Naira devaluation impacts Dangote Industries’ ratings – Fitch, GCR

The devaluation of the naira has been highlighted as a factor that will impact the ratings of Dangote Industries Limited.

According to the international rating agency Fitch Ratings, on Monday, DIL’s national rating was reviewed downward to ‘B+(nga) from ‘AA(nga),’ and its ratings were placed on the Rating Watch Negative.

Also, the senior unsecured debt rating issued by Dangote Industries Funding Plc has been reviewed downwards to ‘B+(nga)’ from ‘AA(nga)’.

On Tuesday, GCR Ratings reaffirmed DIL’s national scale long-term and short-term issuer ratings of AA+(NG) and A1+(NG).

However, both rating commentaries highlighted the impact of the devaluation of the naira on the group’s liquidity rating.

Fitch said that the downgrade reflected a significant deterioration in the group’s liquidity position.

The group’s liquidity position was said to have “followed 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. 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 downgrades, while we do not expect a positive rating action until the company’s liquidity position improves substantially.”

In a statement made available to our correspondent, GCR Ratings highlighted the impact of the newly operational refinery and its contributions to the group’s overall business profile, stating, “The ratings were affirmed on the prospects of significant growth in earnings following the commencement of operations at the new petrochemical refinery and robust earnings expectations from the other businesses.”

However, GCR noted concerns about the devaluation of the naira, adding, “The ratings are constrained by the adverse impact of the currency devaluation on the profitability and financial position of the group, given its significant foreign debt exposure.”

The naira was devalued in June 2023 when the Central Bank of Nigeria harmonised segments of the foreign currency market. The country’s foreign exchange rate has remained volatile despite spirited efforts on the part of the CBN.

Focusing on the immediate refinancing risk, Fitch said, DIL had immediate debt servicing requirements related to the syndicated loan raised to finance the construction of Dangote Oil Refining Company.

According to the rating agency, further delays in meeting the funding requirements would significantly increase the likelihood of financial restructuring or default and lead to further rating downgrades.

It added that currency devaluation in June 2023 caused the group to record a significant foreign exchange loss of N2.7tn in 2023, on the back of a mismatch between dollar-denominated debt and domestic revenues.

It stated the group had senior secured debt raised at subsidiary levels, amounting to $2.7bn at end-2023, representing 49 per cent of total group debt.

“The debt structure also includes on-demand shareholder loans from its ultimate parent, Greenview plc, amounting to $2.3bn, representing 43 per cent of total debt. We view shareholder loans as subordinate debt. The company has also raised senior unsecured debt amounting to N350bn with long-dated maturities in 2029 and 2032 to finance capex requirements.”

Focusing on the Nigerian National Petroleum Corporation Limited’s stake in the Dangote refinery, the rating agency indicated that the decision of the national oil firm not to exercise its option of acquiring an additional 12.75 per cent as of June 2024 may have an impact on the group’s ability to repay debt.

In 2021, NNPCL acquired a 7.25 per cent stake in DORC’s project entity for $1.0bn, with an option to purchase the remaining 12.75 per cent stake by June 2024.

“Since the option has not been exercised, the group plans to divest a 12.75 per cent stake in DORC in 2024. The group intends to service its significant syndicated loan maturing in August 2024 from the equity divestment. However, timely divestment and meeting the imminent maturity are highly uncertain in our view,” part of the commentary read.

However, GCR said that it recognised the potential of the Dangote Group, whose business profile had been bolstered by the commencement of refining operations in February 2024.

“The refinery is expected to play a significant role in enhancing the group’s business fundamentals, particularly with its capacity as the largest refinery in Africa and Europe.”

GCR further commented on the group’s strategic positioning, adding that these factors contribute to the positive outlook for Dangote’s future growth. We expect strong export sales potential given the recent debut exports of refined oil to Europe,” GCR remarked.