Dangote Cement Plc has obtained approval from its Board of Directors to access the capital market to support business growth and maximize available sources of its debt funding, according to a notice at the Nigerian Exchange (NGX) Limited signed by Edward Imoedemhe, deputy company secretary, Dangote Cement Plc.
Dangote Cement Plc is Nigeria’s largest listed entity by market capitalization on the Nigerian Bourse, as well as sub-Saharan Africa’s leading cement producer, with a combined installed capacity of 48.6Mta across its operations in 10 African countries.
The company has submitted an application to the Securities and Exchange Commission (SEC) for the registration of a bond issuance programme.
Subsequent to obtaining regulatory approvals, the company intends to explore its medium- to long-term debt funding options through the debt capital market, subject to favourable market conditions.
When raised, the proposed funding will be used for capital expenditure of the company’s expansion projects, short-term debt refinancing, and working capital requirements.
Also, Moody’s Investors Service has assigned a (P)B2 local currency rating and Aa3.ng national scale rating (NSR) to the N300 billion domestic medium-term note programme (DMTN) issued by Dangote Cement Plc (DCP) and assigned a B2 local currency rating and Aa3.ng NSR to the proposed series 1 notes to be issued under the DMTN programme.
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DCP’s B1 and Aa2.ng corporate family ratings (CFR), B1-PD probability of default rating and B2/Aa3.ng ratings on its existing N100 billion senior unsecured bonds due 2025 are unaffected. The negative outlook is unchanged.
The assigned ratings are subject to review of final documentation and assume no material change in the terms and conditions of the transaction as advised to Moody’s.
The (P)B2 and Aa3.ng ratings assigned to the DMTN program and B2/Aa3.ng ratings to the company’s series 1 unsecured notes are one notch lower than the company’s B1 CFR. This reflects their subordination to the company’s secured debt in the capital structure.
In addition, the series 1 notes do not benefit from upstream guarantees from operating subsidiaries where the bulk of the secured debt is issued. As a result, the notes effectively rank junior to other operating subsidiary secured liabilities in a default scenario.
This is the second long-term bond that DCP is issuing, highlighting the company’s ongoing commitment to extend its debt maturity profile. Moody’s view this as a positive step to reducing its reliance on short-term debt which, assuming a N100 billion bond issuance, will reduce the proportion of short-term debt towards 50percent from 67percent of DCP’s N483 billion debt obligations as of 31 December 2020.
However, in Moody’s opinion, DCP’s liquidity remains exposed to ongoing refinancing risks because of its high proportion of short-term debt and sizable annual dividends payments (N272 billion recommended by the board for 2020, subject to AGM approval).
Dividend payments, which occur in May/June each year, reduce the company’s cash balance (N146 billion as of 31 December 2020) that provide a liquidity buffer against any non-rollover of short-term debt liabilities.
In Moody’s view, DCP has limited flexibility to reduce its annual dividends because its main shareholder, Dangote Industries Limited which owns 85.75percent of DCP, is reliant on these funds to help complete its oil refinery project which Moody’s understands is 80percent complete.
Moody’s recognizes that DCP has a good track record of accessing the local funding market given its low leverage, blue chip corporate status in Nigeria and strong local banking relations.
The issuance will have a limited impact on leverage given proceeds will be used to repay short-term debt, fund ongoing capital projects and for working capital requirements. Post the bond issuance, Moody’s expects gross debt / EBITDA to remain conservatively positioned around 1.0x for 2021.
DCP’s B1 CFR, which is one notch above the Government of Nigeria’s B2 rating, considers the company’s strong intrinsic credit quality and majority naira debt structure balanced against meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level.
The B1 CFR is supported by the company’s (1) strong market presence in Nigeria and other African markets in which it operates; (2) high gross margins above 60percent on a Moody’s adjusted basis; (3) low leverage of 1.0x, as measured by gross debt/EBITDA, and high-interest coverage of 7.1x, as measured by EBIT/interest expense, as of the last twelve months to 30 September 2020; (4) funding policies that match debt funding to the local currency cash flow generation; and (5) prudent financial policies that ensure credit metrics remain strong through operating and project build cycles.
The ratings also factor (1) the relatively small scale level of cement production when compared to global peers, with production of 25.7 million tons (mt) for 2020; (2) single product exposure being cement; (3) a concentration of production in Nigeria, representing 69.6percent of revenues in 2020; (4) high reliance on short-term debt funding exposing the company to liquidity risk; and (5) an aggressive dividend policy.
The negative outlook mirrors the Nigerian sovereign negative outlook, reflecting Moody’s view that the credit quality of DCP is tied to the economic and political developments in Nigeria. The negative outlook further reflects DCP’s reliance on short-term funding combined with high annual dividends payments, which expose the company to a potential liquidity shortfall over the next 12 to 18 months.
A rating upgrade is unlikely, given DCP’s B1 CFR is constrained by the Government of Nigeria’s local currency issuer rating of B2. Due to the high revenue contribution from its domestic operations, there is a strong interlinkage between DCP’s rating and the sovereign rating, which prevents DCP to be rated more than one rating level above the sovereign. Even if the sovereign rating were to be upgraded, DCP would need to demonstrate a track record of good liquidity management for an upgrade to be considered.
