Why Flour Mills Credit Protection Metrics Remain Under Pressure
By Modupe Gbadeyanka
A local rating agency, Global Credit Ratings (GCR), said the credit protection metrics of Flour Mills of Nigeria Plc have remained under pressure due to constrained cash generation and its highly working capital-intensive operations, exacerbated by related party requirements its liquidity.
In a statement issued to announce assigning an indicative public rating of BBB+(NG) to the Series 3 Senior Unsecured Tranche A Bonds and Series 3 Senior Unsecured Tranche B Bonds of Flour Mills Nigeria Plc, the rating firm noted as a result of this, the net debt to EBITDA rose to 2.7x in FY19 and registered above 2.8x at 1H FY20.
It said notwithstanding modest improvements, interest coverage is relatively low (1.6x), while operating cash flow coverage of debt is expected to remain weak/negative.
Flour Mills intends to raise N20 billion in Series 3 Tranche A and B Bonds during first quarter of 2020, while the actual bond principal amounts will be confirmed following book building.
The bulk of net proceeds (80 percent) will be utilised to settle short term debt drawn down from bank loans and for working capital requirements (20 percent).
In 2018, the miller registered a N70 billion bond issuance scheme with Securities and Exchange Commission (SEC). An initial N20.1 billion was raised in two tranches in November 2018; being Series 1 Bonds with a nominal value of N10.1 billion and Series 2 Bonds with a nominal value of N10 billion.
The Tranche A Bonds and Tranche B Bonds have tenors of three years and five years respectively with expected maturity in 2023 and 2025. Similar to earlier issuances, the Series 3 Tranche A and B Bonds will constitute direct, unconditional, senior and unsecured obligations of the issuer.
In a statement issued by GCR, it said Flour Mills has also be accorded a stable outlook, noting that the final ratings would be accorded upon receipt of satisfactorily signed and executed final transaction documents.
GCR explained that it assigned the ratings to Flour Mills because the firm maintains a leading position in the Nigerian flour milling industry, driven by its experienced management team, extensive milling capacity, product diversification and a broad distribution network.
According to GCR, net proceeds from the Series 1 Bonds and Series 2 Bonds Issue were used to settle certain maturing debt obligations, thus, short term debt declined to 57 percent of total debt in 1H FY20 (FY19: 72 percent), albeit still high.
It said ongoing refinancing and liquidity risk remain elevated, especially given persistent negative free cash flows. In addition to Tranche A and Tranche B Bonds, the issuer intends to term out certain bank facilities, which would be supportive of a materially enhanced debt maturity profile, with approximately 25 percent of debt maturing in the first two years. Coupled with more sustainable operating cash flows, this would bode positively for Flour Mills’ funding and liquidity profile.