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Moody’s Downgrades Dangote Cement to B2, Says Company Exposed to Currency Risk

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Dangote Cement - Investors King

Moody’s Investors Service on Friday downgraded Dangote Cement plc (“DCP”) long term corporate family rating (CFR) to B2 from B1, the national scale long term corporate family rating to Aa3.ng from Aa2.ng and the probability of default rating (PDR) to B2-PD from B1-PD.

At the same time, Moody’s has affirmed the (P)B2 local currency rating and Aa3.ng national scale rating assigned to the NGN300 billion domestic medium-term note program (DMTN) and the B2 local currency and Aa3.ng NSR to the senior unsecured notes issued by DCP. Moody’s has also changed the outlook to negative from ratings under review.

“The downgrade of the CFR to B2 is driven by the increase in dollar debt in DCP’s capital structure which was not initially contemplated in the B1 rating. This exposes DCP to increased currency risks because most its cash flow are generated in naira and other African currencies and the fact that all the dollar debt has maturities of less than a year. This currency risk is captured under Moody’s B2 foreign currency ceiling of Nigeria which is limiting the ability of DCP to be rated higher”, say Dion Bate (Vice President – Senior Analyst), the lead analyst for Dangote Cement.

“The downgrade however is not driven by concerns around the cement fundamentals in Africa or the business, which continues to perform strongly”, adds Mr. Bate. This rating action concludes the review for downgrade, which was initiated on 5 August 2021.

The downgrade to B2 reflects the increased amount of dollar debt to around 230 billion naira equivalent, representing 43% of total debt as of 30 September 2021, up from 71bn naira equivalent in 2019. While DCP has begun generating dollar revenue through exports and repatriations of dollar cash flow from its other African operations, it is still reliant on the Central Bank of Nigeria for dollars, which remains restricted. The high proportion of dollar debt in the capital structure exposes DCP to currency risk, which included among others access to dollars and naira weakness, that is captured by Nigeria’s foreign currency ceiling of B2 instead of Nigeria’s Ba3 local currency ceiling assigned by Moody’s. Under Moody’s methodology approach, Nigeria’s B2 foreign-currency ceiling, limits the ability of a domestic corporate, that has meaningful foreign currency obligations, to be rated higher which constrains a company’s rating. It is management’s expectation that over time as dollar export revenue grow (currently around 4% of revenue) DCP would be able to internally fund its demand for dollars and eliminate the need for dollar facilities.

The affirmation of the B2 ratings assigned to the DMTN program and senior unsecured notes reflect Moody’s position that the previous notching considerations of one notch below the CFR is no longer appropriate. This is because of the low secured debt in the capital structure, sustainably low group leverage and high unencumbered asset base in Nigeria that provide sufficient recovery protection for senior unsecured lenders.

DCP’s B2 and Aa3.ng CFR’s are supported by the company’s (1) strong market presence in Nigeria and other African markets in which it operates; (2) high gross margins of above 60% on a Moody’s-adjusted basis; (3) low leverage of 0.9x, as measured by gross debt/EBITDA, and high interest coverage of 10.8 x, as measured by EBIT/interest expense, for the last 12 months (LTM) ending 30 June 2021; and (4) prudent financial policies that ensure credit metrics remain strong through operating and project build cycles.

The ratings also factor (1) the relatively small scale level of cement production when compared to global peers, with production of 25.7 million tons (mt) for 2020; (2) single product exposure being cement; (3) a concentration of production in Nigeria (Government of, B2 negative), representing 70% of revenue for LTM 30 September 2021; (4) high reliance on short term debt funding and an aggressive dividend policy that exposes the company to liquidity risk.

DCP’s liquidity profile is adequate but is exposed to ongoing refinancing risks because of the large portion of short term debt equal to NGN343 billion, representing 64% of total debt as of 30 September 2021. While DCP has strong cash generation with a cash balance of N179.1 billion, it pay large dividends (N272 billion in May 2021) which temporarily weakens its liquidity. Moody’s recognises that DCP has a good track record of accessing the local funding market given its low leverage, blue chip corporate status in Nigeria and strong local banking relations. Furthermore, its main shareholder DIL could support DCP as done in the past, if required.

The negative outlook mirrors the Nigerian sovereign’s negative outlook, reflecting our view that DCP’s credit quality is predominantly tied to the economic and political developments in Nigeria. The negative outlook further reflects DCP’s reliance on short-term funding and its high annual dividends, which expose the company to a potential liquidity shortfall over the next 12-18 months.

Globally, the building materials sector has high credit exposure to environmental risks. The cement industry is energy intensive and the mining and manufacturing process for cement production consume large amounts of coal, electricity and water. DCP’s production meets domestic emission standards and the company has implemented measures to improve energy efficiencies and transition to cleaner natural gas for its power needs.

Factors That Could Lead to an Upgrade or Further Downgrade of Dangote Cement

A rating upgrade is unlikely, because DCP’s B2 rating is constrained by the Nigerian government’s foreign currency ceiling of B2. Because of the high revenue contribution from its domestic operations, there is a strong link between DCP’s rating and the sovereign rating, which prevents DCP from being rated higher than the foreign currency ceiling of Nigeria. If the sovereign rating or foreign currency ceiling were to be upgraded, DCP would need to demonstrate a track record of good liquidity management for an upgrade to be considered.

DCP’s ratings are likely to be downgraded in the case of a downgrade of the Nigerian government rating or foreign currency ceiling. A downgrade could also occur if (1) DCP’s liquidity is weak; (2) the Nigerian government introduces special taxes, levies or other punitive measures that negatively impact DCP’s profit or cash flow, such that operating margins fall below 20% on a sustained basis and adjusted debt/EBITDA trends above 4.0x or adjusted EBIT/interest expense trends below 2.5x; and (3) DCP moves away from its policy of matching the currency of its underlying cash flow with that of its debt.

 

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Merger and Acquisition

MainOne to be Acquired by America’s Equinix in a $320m Deal

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MainOne - Investors King

Nigerian and West African data centre and cable service provider, MainOne is close to being acquired by an American internet company in a deal that is touted to have a value of $320 million.

In a release by Equinix, the $320 million deal is expected to be sealed and signed in the first quarter of 2022, pending the satisfaction of conventional closing conditions, including the required regulatory approvals.

A Public Relations personnel from MainOne confirmed the deal, but stated that he had access to limited information. He was however convinced that the deal would be a total buyout.

MainOne was founded in 2010 by Funke Opeke, a Nigerian. The company has over 1,000 kilometres of reliable terrestrial fibre networks across the southern region of the country, while also owning and operating a subsea network from Nigeria to Portugal (in Europe).

The company also has digital infrastructure assets including three data centres (which are operational) across the western area of Africa. It also has another facility under construction, which is set for a launch in Q1 2022. These facilities have helped the company enable connectivity for Nigeria’s business community.

Equinix, on this background believes that MainOne is one of the most thrilling tech businesses to come out of Africa. Charles Meyers, the CEO and President of Equinix which has its headquarters in California, stated that the acquisition of MainOne would be the first step in the company’s strategy to become a leading African carrier neutral digital infrastructure company in the long term.

Meyers said that MainOne’s leading position in interconnection and its experienced management team are critical assets in Equinix’s bid to become the leading neutral provider of digital infrastructure across Africa.

Meyers noted that the growth in data consumption in Africa is one of the fastest in the whole world, and MainOne’s infrastructure, customer relationships and operating capability will extend Equinix’s reach and boost opportunities for customers based in Africa and other parts of the world.

It was agreed in the deal that all members of the MainOne management team, including the CEO will continue in their respective roles. Equinix will also take on MainOne’s about 500 employees, but it is unclear what will happen to them under the new dispensation.

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Company News

Former Dangote Group Truck Driver Sues Company over Injuries Sustained in Accident

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Dangote Cement - Investors King

A truck driver who worked with Dangote Cement, Anas Ibrahim has filed a lawsuit against the company for abandoning him and sacking him after he had sustained serious injuries in an accident that occurred while he was on duty.

Ibrahim was involved in an accident on July 1, 2020 while travelling along the Lagos-Abeokuta expressway when a vehicle ran into the Dangote truck he was driving after he offloaded bags of cement at the company’s depot.

Initially, he was taken to the Sango Otta General Hospital in Ogun state after he lost consciousness. After that, he was transferred to the Federal Medical Centre, Abeokuta before he was finally taken to the Mohammed Sunusi Specialist Hospital, Kano where he currently is.

The accident victim stated that he had suffered three broken ribs and had a complex fracture in his limbs, according to FIJ.

Ibrahim, through his lawyer dragged Dangote Cement to the National Industrial Court of Nigeria based in Kano. The complainant told the court that the company had neglected him and also refused to pay his medical bills after they terminated his employment.

Ibrahim sought an order of the court, which would require Dangote to pay him N50 million as compensation, N10 million exemplary damages and N1 million in legal fees.

The Dangote Group Spokesperson, Anthony Chiejina said to the FIJ that he was unable to comment on Ibrahim’s situation because he was still in mourning of Sani Dangote, brother to Aliko Dangote and the Vice President of the company.

Chiejina then said it was unfair for the newspapers to report the sacking and neglect of the truck driver who sustained serious injuries in the line of duty at a time when the company was in mourning. He went ahead to claim that truck drivers working for the company cannot be trusted all the time, although he failed to react to the situation.

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Merger and Acquisition

Nvidia’s Arm Acquisition Now Highly Unlikely to Go Through

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Gartner semiconductor analyst Alan Priestly has said that Nvidia’s planned $40 billion acquisition of United Kingdom Chip Designer Arm is becoming more unlikely to be successful.

Priestly attributed this possible failure to the increasing number of regulatory inquiries which the deal is facing, also making mention of concerns in the United Kingdom, the European Union, the United States of America and China. Priestly said this to CNBC on Wednesday, with both Nvidia and Arm failing to respond immediately to a request for comment by CNBC.

The deal had previously eyed a completion date of March 2022, but the CEO of Nvidia Jensen Huang had admitted in August that the deal may go beyond the anticipated date.

Arm was born out of an old computing company known as Acorn Computers back in 1990. The energy-efficient chips designed by the company are used in about 95% of smartphones around the world and 95% of chips designed in China. The company was bought by Japan-owned SoftBank in 2016 for about 24 billion pounds ($32 billion), authorizes its chip designs to over 500 companies who use these chips when making their own semiconductors.

Critics have concerns that the merger with Nvidia – who is responsible for designing its own chips – could hinder Arm’s semiconductor designs which have been dubbed neutral, and may then lead to increased prices, less available choices and reduced innovation across the industry. Nvidia however argues that the deal will result in more innovation and that Arm will benefit from an increase in investment.

American chip giant Broadcom has publicly shown support for the deal, but many others remain against it.

Qualcomm has stated that Nvidia could proceed to limit the supply of Arm’s technology to competitors, or even raise prices. Bloomberg reports that Google and Microsoft have raised similar concerns with regulators.

The United Kingdom announced back in November that it would be launching a full investigation into the takeover of Arm by Nvidia, with the Competition and Markets Authority (CMA) investigating antitrust concerns and national security issues over the period of 24 weeks.

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