Despite feeling the heat of the central bank’s decision to raise interest rates, Nigeria’s biggest firms are recording a steady growth in loan books, a move aimed at encouraging investors who fret that deteriorating consumer purchasing power, foreign exchange scarcity, and energy crisis would damp firms’ appetite for expansion.
For most companies operating in Africa’s biggest economy, 2022 was a tough year as double- digits 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 as a survey by BusinessDay of 25 companies across six sectors showed an increase in loans and borrowings by 26 percent to N1.97 trillion in 2022.
Analysts say firms prefer to raise money through debt rather than equity because it is cheaper and because it enjoys a tax shield that helps profitability. Secondly, taking on debt does not lead to dilution of control.
“Normally, longer tenured loans have higher interest, so in an environment where rate is elevated, companies often seek to lower their cost by using shorter tenured loans, which would attract relatively lower interest rates,” said a chief financial officer who does not want his name mentioned.
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Nigeria’s apex bank has been hiking the benchmark monetary policy (MPR) rate since the first quarter of 2022 to tame red-hot inflation worsened or exacerbated by the war between Russia and Ukraine.
And that led to elevated bond yields as firms tapped into unsecured shorter-term debt to finance their payroll, inventories, and other short-term liabilities.
“Likewise, it is easier to refinance and pay down short-term loans when the interest rate starts coming down, as against locking into long-tenured ones that may have punitive fees and cost to finance,” said the analyst.
Tunde Adeniyi, an investment analyst with Sofidam Capitals warned that too much debt especially in a high-interest rate environment where an aggressive rate hike by the central bank seeks to tame rising inflation makes refinancing more difficult amid rising borrowing costs and slower economic growth.
“It is worse still if a firm has a very weak operating income which cannot absorb finance costs,” Adeniyi said.
The firms surveyed by BusinessDay include Okomu Oil Palm, Presco Plc, Cadbury Nigeria Plc, Unilever Nigeria Plc, Dangote Sugar Refinery, Nestle Nigeria Plc, Nascon Allied Industries, BUA Foods, Nigerian Breweries, Dangote Cement, BUA Cement, Lafarge Africa, Morison Industries, May & Baker Nigeria, Fidson Healthcare Plc, GlaxoSmithKline Consumer Nigeria Plc, Neimeth International Pharmaceuticals, Transcorp Hotels, Ikeja Hotels, Seplat Energy Plc, Conoil Plc, MRS Oil Nigeria Plc, TotalEnergies Marketing Nigeria Plc, Ardova Plc, and Eterna Plc.
Sector Analysis
Palm Oil Makers
Nigerian palm oil makers, Okomu Oil Palm and Presco Plc benefited from higher crude palm oil (CPO) prices in 2022 due to the tight global palm oil supply which spurred increased sales.
However, inflation and higher interest rates bit deeper, and profitability for the pair declined by 909 basis points to 27.27 percent in 2022 from 36.38 percent in 2021.
Interest expenses from loans and borrowings surged by 64.84 percent and 204 percent for Okomu and Presco respectively, as borrowings increased by 12.15 percent and 29 percent respectively in 2022.
Consumer Good Firms
The Nigerian consumer good firms sector has been constrained by the macro economic challenges which dampened consumer purchasing power, and consequently, reduced profitability for these firms.
Cash generated from operations for these firms (with the exclusion of BUA Foods who reported a 14,117 percent increase) was down by 32.01 percent during the period.
As a result, amidst a high-interest rate environment, these firms have increased their overall borrowings in order to finance their working capital (a measure of a company’s liquidity and short-term financial health) obligations.
Total borrowings reported but the largest firms in the sector increased by 38.63 percent to N502.39 billion in 2022 from N362 billion in 2021, while cumulative interests charged on those borrowings surged by 92 percent to N34.94 billion in 2022 from N18.24 billion in 2021.
“If they are borrowing more for the short term, it would be attributed to the elevated cost of production which ordinarily would encourage increased working capital requirements. On the other hand, long-term borrowing suggests a business expansion driv,” Ayodeji Ajilore, an investment research analyst at ARM Securities Limited said.
“For instance, Dangote is keen on expanding in Africa, and leveraging the debt market for such activity is not out of place. In summary, we credit the recent surge to elevated working capital requirements which has led most firms to the debt capital market,” he added.
Cement Makers
Nigeria’s largest cement makers, Dangote Cement Plc, BUA Cement Plc, and Lafarge Africa collectively reported a 29 percent increase in total borrowings to N868.76 billion in 2022 from N671.72 billion in 2021.
The cost of which rose by 22 percent to N84.39 billion in 2022 from N69.12 billion, with Dangote Cement (DangCem) accounting for the bulk of interest expense reported by the sector.
DangCem reported a 31.61 percent increase in interest on loans and borrowings amounting to N75.24 billion in 2022 from N57.17 billion in 2021, while Lafarge Africa and BUA Cement reported declines in interest expense by 51.61 percent and 3.3 percent respectively.
“We saw significant borrowings due to the companies working capital needs, cash upstreaming to DIL and the companies expansion in Ghana and Côte d’Ivoire,” Kayode Eseyin, analyst, investment research and strategy, CardinalStone Partners said.
“BUA Cement has been rapidly expanding, and most of those expansions have been debt funded, hence the increase in loans and borrowings,” Eseyin added.
BUA Cement, in an earnings release note, said it “commissioned the 3mmt, Sokoto line-4 in January 2022, thereby increasing output capacity to 11 mmtpa, and new line expansion in Sokoto and Okpella well in progress.”
Data from the Nigerian Exchange Group shows that BUA Cement reported interest expense on debt security issued totaling N9.01 billion in 2022, up from N8.95 billion in 2021.
Similarly, last February, Dangote Cement issued N50 billion commercial paper sales; the firm issued the debt instruments in two maturities, with the Series 4 at a 183-day tenor and the Series 5 at a 267-day tenor.
Last year, the company said it completed the issuance of N116 billion series 2 fixed rate senior unsecured bonds under its N300 billion multi-instrument issuance programme.
Healthcare Sector
The healthcare sector was not left out, as the sector recorded a 12 percent increase in cumulative borrowings to N19.7 billion in 2022 from N17.56 billion in 2021, while interest charged on those borrowings grew by 35.76 percent to N2.46 billion in 2022 from N1.81 billion in 2021.
Fidson Healthcare Plc reported the highest increase in borrowings and interest on borrowings compared to its peers in 2022. Its total borrowings surged by 38.17 percent to N11.62 billion in 2022 from N8.41 billion in 2021, while interest on borrowings increased by 47.46 percent to N1.74 billion in 2022 from N1.18 billion in 2021.
Similarly, May & Baker Nigeria, Morison Industries, and Neimeth International Pharmaceuticals reported a 19.54 percent, 13 percent, and 6.91 percent increase in interest on borrowings respectively in 2022.
Hospitality Sector (Hotels)
Largest players in the Nigerian hotel sector, Transcorp Hotels and Ikeja Hotels appear to have positioned themselves to cushion the effect of the rising interest rate hike, as the sector reported a 3.67 percent increase in interest expense from loans and borrowings obtained.
Transcorp Hotels’ interest expense on loans and borrowings grew at a slow rate by 1.72 percent to N4.14 billion in 2022, while Ikeja Hotels reported a 12.05 percent increase to N271 million.
Oil & Gas Sector
The Nigerian oil and gas sector saw total borrowings rise by 13.42 percent to N475.69 billion in 2022 compared to N419.41 billion in 2021, with short-term borrowings accounting for the bulk of the total borrowings, thereby indicating that companies in the oil and gas sector are borrowing to meet working capital needs (short term obligations).
Furthermore, interest charged on the borrowings reported grew by 13.71 percent to N40.48 billion in 2022 from N35.59 billion in 2021.
Of the six (6) oil and gas firms analysed by BusinessDay, TotalEnergies Marketing Nigeria Plc and Ardova Plc reported the highest surge in interest expense on loans and borrowings by 261.84 percent and N141.63 percent respectively to N5.5 billion and N5.05 billion in 2022.
Similarly, TotalEnergies Marketing Nigeria Plc increased its borrowing threshold by 218.98 percent to N48.39 billion in 2022 from N15.17 billion in 2021.
