Moody’s Investors Service, (“Moody’s”) has today assigned a (P)B2 local currency rating and Aa3.ng national scale rating (NSR) to the NGN300 billion domestic medium term note program (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 program.
At the same time, Moody’s has affirmed DCP’s B1 corporate family rating (CFR), B1-PD probability of default rating and Aa2.ng NSR CFR. The rating outlook is negative.
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.
DCP’s B1 CFR, which is one notch above the Government of Nigeria’s B2 rating, considers the company’s strong intrinsic credit quality balanced against meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level.
The B1 rating 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 60% on a Moody’s adjusted basis; (3) low leverage of 0.9x, as measured by gross debt/EBITDA and high interest coverage of 6.6x, as measured by EBIT/interest expense, in 2019; (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 22.8 million tons (mt) for 2019; (2) single product exposure being cement; (3) a concentration of production in Nigeria, representing 68% of revenues in 2019; (4) high reliance on short term debt funding exposing the company to liquidity risk; and (5) an aggressive dividend policy.
DCP’s liquidity profile is weak because it relies on the rollover of short term debt and commercial paper funding, equal to NGN106 billion and NGN137 billion respectively as of 31 December 2019. Combined with the board recommended dividend of NGN273 billion (approx.$750 million), which if approved and paid in June 2020, will weaken DCP’s liquidity and expose the business to refinance risk.
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. Furthermore, Moody’s expects a portion of the proceeds from the issuance of the proposed notes to be used to refinance short term debt which will somewhat improve the company’s liquidity profile.
Environmental, Social And Governance (ESG) Considerations
The cement industry is energy intensive and the mining and manufacturing process for cement production consume large amounts of coal, electricity and water. Dangote’s production meets domestic emission standards and the company has implemented measures to increase energy efficiency.
In terms of corporate governance, the company is 85.1% owned by Dangote Industries Limited, which is in turn owned by its founder and chairman, Aliko Dangote. This does present key man risk in Moody’s view given that Mr. Dangote continues to play a pivotal role in the fortunes of the company.
Rationale For The Negative Outlook
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. Moody’s expect the issuance of long term debt to reduce the reliance on short term debt, alleviating near term liquidity risk.
What Could Change The Rating Up/Down
A rating upgrade is unlikely, given DCP’s B1 rating 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.
The ratings are likely to be downgraded in the case of a downgrade of the Government of Nigeria’s rating. A downgrade could also occur if (1) liquidity does not improve; (2) the Nigerian government introduces special taxes, levies or other punitive measures that negatively impact DCP’s profits or cashflow, such that operating margins falls below 20% on a sustained basis and adjusted debt to EBITDA trends above 4x or adjusted EBIT to interest expense trends below 2.5x; and (3) DCP moves away from its policy of matching the currency of its underlying cash flows with that of its debt.
List Of Affected Ratings
Issuer: Dangote Cement Plc Senior Unsecured Medium-Term Note Program, Assigned (P)B2 NSR Senior Unsecured Medium-Term Note Program, Assigned Aa3.ng Senior Unsecured Regular Bond/Debenture, Assigned B2 NSR Senior Unsecured Regular Bond/Debenture, Assigned Aa3.ng
Issuer: Dangote Cement Plc Probability of Default Rating, Affirmed B1-PD Corporate Family Rating, Affirmed B1 NSR Corporate Family Rating, Affirmed Aa2.ng
Issuer: Dangote Cement Plc Outlook, Remains Negative