Moody Changes Ratings for IHS, Seplat and DANGCEM Following Negative Rating on Sovereign Outlook

Monday, December 09,2019 / 03:42 PM / by Moody's InvestorsService / Header Image Credit: CBS News

Moody's Investors Service has taken rating actions on threeNigerian non-financial corporates.

These rating actions follow Moody's sovereign outlook change, on 4 December, of the Government of Nigeria's ratings to negative from stable and affirmation of the B2 long-term foreign-currency and local-currency issuer ratings.

Moody's has subsequently affirmed the B2 corporate family rating (CFR) and changed the outlook to negative from stable on the following companies:

IHS Netherlands Holdco B.V. (IHS)
Seplat Petroleum Development Company Plc (Seplat)

Moody's has also affirmed the B1 CFR of Dangote Cement Plc (DCP) and changed the rating outlook to negative from stable. At the same time DCP's national scale rating was downgraded to Aa2.ng from Aaa.ng to factor a weaker Government of Nigeria rating.

Change of Outlook to Negative from Stable

The negative outlook on these corporates is driven by the Nigerian sovereign outlook change to negative from stable. Moody's believes that the credit quality of these companies is inevitably tied to the economic and political developments in Nigeria, with earnings and cash flows generated in Nigeria. The soft Nigerian economic growth has translated into limited expansionary activity in the wider consumer and business environments, leading to deteriorating corporate earnings and weak consumer spending. The rating agency expects low real GDP growth in Nigeria of 2.5% for 2020.

Ratings Rationale

Dangote Cement Plc

The affirmation of the B1 CFR and downgrade of the national scale rating to Aa2.ng considers the company's strong intrinsic credit quality balanced against the meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level. DCP has a very strong credit profile, however, as Africa's largest cement producer, it has material production concentration to Nigeria which generates around 69% of revenues. The B1 CFR is one notch above the sovereign rating because of the company's strong credit metrics including debt/EBITDA of 1.0x, the track record of demonstrated financial support from a larger and more diversified parent, Dangote Industries Limited (DIL), and funding in local currency.

The cement industry is energy intensive and the mining and manufacturing process for cement production consumes large amounts of coal, electricity and water. Dangote's production meets domestic emission standards and has implemented measures to increase energy efficiency.

In terms of corporate governance, the company is 85.1% owned by Dangote Industries Limited, which is owned by its founder and chairman, Aliko Dangote. This does present key man risk in Moody's view given that Mr. Dangote continues to play a pivotal part in the fortunes of the company.

IHS Netherlands Holdco B.V.

The affirmation of the B2 CFR rating reflects the affirmation of the sovereign rating at the same level. The CFR on IHS Netherlands Holdco B.V., a leading mobile network tower provider, is constrained by the complete concentration of EBITDA generation in Nigeria which also exposes the company to volatility in the naira/US dollar exchange rate. The rating action does acknowledge IHS' resiliency in Nigeria with revenue growth of 11.4% over the 9 months to 30 September 2019.

To manage governance risks, IHS has in place a workplace code and conduct to (1) prevent incidences of bribery and corruption, and (2) abide by sanction laws and regulations. Following the investment in 2011 by the IBRD (World Bank) (Aaa stable) and International Finance Corporation (Aaa stable), steps were taken to align IHS' standards with international best practice.

Seplat Petroleum Development Company Plc

The affirmation of the B2 CFR rating reflects the affirmation of the sovereign rating at the same level. The CFR on Seplat, an indigenous exploration and production company in Nigeria, is constrained by the Government of Nigeria's sovereign rating. The company's ratings also factor in a requirement that proceeds from the sales of oil and gas have to pass through the Nigerian banking system for 24 hours before they are allowed to be moved offshore. Seplat's production is derived entirely from Nigeria's Niger Delta, an area with a history of militancy. Seplat is also reliant upon Nigerian government-owned entities, the Nigerian Petroleum Development Company and the Nigerian Gas Marketing Company, for timely payment when it comes to cash calls for meeting both operating and capital expenditures.

Environmental considerations incorporated into Moody's credit analysis for Seplat are primarily related to potential carbon dioxide regulations, but also include natural and man-made hazards. Seplat meets flaring requirements imposed by the Nigerian government. Future laws and regulations that could accelerate the pace of energy transition or changes in technology that affect demand for hydrocarbons represent a material and growing risk for Seplat.

Community engagement is an important consideration when it comes to a license to operate in the Niger Delta. Under the terms of a Global Memorandum of Understanding entered into with the local communities, Seplat undertakes and adheres to social investment programmes.

Seplat's strong liquidity position and low financial leverage are important characteristics for managing these environmental and social risks.

What Could Change The Ratings Up/Down

Dangote Cement Plc

Given the negative outlook on the Nigerian sovereign and strong linkages to the Nigerian economy, an upgrade is unlikely in the near-term. The outlook could be changed to stable if the Government of Nigeria's rating outlook is changed to stable.

Upward pressure on the ratings is constrained by the Government of Nigeria's local currency issuer rating of B2 as we consider a strong interlinkage with DCP's ratings due to the high revenue contribution from its domestic operations which constrains the company to be rated one rating level above the sovereign.

The ratings are likely to be downgraded in the case of a downgrade of the Government of Nigeria's rating. A downgrade could also occur if:

The government of Nigeria introduces special taxes, levies or other punitive measures in respect of Dangote's profits or cashflow.

Operating margins falls below 20% on a sustained basis.

Adjusted debt to EBITDA trends above 4x or adjusted EBIT to interest expense trends below 2.5x.

Liquidity becomes pressured.

DCP moves away from it conservative financial policies, most notably matching of the currency of its underlying cash flow generation to that of debt commitments.

IHS Netherlands Holdco B.V.

Given the negative outlook on the Nigerian sovereign, an upgrade is unlikely in the near-term. The outlook could be changed to stable if the Government of Nigeria's rating outlook is changed to stable.

Subject to an upgrade of the Nigerian government bond rating, an upgrade could be considered if its debt/EBITDA remains below 5.0x (including the subordinated intercompany shareholder loan) and its liquidity is robust on a sustained basis.

The ratings are likely to be downgraded in case of a downgrade of the Government of Nigeria's rating.

Moody's would also consider a downgrade if one or a combination of the following occurs:

Debt/EBITDA exceeding 8x (including the subordinated intercompany shareholder loan) or a weakening in IHS' liquidity.

Adverse contractual, regulatory, economic and/or political developments that materially weaken IHS' ability to operate profitably on a sustained basis.

Any indication that the company is considering equitising its intercompany shareholder loan, which could constitute a default under our definition.

Seplat Petroleum Development Company Plc

Seplat could be upgraded if it were to materially diversify production away from Nigeria towards an operating jurisdiction which carries a higher sovereign rating.

Subject to an upgrade of the Nigerian government bond rating, an upgrade could be considered if: