Report: Tight Monetary Condition Makes Local Debt Financing Costly

Ugo Aliogo

A report by KPMG has stated that the tight monetary condition in Nigeria and others in Sub Saharan African (SSA) countries has made local debt financing costly and favours higher cash contributions in mergers and acquisition transactions.

The report also stated that growth capital investing does not typically rely on debt, adding that profit volatility makes debt financing less appropriate, “and many companies may lack the assets to secure loans, making an equity-led approach more suitable for financial investors in SSA.”

The report remarked that regarding valuation models used to price deals, international and domestic investors take broadly the same approach, noting that EBITDA multiples are the main method employed by 89 per cent of the former and 77 per cent of the latter, while 8 per cent of foreign investors and 20 per cent of their local counterparts relied upon book value multiples

The report entitled: “Doing Deals in Sub-Saharan Africa,” said as much as 91 per cent of respondents selected cash as one of the sources of deal financing for their last SSA acquisition and 33 per cent report it was the single most significant, while noting that this was ahead of bank loans (with 65 per cent and 21 per cent, respectively) and significantly ahead of debt capital markets, with only 9 per cent identifying this as the single most important type of financing.

It also stated that in some cases, large-cap African companies can access international capital markets to back deals, but these are rare occasions.

The report further explained that there is a clear preference for cash to finance deals in SSA, long before the global rise in prices in the wake of the COVID-19 pandemic, adding that many of the region’s largest economies were experiencing high single and even double-digit inflation, for example, Nigeria’s consumer price index (CPI) increased to 22.8 percent in June 2023 from 11.4 percent in 2019.