Fitch Ratings, an American credit rating agency, has downgraded the National Long-Term Rating of Dangote Industries Limited (DIL) from ‘AA(nga)’ to ‘B+(nga)’, citing a notable deterioration in the conglomerate’s liquidity position.
The downgrade also affects the senior unsecured debt rating issued by Dangote Industries Funding Plc, which has been reduced from ‘AA(nga)’ to ‘B+(nga)’.
Dangote Industries downgrade from ‘AA(nga)’ to ‘B+(nga)’ indicates a significant reduction in creditworthiness. The ‘AA(nga)’ rating indicates a very strong capacity to meet financial commitments, while the ‘B+(nga)’ rating suggests a higher vulnerability to adverse business, financial, and economic conditions, though the company is still meeting its financial commitments.
Fitch, in its latest report published on Monday, also simultaneously placed the ratings on Rating Watch Negative (RWN).
“The downgrade reflects significant deterioration in the group’s liquidity position following lower than expected disposal proceeds, operational and financial underperformance compared to our prior expectations, also affected by local currency devaluation, and a lack of contracted backup funding to repay its significant debt facilities maturing on August 31, 2024. We view the lack of DIL’s audited accounts for 2023 as a corporate governance issue,” Fitch Ratings said.
“The RWN reflects uncertainty related to the group’s ability to refinance maturing debt. Lack of tangible steps to refinance or repay the maturing debt would lead to further downgrade while we do not expect a positive rating action until the company’s liquidity position improves substantially.”
It said Dangote Industries Limited faces immediate debt servicing requirements related to the syndicated loan raised to finance the construction of Dangote Oil Refining Company (DORC), adding that “further delays in meeting the funding requirements would significantly increase the likelihood of financial restructuring or default and lead to further rating downgrades.”
Fitch stated that the major currency devaluation in 2023 caused Dangote Industries to record a looming FX loss of NGN2.7 trillion in 2023 as the company faces a mismatch between USD-denominated debt and domestic revenues.
This devaluation is expected to continue at an accelerated pace in 2024, the international agency reported, stating, “The group has senior secured debt raised at subsidiary levels amounting to USD2.7 billion at the end of 2023, representing 49% of total group debt. The debt structure also includes on-demand shareholder loans from its ultimate parent, Greenview plc, amounting to USD 2.3 billion, representing 43% of the total debt. We view shareholder loans as subordinate debt. The company has also raised senior unsecured debt amounting to NGN350 billion with long-dated maturities in 2029 and 2032 to finance capex requirements.”
The Nigerian National Petroleum Corporation (NNPC) acquired a 7.25% stake in DORC’s project entity for USD 1.0 billion in 2021, with an option to purchase an additional 12.75% stake by 2024.
As the NNPC has not exercised this option, Fitch said Dangote Industries plans to divest this stake to meet its August 2024 loan maturity; however, Fitch said the timely divestment and meeting the imminent maturity are highly uncertain in its view.
According to Fitch, Dangote Industries’ cement production arm, Dangote Cement Plc (DCP), also faces challenges with softer retail demand and increased raw material costs, leading to reduced profitability.
“We expect DIL’s EBITDA margins in cement production to drop further in 2024 following softer retail demand for cement, particularly in the Nigerian market, as well as limited ability to pass on increased raw material cost to consumers.
“Dangote Cement Plc (DCP) is a DIL-controlled cement producer with factories spread across 10 African countries. Nigeria remains the major contributor to DCP’s consolidated revenues. In 2023, the group had a 52 million tonne per annum (Mta) capacity and sold 27.2 Mta through various operations in Africa. Revenues in local currency grew by 36% to NGN2.2 trillion in 2023 and EBITDA to NGN886 billion from NGN708 billion in 2022. Export sales of clinker to West African markets from Nigeria, stood at NGN12.3bn in 2023, with a 400% increase year-on year,”
Regarding Dangote Fertiliser (DFL), Fitch said the fertiliser utilisation rate is still low as the group operates below capacity due to inadequate gas supply, achieving only a 50% utilisation rate in 2023.
“Dangote Fertilizer (DFL) has a total production capacity of 2.8 million tons per annum (MTPA) of Urea and Ammonia. Chevron and NNPC have committed to supplying gas for 20 years at a rate of 200 million standard cubic feet per day (mscf/day). Although the project began its first phase of production in 2021, the average utilization rate improved but remains low at just 50% in 2023 (up from 32% in 2022).
“The utilisation rate was hindered by inadequate gas supply which in our view affects operational efficiency. The company anticipates further improvements in utilization once the ongoing pipeline repairs are completed in August 2024.”
CREDIT: GUARDIAN
