Moody’s Raises Red Flag in Dangote Cement’s Liquidity Level
By Modupe Gbadeyanka
Reputable global rating agency, Moody’s Investors Service, has warned that Dangote Cement Plc could be exposed to a refinance risk as a result of its weak liquidity profile.
In a statement issued yesterday, Moody’s said the cement firm’s liquidity profile remains weak because it relies on the rollover of short-term debt and commercial paper funding, equal to N106 billion and N137 billion respectively as December 31, 2019.
It noted that “combined with the board recommended dividend of N273 billion, which if approved and paid in June 2020, will weaken Dangote Cement’s liquidity and expose the business to refinance risk.”
The rating company, which gave a negative outlook on Dangote Cement as a result of the Nigerian sovereign negative outlook, explained that this (outlook) was done due to the firm’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 said it expects the issuance of long-term debt to reduce the reliance on short-term debt, alleviating near term liquidity risk.
Recently, Dangote Cement informed the market of its intention to issue the first tranche of its N300 billion debt programme, noting that it has already submitted some papers with the Securities and Exchange Commission (SEC) concerning the exercise.
Dangote Cement said it would use proceeds from the exercise to refinance existing short-term debt previously applied towards cement expansion projects, working capital and general corporate purposes.
On Tuesday, Moody’s assigned B1 rating to the capital raising because of the company’s strong market presence in Nigeria and other African markets in which it operates; high gross margins above 60 percent on a Moody’s adjusted basis; 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; funding policies that match debt funding to the local currency cash flow generation; and prudent financial policies that ensure credit metrics remain strong through operating and project build cycles.
In terms of corporate governance, Dangote Cement is 85.1 percent owned by Dangote Industries Limited, which is in turn owned by its founder and chairman, Mr Aliko Dangote.
In the view of Moody’s, this presents key man risk given that Mr Dangote continues to play a pivotal role in the fortunes of the company.
The rating organisation warned that it could downgrade Dangote Cement if liquidity does not improve; the Nigerian government introduces special taxes, levies or other punitive measures that negatively impact the firm’s profits or cashflow, such that operating margins falls below 20 percent on a sustained basis and adjusted debt to EBITDA trends above 4x or adjusted EBIT to interest expense trends below 2.5x; and the cement giant moves away from its policy of matching the currency of its underlying cash flows with that of its debt.