Firms interest expense spike as debt binge bites

Asurge in interest expense incurred by listed Nigerian corporate firms to service debts owed is beginning to put a squeeze on their bottom lines.

There was a 69 percent increase in finance costs paid by the 40 largest NSE quoted firms (ex financials) in the most recent quarter to June 2015, according to BusinessDay’s analysis of the firm’s balance sheets.

Total debt including loans, overdrafts, short and long term borrowings and commercial paper, surged to N1.3 trillion, as companies sought to expand capacity or maintain working capital.

“Companies overtime depend on expensive short-to-medium term loans to finance working capital, expansion and CAPEX projects,” said Abiodun Keripe, Elixir Investment Partners Ltd’s head of research and strategy.

“This clearly has not helped profitability, even in the context of shrinking top-line growth.”

The 40 firms with a combined market capitalisation of N6.79 trillion, including Dangote Cement, Nigerian Breweries, Flour Mills, Nestle, Seplat, Guinness Nigeria and Transnational Corporation, had cumulative finance costs of N71 billion for the period, according to data compiled by BusinessDay.

Some firms finance costs were as high as 70 percent of their reported net income for the period, while a few paid more to service loans than they made at the bottom-line.

MRS Oil, Dangote Flour, May & Baker, Honeywell Flour and Computer Warehouse Group, which paid finance costs of N466 million, N2.5 billion, N284 million, N311 million and N109 million in the period, however reported net income of N37.5 million, (N9.1 billion loss), N29.7 million, N283 million and (N350 million loss), respectively.

For Conoil which had about N17.6 billion in unsecured borrowings in the period, including bank overdrafts at an average effective interest rate of 17.5 percent per annum, based on NIBOR plus lender’s mark-up, its overdraft was necessitated by:

“Delay in payment of subsidy claims by the Federal Government on importation/ purchase of products for resale, in line with the provision of the Petroleum Support Fund Act for regulated petroleum products.”

While the risk of default for most of the companies is low to negligible, analysts say more borrowing, along with lower earnings may be a problem.

This may be exacerbated by a slowing economy and a Nigerian Central Bank that is loathe to cut interest rates as oil prices remain soft.

The level of quoted firms leverage has been impacting performance negatively, according to Olutola Oni, head of research at investment firm, WSTC Financial Services Ltd.

“The problems many of the quoted firms have, as regards debts are in two folds,” Oni said in response to questions.

“This includes higher cost of borrowing and the inability of firms to grow revenue in such a scale that will offset the burden of the debts on bottom-line. This is particularly the case for many of the firms within the downstream oil & gas sector and fast moving consumer goods sector.”

Stocks of companies that have spent the most as a percentage of net income to service debts have on average performed worse than the NSE All Share Index.

MRS oil, Dangote Flour, May & Baker, Honeywell Flour, Computer Warehouse Group, have returned -6 percent, -55.7 percent, -36.1 percent, -29.8 percent and -46.6 percent respectively, in the past year to (Oct 15), compared to a -22.6 percent return for the NSE-ASI in the same period.

“Companies will have to start depending more on cheaper source of funding available in the capital market rather than bank borrowings. FX scarcity and volatility mostly at the parallel market since mid-2014 also have contributed to the jump in interest burden on these companies,” Elixir’s Keripe said.

PATRICK ATUANYA