Naira devaluation credit negative for Dangote Cement, Coca-Cola: Moody’s

The recent naira devaluation is credit negative for Nigeria’s nonfinancial companies with foreign currency-denominated debt and local naira cash flow, Moody’s Investors Service has said

The sharp depreciation of the naira has “mixed credit implications for the nonfinancial companies we rate, particularly those that have large operations or generate the bulk of their revenue in Nigeria”, it said in a report seen by Markets Reporters.

The rating agency, however, expects the naira depreciation to increase the foreign currency in Nigeria and improve market confidence in the ability to convert the naira, which would benefit companies that upstream foreign-currency dividends to their parent company.

“The strain of the sudden currency devaluation will be more acute for companies with large amounts of foreign currency-denominated debt like Dangote Cement Plc (Caa1 stable),” it said. “As of December 2022, around 50 percent of Dangote’s total reported debt was in US dollars, West African franc and South African rand and 50 percent was naira-denominated.”

It added, “In the same period, Dangote generated only about 9% of its EBITDA outside Nigeria, rising to 16% of EBITDA in the first quarter of 2023. And because Dangote is highly reliant on short-term debt funding, the Naira’s devaluation exposes the company to liquidity risk.

“As the naira depreciates, we expect a proportional increase in non-naira debt when reported in local currency terms, increasing the company’s leverage.”

Naira depreciation is also negative for European companies operating in Nigeria because of a weaker profit translation on top of ongoing difficulties finding non-naira currency to extract cash, according to Moody’s.

It said, “For soft drink bottler Coca-Cola HBC AG (CCHBC, Baa1 stable), Nigeria is its largest market by volume and one of the largest markets by revenue, contributing 15 percent of the group’s volume and 11 percent of its revenue.

“In 2022, the company’s emerging market region had a slightly higher comparable EBIT margin of 11.3% compared with 10.1% for the total group. Assuming a relatively similar contribution to margin, the recent devaluation will increase its Moody’s-adjusted gross debt to EBITDA ratio to 2.7x from 2.6x, which is still well within the range we expect for CCHBC’s current rating.”

Alcoholic beverages producer Diageo Plc (A3 stable) and brewer Heineken N.V. (A3 stable) also have significant operations in Nigeria through the consolidation of subsidiaries, Moody’s said. Diageo owns 58.02 percent of Guinness Nigeria Plc and Heineken has a 56.7 percent stake in Nigerian Breweries Plc, it added.

“However, the two subsidiaries’ profit accounted for 1%-2% of the parent companies’ consolidated profit in 2022, so devaluation will have a relatively small effect on consolidated results,” the agency said.

Seplat Energy Plc (Caa1 stable) “is less exposed to foreign currency exchange rates and convertibility risk”, it said.

The company receives most of its revenue in dollars and its dollar-denominated $650 million bond is not due until 2026, according to Moody’s.

“Less than 15% of the company’s revenue is naira-denominated, and this is predominantly gas revenue which covers part of the company’s local naira costs. However, the company is not fully insulated from currency control risks in Nigeria. The regulation requires companies generating export proceeds to send their dollar-denominated oil revenue into Nigeria within 90 days of receipt, after which the company can transfer the dollars funds back into offshore bank accounts,” it said.

For mobile telecommunication tower company IHS Holding Limited (B3 stable), the change to a unified exchange rate is credit positive if it increases the availability of dollars, making it easier for IHS to use its dividends to service its international group debt, according to the agency.

It said, “The company is well protected from the effects of currency depreciation and its debt is mostly naira-denominated.

“The exchange rate unification is also credit positive for IHS’ main customer in Nigeria, MTN Group Limited (MTN, Ba2 stable). The South Africa-based mobile telecom operator generated 43 percent of its EBITDA in Nigeria in 2022 and also services its rand- and dollar-denominated group debt by upstreaming dividends and management fees from its subsidiaries, accounting for 30 percent of holding company cash flow in 2022. However, this year MTN opted for a scrip dividend because of limited dollar liquidity in Nigeria and as a better store of short-term value until the exchange rate normalizes.”

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