Moody’s affirms Dangote Sugar Refinery’s Caa1 CFR, Outlook changed to stable

Moody’s Ratings (Moody’s) has affirmed the Caa1 corporate family rating (CFR) of Dangote Sugar Refinery Plc (DSR).

Concurrently, Moody’s has repositioned the national scale rating (NSR) to Ba1.ng from Baa3.ng. The rating outlook has been changed to stable from positive. Dangote Sugar Refinery is the largest Sub-Saharan African sugar producer and refiner based in Nigeria.

The global rating agency attributed the change to the negative impact of the Naira devaluation on the operations of DSR. The rating agency in a statement said, “the affirmation of DSR’s Caa1 CFR and change in outlook to stable with the repositioning of the NSR to Ba1.ng reflects Moody’s view that the company’s raw material import business model continues to be negatively affected by the sharp devaluation of Nigeria’s currency, the Naira, against the US dollar during the last 12 months. The currency devaluation has deteriorated DSR’s liquidityposition and materially increased its letters of credit (LoC) in Naira terms, weakening the company’s credit profile.”

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In June 2023, the Central Bank of Nigeria (CBN) announced the unification of its multiple foreign exchange windows, merging all official rates into its Investors and Exporters window which has significantly devalued the Naira, particularly in June 2023 and February 2024 from around 460 Naira per USD in June 2023 to around
1,500 in February 2024.

The positive action to be taken against the headwinds of the currency situation in Nigeria is to focus on the Backward Integration Plan for
sugar production in Nigeria. DSR has made significant investments and will continue to grow its size of the local sugar production capacity.
Given the devaluation of the currency which has made locally produced sugar to have significant profit margin compared to imported sugar.

DSR has intensified production activities at its Numan and Nasarawa sugar plantation. The positive action to be taken against the
headwinds of the currency situation in Nigeria is to focus on the Backward Integration Plan for sugar production in Nigeria. DSR has
made significant investments and will continue to grow its size of the local sugar production capacity. Given the devaluation of the currency
which has made locally produced sugar to have significant profit margin compared to imported sugar. DSR has intensified production
activities at its Numan and Nasarawa sugar plantation.

According to Moody, factors considered in the rating of DSR include the positive industry fundamentals supported by government regulation and Nigeria’s demographic and societal trends, DSR’s market positioning as Nigeria’s largest manufacturer and seller of refined sugar, low levels of Moody’s adjusted debt of NGN62 billion excluding letter of credit; and track record of adequate operating margin of 18
percent over the last five years and capacity to pass through additional costs albeit with a lag.

Also, the ratings according to the agency, reflect the company’s exposure to Nigeria, a country that has high social, political, economic and regulatory risks; high exposure to foreign currency risk exposure due to hard currency imports and local sales under a depreciating Naira currency scenario; exposure to commodity price risk volatility through raw material imports of sugar; (4) high reliance on letters of credit of NGN420 billion as of 31 March, which are interest
bearing and used for hard currency working capital financing; and weak credit metrics driven by a weaker than expected operating
performance and large foreign currency losses.

“The stable outlook reflects our expectation that DSR’s volumes will grow towards the levels achieved in 2022 over the next 18 months. The
stable outlook also assumes that the company’s outstanding letters of credit with banks will be rolled over and not increase in size, Moody’s Rating concluded.