Fitch Downgrades Dangote Industry’s National Rating to ‘B+(nga) on Operational, Financial Underperformance

•Says naira devaluation led to FX loss of N2.7tn in 2023

Emmanuel Addeh in Abuja

Fitch Ratings has downgraded Dangote Industries Limited (DIL) National Long-term Rating to ‘B+(nga)’ from ‘AA(nga)’ on what it termed operational and financial underperformance, made worse by local currency devaluation.

Fitch also simultaneously placed the ratings on Rating Watch Negative (RWN), stressing that it followed lower than expected disposal proceeds.

During the H1, 2024, Fitch stated that the Dangote refinery operated at around 50 per cent capacity and produced between 325,000 bpd to 375,000 bpd, but the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) contribution from the refinery had been far below  previous projection.

“The downgrade reflects significant deterioration in the group’s liquidity position following lower than expected disposal proceeds, operational and financial underperformance compared to our prior expectations, also affected by local currency devaluation, and lack of contracted backup funding to repay its significant debt facilities maturing on  August 31, 2024.

“We view the lack of DIL’s audited accounts for 2023 as a corporate governance issue. The RWN reflects uncertainty related to the group’s ability to refinance maturing debt. Lack of tangible steps to refinance or repay the maturing debt would lead to further downgrade while we do not expect a positive rating action until the company’s liquidity position improves substantially,” Fitch said.

DIL, Fitch said, has immediate debt servicing requirements related to the syndicated loan raised to finance the construction of Dangote Oil Refining Company (DORC).

According to the ratings agency, further delays in meeting the funding requirements would significantly increase the likelihood of financial restructuring or default and lead to further rating downgrade.

However, Fitch stated that it was expecting a gradual improvement in EBITDA contribution from DORC going forward, following the initiation of petrol production in Q3 this year.

“Major currency devaluation in 2023, caused the group to record a significant FX loss of NGN2.7 trillion in 2023 as the company faces a mismatch between USD denominated debt and domestic revenues. We expect devaluation to continue at a higher pace in 2024,” the agency stressed.

The group, it said, has senior secured debt raised at subsidiary levels amounting to $2.7 billion at end-2023 representing 49 per cent of total group debt.

The debt structure, it said, also includes an on-demand shareholder loans from its ultimate parent Greenview plc, amounting to $2.3 billion representing 43 per cent of total debt.

“We view the shareholder loans as subordinated debt. The company has also raised senior unsecured debt amounting to N350 billion with long dated maturities in 2029 and 2032 to finance capex requirements,” it stated.

Fitch also based its rating on Dangote’s reduced cement profitability, stressing that it expects DIL’s EBITDA margins in cement production to drop further in 2024 following softer retail demand for cement particularly in the Nigerian market as well as limited ability to pass on increased raw material cost to consumers.

“Dangote Cement Plc (DCP) is a DIL-controlled cement producer with factories spread across 10 African countries. Nigeria remains the major contributor to DCP’s consolidated revenues. In 2023, the group had a 52 million tonne per annum (Mta) capacity and sold 27.2 Mta through various operations in Africa.

“Revenues in local currency grew by 36 per cent to N2.2 trillion in 2023 and EBITDA to N886 billion from NGN708 billion in 2022. Export sales of clinker to West African markets from Nigeria, stood at N12.3bn in 2023 with a 400 per cent increase year-on year.

“Fertiliser utilisation rate still low. Dangote Fertiliser (DFL) has a total production capacity of 2.8 million tons per annum (MTPA) of Urea and Ammonia. Chevron and NNPC have committed to supplying gas for 20 years at a rate of 200 million standard cubic feet per day (mscf/day).

“Although the project began its first phase of production in 2021, the average utilisation rate improved but remains low at just 50 per cent in 2023 (up from 32 per cent in 2022). The utilisation rate was hindered by inadequate gas supply which in our view affects operational efficiency. The company anticipates further improvements in utilisation once the ongoing pipeline repairs are completed in August 2024,” it stated.

Fitch said that it expects the fertiliser and oil refinery segments of the group to contribute 20 per cent and 30 per cent to consolidated EBITDA by 2024 and 2025.

The group’s consolidated EBITDA margin, it said, is projected to dilute from 33 per cent in 2023 to 9.1 per cent in 2024 due to the low-margin refinery business, which began operations in February 2024 and poor utilisation across the business lines.

It stated that Capex remains high at N1.0 trillion in 2024, mainly due to the construction of a gas pipeline at DFL and the ongoing production ramp-up at DORC.

According to the ratings agency, Capex will likely reduce to N0.5 trillion from 2024 to 2026, primarily for maintenance, with no dividend payments to shareholders anticipated until 2027.

On factors that could, individually or collectively, lead to positive rating action/upgrade, it listed refinancing or repayment of the upcoming maturities and a significant improvement in the liquidity position.

Also, Fitch explained that factors that could, individually or collectively, lead to negative rating action/downgrade, include lack of tangible steps to refinance upcoming maturities or steps towards default-like financial restructuring or payment default.

“ As of YE23, DIL’s consolidated liquidity profile comprised of NGN1.4 trillion of readily available cash (unaudited) and NGN400 billion as of 1Q24, with no headroom under the revolver facility. Additionally, we expect further deterioration in FCF due FX swings and capital requirements in 2024 and 2025.

“Liquidity is insufficient to address upcoming debt maturities. The group plans to finance the substantial syndicated loan maturing in August 2024 through the divestment proceeds of 12.75 per cent stake in DORC. However, the successful execution is highly uncertain in our view.

“The capital structure is mainly comprised of secured debt representing nearly 50 per cent of total debt and 43 per cent is comprised of USD denominated related party debt, that is repayable on demand. The portion of unsecured borrowings reduced to 8 per cent given it is denominated in Nigerian Naira,” Fitch stated.