Corporate debt jumps 133% as Nigerian firms battle cash crunch

Nigerian firms recorded a 133 percent increase in corporate borrowings in 2022 as working capital needs soared amid an intense cash crunch, according to findings by BusinessDay.

For most companies operating in Africa’s biggest economy, 2022 was a tough year as double-digit inflation and naira devaluation ate deep into profit margins, leaving firms with little or no money to carry out their day-to-day obligations.

The above development resulted in firms increasing their appetite for loans, with a record N1.5 trillion ($3.2 billion) of local currency debt instruments issued in 2022, representing a 133 percent increase from 2021 levels, data sourced from GCR Ratings, a credit rating agency, showed.

That was despite the high-interest rate environment in 2022, which saw the Central Bank of Nigeria hike rates aggressively to curb accelerating inflation.

“More than ever, commercial paper (CP) is being used to fund the working capital needs of Nigerian corporates despite a volatile interest rate environment,” the rating agency said in a report.

According to GCR Ratings, 2022 saw a deepening of challenges for Nigerian corporates on account of weak economic growth, a high headline inflation rate, spiraling fuel costs, and supply-chain disruptions.

“As a result of this challenging environment, Nigerian corporates increasingly sought short-term funds through CP issuances in order to meet their working capital requirements i.e., to fund their day-to-day operations,” it said in a note sent to BusinessDay.

The agency said working capital funding is common for businesses facing near-to-medium-term uncertainty or businesses with inconsistent cash flow.

Read also: World bank outlines sustainable actions for debt distressed countries

BusinessDay findings showed that there were 140 CP transactions totalling N737 billion ($1.60 billion) last year versus 61 transactions totalling N379 billion ($824 million) in 2021.

“Normally, longer-tenured loans have higher interest; so in an environment where rate is elevated, companies often seek to lower their costs by using shorter-tenured loans, which would attract relatively lower interest rates,” said a chief financial officer who does not want his name mentioned.

BusinessDay’s findings showed companies’ bond issuance also grew significantly over 2022 at 189 percent in 2022.

“Nigerian corporates are choosing to issue local currency debt capital over borrowing in foreign currency,” GCR Ratings said.

It noted that the challenging foreign exchange environment in Nigeria manifests itself in foreign currency shortages within the financial system and weakened relationships between Nigerian banks and foreign correspondent banks which ultimately led to unfavourable terms for Nigerian corporates looking to borrow in foreign currency.

Nigeria’s largest cement makers, Dangote Cement Plc, BUA Cement Plc, and Lafarge Africa Plc, collectively reported a 29 percent increase in total borrowings to N868.76 billion in 2022 from N671.72 billion in 2021.

The Nigerian oil and gas sector also saw total borrowings rise by 13.42 percent to N475.69 billion in 2022 from N419.41 billion in 2021 as short-term borrowings accounted for the bulk of the total borrowings, indicating that companies in the sector are borrowing to meet working capital needs (short-term obligations).

Also, the interest charged on the borrowings reported grew by 13.71 percent to N40.48 billion in 2022 from N35.59 billion in 2021.

“We do not expect the unfavourable terms of foreign currency borrowing to change in the near term,” the rating agency said.

“Over the next 12 to 18 months, we expect robust debt issuance to be sustained as the political direction of new leadership becomes more certain, a development that will allow Nigerian corporates make better-informed funding decisions,” it said.

Data obtained from FMDQ Group showed that 28 firms issued CPs worth N507 billion in the first quarter of 2023, compared to the N175.4 billion raised in the corresponding period of 2022.

GCR Ratings said that in the short-term, issuance will be supported by the aforementioned fall in yields.

“At present, we are witnessing a strong pipeline of new transactions over the next 12 months, partly in new asset classes such asset-backed securities,” it said.

It said the advent of Basel III regulations will mean that Nigerian banks will have an increased need to issue additional Tier 1 and Tier 2 debt capital.

According to Investopedia, Basel III is an international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand.

“Basel III’s liquidity coverage requirements mean that banks will have a greater need for high-quality liquid assets in the form of corporate bonds. Overall, Basel III will be supportive of deepening Nigeria’s capital markets,” GCR Ratings said.

“Issuing debt instruments continues to be an increasingly viable funding source for Nigerian entities. Companies will continue to diversify their funding base through the issuance of CP and/or bonds for the foreseeable future,” it added.