some geographic diversification outside of Nigeria and strong liquidity, their ratings are constrained by Nigeria's B2 foreign currency ceiling. Nigeria's B2 foreign-currency ceiling limits the ability of a domestic corporate that has foreign currency obligations to be rated higher, which constrains a company's rating.

 

Dangote Cement Plc

 

The affirmation of Dangote Cement plc's (Dangote Cement) B2 CFR and stabilization of the outlook reflect the meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level. DCP has a very strong credit profile, however, as Africa's largest cement producer, it has material production concentration to Nigeria which generates around 71% of revenues.

 

The cement industry is energy intensive and the mining and manufacturing process for cement production consume large amounts of coal, electricity and water. While DCP's operations are exposed to high environmental risks, its production meets domestic emission standards and the company has implemented measures to increase energy efficiency and transition to cleaner natural gas and alternative fuels for its power needs. In terms of corporate governance, the company is 85.1% owned by Dangote Industries Limited, which is owned by its founder and chairman, Aliko Dangote. This does present key man risk in Moody's view given that Mr. Dangote continues to play a pivotal part in the fortunes of the company. Despite DCP's conservative leverage, the company pays material dividends to its shareholders which we consider as a risk in light of its reliance on short term debt.


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IHS Holding Limited

 

The affirmation of the B2 CFR reflects the affirmation of the sovereign rating at the same level. The CFR on IHS Holding Limited, the leading independent mobile tower operator in Africa, is constrained by the concentration of EBITDA generation in Nigeria. For the twelve months ending September 2021, Nigeria accounted for over 70% of group EBITDA, even when factoring in the announced acquisition of a portfolio of towers in South Africa, which is expected to complete in early 2022. A key risk for IHS Holding in Nigeria is the limited US dollar availability, which can limit its ability to convert and repatriate earnings outside of the country to service its US dollar debt obligations. The rating action also acknowledges IHS Holding's continued strong performance in Nigeria as well as its good liquidity, including sizable cash balances held outside of Nigeria of $224 million (equivalent) as of 30 September 2021, full availability under a $270 million liquidity facility and a $500 million bridge facility for certain acquisitions. The cash balance outside of Nigeria increased after September through proceeds from IHS Holding's IPO and new bond issuance.

 

Seplat Energy Plc

 

The affirmation of the B2 CFR rating reflects the affirmation of the sovereign rating at the same level. As an indigenous exploration and production company in Nigeria, Seplat generates all its revenue in Nigeria. The company's ratings consider the close ties to the Nigerian economy and government, such as the requirement that proceeds from the sales of oil and gas have to pass through the Nigerian banking system for 24 hours before they are allowed to be moved offshore and reliance upon Nigerian government-owned entities, the Nigerian Petroleum Development Company and the Nigerian Gas Marketing Company, for timely payment when it comes to cash calls for meeting both operating and capital expenditures.

 

Seplat has very high negative exposure to environmental risks mainly driven by very high carbon transition and weather related risks. Upstream companies will face increasing pressure over time, particularly oil producers such as Seplat, as decarbonization efforts and the transition towards cleaner energy continues. Seplat's strategy to increase gas revenues partly mitigates the carbon transition risk. Seplat also has very high negative exposure to social risks mainly because its operations in the Niger delta (Nigeria) have been exposed to militant activity in the past, that led to production disruption and crude theft from its main oil fields, OML 4, 38 and 41. There has been no militant disruptions since 2016 and the new Amukpe-Escravos export pipeline which will be operational by the end of 2021 will provide an alternative export route, improve uptime and reduce crude losses. Seplat's good liquidity position and moderate financial leverage are important characteristics for managing these environmental and social risks.

 

Factors That Could Lead To An Upgrade Or Downgrade Of The Ratings

 

Dangote Cement Plc

 

A rating upgrade is unlikely, because DCP's B2 rating is constrained by the Nigerian government's foreign currency ceiling of B2. Because of the high revenue contribution from its domestic operations, there is a strong link between DCP's rating and the sovereign rating, which prevents DCP from being rated higher than the foreign currency ceiling. If the sovereign rating or foreign currency ceiling were to be upgraded, DCP would need to demonstrate a track record of good liquidity management for an upgrade to be considered.

 

DCP's ratings are likely to be downgraded in the case of a downgrade of the Nigerian government rating or foreign currency ceiling. A downgrade could also occur if:

 

  • DCP's liquidity weakens;
  • the Nigerian government introduces special taxes, levies or other punitive measures that negatively impact DCP's profit or cash flow, such that operating margins fall below 20% on a sustained basis and adjusted debt/EBITDA trends above 4.0x or adjusted EBIT/interest expense trends below 2.5x; and
  • DCP moves away from its policy of matching the currency of its underlying cash flow with that of its debt.

 

IHS Holding Limited

 

Moody's would consider an upgrade if the Nigerian foreign currency ceiling is upgraded or if revenue and cash flow generation is significantly diversified outside of Nigeria, especially into countries that have lower sovereign risk environments than Nigeria.


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In addition, IHS Holding would need to demonstrate:

  • Debt/EBITDA sustainably remains below 4.5x;
  • Continued positive free cash flow (FCF) generation and strong liquidity

 

A downgrade of the Nigerian foreign-currency ceiling or government bond rating would lead to a downgrade of IHS Holding's rating. Moody's would also consider a downgrade if one or a combination of the following occurs:

 

  • Moody's-adjusted debt/EBITDA trends towards 5.5x;
  • FCF is negative on a sustained basis;
  • IHS Holding's liquidity weakens or it has difficulties in repatriating funds out of Nigeria for a prolonged period; or
  • there is a deterioration in the credit quality of one of its major tenants, causing a material weakening of credit metrics

 

Seplat Energy Plc

 

Seplat's ratings could be upgraded if the company were to strengthen its resource base such that production improves above 70 thousand barrels of oil equivalent per day (kboepd) and demonstrate a track record of limited disruption to daily production. Furthermore, Seplat would need to materially diversify its production away from Nigeria towards an operating jurisdiction that carries a higher sovereign rating. Subject to an upgrade of the Nigerian government bond rating of B2, an upgrade could be considered if the company's:

 

  • debt/EBITDA were to remain sustainably below 3.0x;
  • retained cash flow (RCF)/debt is sustained above 25%; and
  • liquidity were to remain strong.

 

The ratings are likely to be downgraded in case of a downgrade of Nigeria's sovereign rating. Negative pressure on the ratings would also develop if oil prices remain low such that:

 

  • the company's liquidity deteriorates significantly; and
  • debt/EBITDA increases above 4.0x on a sustained basis or RCF/debt below 15%.


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Related News - Rating Agencies on Nigeria

  1. Moody's Changes Nigeria's Outlook to Stable, Affirms B2 Ratings
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  14. Moody's Changes Nigeria's Sovereign Ratings Outlook to Negative From Stable; Affirms The B2 Ratings
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