By Dipo Olowookere
The national scale rating of Dangote Cement Plc has been downgraded from Aaa.ng to Aa2.ng. This action was taken by Moody’s Investors Service and it was to factor a weaker Nigerian government rating.
Last Wednesday, Moody’s announced a change in the sovereign outlook of Nigeria’s ratings to negative from stable. Consequently, the rating agency took actions on the ratings of Dangote Cement and two other companies operating in the country; IHS Netherlands Holdco B.V. (IHS) and Seplat Petroleum Development Company Plc (Seplat).
In a report released on Saturday, Moody’s said it believes that the credit quality of these companies is inevitably tied to the economic and political developments in Nigeria, with earnings and cash flows generated in Nigeria.
“The soft Nigerian economic growth has translated into limited expansionary activity in the wider consumer and business environments, leading to deteriorating corporate earnings and weak consumer spending. The rating agency expects low real GDP growth in Nigeria of 2.5 percent for 2020,” a statement from the firm said.
In the statement, Moody’s said it affirmed the B1 corporate family rating (CFR) of Dangote Cement and then changed the rating outlook to negative from stable.
Concerning the downgrading of the national scale rating to Aa2.ng, the agency said it considers the cement giant’s strong intrinsic credit quality balanced against the meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level.
It noted that the firm has a very strong credit profile, however, as Africa’s largest cement producer, it has material production concentration to Nigeria which generates around 69 percent of revenues.
“The B1 CFR is one notch above the sovereign rating because of the company’s strong credit metrics including debt/EBITDA of 1.0x, the track record of demonstrated financial support from a larger and more diversified parent, Dangote Industries Limited (DIL), and funding in local currency,” it stated.
“The cement industry is energy intensive and the mining and manufacturing process for cement production consumes large amounts of coal, electricity and water. Dangote’s production meets domestic emission standards and has implemented measures to increase energy efficiency.
“In terms of corporate governance, the company is 85.1 percent owned by Dangote Industries Limited, which is 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 part in the fortunes of the company,” the report said.
Moody’s noted that given the negative outlook on the Nigerian sovereign and strong linkages to the Nigerian economy, an upgrade is unlikely in the near-term. It added that the outlook could be changed to stable if the Government of Nigeria’s rating outlook is changed to stable.
“Upward pressure on the ratings is constrained by the Government of Nigeria’s local currency issuer rating of B2 as we consider a strong interlinkage with Dangote Cement’s ratings due to the high revenue contribution from its domestic operations which constrains the company to be rated one rating level above the sovereign,” it said.
However, it warned that the ratings are likely to be downgraded in the case of a downgrade of the Government of Nigeria’s rating.
It said this could also occur if the government of Nigeria introduces special taxes, levies or other punitive measures in respect of Dangote’s profits or cashflow.
It stated that another government’s actions that could result in a downgrade could be if the operating margins falls below 20 percent on a sustained basis; if the adjusted debt to EBITDA trends above 4x or adjusted EBIT to interest expense trends below 2.5x and if liquidity becomes pressured.
If further said it could downgrade the rating if Dangote Cement moves away from its conservative financial policies, most notably matching of the currency of its underlying cash flow generation to that of debt commitments.
Adedapo Adesanya