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Economy | Reviews & Outlooks

Moody's Downgrades Ratings of Dangote and Seplat to Caa1 and Confirms the Rating of IHS at B3 Following Nigeria Sovereign Downgrade

Feb 03, 2023   •   by   •   Source: Moody’s Investors Service   •   eye-icon 263 views

Moody's Investors Service ("Moody's") has downgraded the ratings of Dangote Cement Plc (Dangote) and Seplat Energy Plc (Seplat) to Caa1 from B3 and has confirmed the ratings of IHS Holding Limited (IHS) at B3. All three non-financial corporates are domiciled in, or have substantial exposure to Nigeria and the rating action follows Moody's downgrade of Nigeria's long-term issuer rating to Caa1 from B3 and a change in outlook to stable from ratings under review. Moody's also lowered Nigeria's local currency country ceiling to B2 from B1 and the foreign currency country ceiling to Caa1 from B3. 

 

All outlooks were changed to stable from ratings under review and today's rating action concludes the review for downgrade initiated on 28 October 2022.

 

Moody's has also repositioned the national scale corporate family rating (CFR) of Dangote Cement Plc to Baa3.ng from A3.ng to reflect the mapping of Global Scale Ratings to National Scale Ratings.

 

Ratings Rationale

The rating actions on Dangote and Seplat are a direct consequence of the rating downgrade of the Government of Nigeria and the lowering of Nigeria's foreign currency country ceiling, both to Caa1. As a result, the Nigerian corporates, which are domiciled in Nigeria and which were previously constrained at the B3 ceiling are now constrained at Caa1. IHS' rating was confirmed at B3 because the company is not domiciled in Nigeria. All rating outlooks are changed to stable from ratings under review.

The change of the outlook on the ratings of these companies to stable from ratings under review is a direct consequence of the change in outlook on the ratings of the Nigerian sovereign to stable from ratings under review.

 

Dangote, IHS and Seplat continue to have relatively prudent financial policies, adequate liquidity, moderate to low leverage and strong business profiles, generally supported by market leading positions, some geographic diversification outside of Nigeria or export revenues. Nigeria's Caa1 foreign-currency ceiling limits the ability of a domestic corporate that has foreign currency obligations to be rated higher, which constrains a company's rating. As a result, Dangote and Seplat's ratings are constrained by the foreign currency country ceiling. IHS is domiciled outside of Nigeria, in the Cayman Islands, and is constrained at 1 notch above the long term-issuer rating of Nigeria. All three issuers' ratings are constrained  because they generate a material portion of their earnings and cash flows in Nigeria and are materially exposed to Nigeria's political, legal, fiscal and regulatory environment and therefore have interlinkages with Nigeria's sovereign rating.

 

Seplat is less exposed to convertibility risk given most of its revenue are paid in dollars. However, its export dollar oil revenue are required to be repatriated back into Nigeria within 90 days of receipt, after which Seplat can transfer these US dollars funds back into offshore bank accounts. To date Seplat has had no restrictions imposed from Central Bank of Nigeria and the company targets to have 70% of total cash balances in USD and 70% of that in offshore accounts. Seplat's $650 million senior unsecured notes are due in 2026 and the company has a good liquidity profile supported by $305 million of cash on balance sheet and full access to the $350 million undrawn revolving credit facility as of September 2022.

 

Dangote's high proportion of dollar debt in the capital structure exposes the company to currency convertibility risk. While Dangote continues to grow its 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 company's liquidity profile is adequate but is exposed to ongoing refinancing risks because of the large portion of short term debt equal to NGN383 billion, representing 55% of total Moody's adjusted debt as of 30 September 2022. Dangote benefits from strong cash flow generation with cash balances of NGN217 billion as of 30 September 2022.

 

IHS' rating was confirmed at B3, reflecting a constraint of the rating at the lower of i) 1 notch above the Caa1 long-term issuer rating of Nigeria and ii) the local currency ceiling of B2. Moody's does not view IHS' foreign currency obligations as being constrained by the foreign currency ceiling. This is because (i) IHS is incorporated in the Cayman Islands and bonds are issued at the Cayman Islands group holding company, IHS Holding Limited and at a Netherlands-incorporated intermediate holding company, IHS Netherlands Holdco B.V., (ii) IHS has no outstanding dollar debt obligations in Nigeria, apart from letters of credit, and (iii) has sufficient liquidity outside of Nigeria to continue its international operations and servicing its debt obligations for at least two years, even if it was unable to upstream any excess cash from Nigeria during this time. Therefore, IHS' foreign currency debt is not subject to the risks affecting foreign currency obligations of locally-domiciled issuers, governed by local law.

 

The B3 rating continues to reflect the company's exposure to the weak operating environment in Nigeria and in particular to currency convertibility risk. Over time the company's liquidity position will weaken if it is unable to upstream excess cash generated in Nigeria. IHS earns around 67% of its EBITDA from Nigeria, which is denominated in naira, when factoring in 12 months of contribution from its South African tower acquisition that closed in June 2022. IHS' contracts are either dollar-linked or have naira CPI pricing escalators that allow the company to pass through most of the cost inflation or currency depreciation it is exposed to. Nevertheless, the fact that revenues are invoiced in naira exposes the company to dollar shortages in the country and the resulting convertibility risk. IHS services its dollar bonds through cash upstreamed to the group by its international operations, the largest one of which are in Nigeria. During the twelve months to December 2022, IHS upstreamed $207 million of cash from Nigeria, in addition to upstreams from other operating companies. Liquidity remains good and is supported by a cash balance of $432 million outside of Nigeria as of September 2022 as well as $500 million of combined availability under revolving credit and term loan facilities, which Moody's expects will provide the company with adequate liquidity for at least the next two years, even in the case that it was unable to upstream any cash flow from Nigeria over this timeframe.

 

Stable Outlook

 

SEPLAT

The stable outlook is in line with the stable outlook of the government of Nigeria rating reflecting Seplat's close credit links to the Government of Nigeria and operational exposure to the country's political, legal, fiscal and regulatory environment.

 

DANGOTE

The stable outlook is in line with the stable outlook of the government of Nigeria rating reflecting Dangote's close credit links to the Government of Nigeria and operational exposure to the country's political, legal, fiscal and regulatory environment.

 

IHS

The stable outlook is in line with the stable outlook of the government of Nigeria rating and also takes into account Moody's expectation that the company will continue to service its debt from existing liquidity and upstreaming of dividends.

 

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

SEPLAT

The ratings of Seplat could be upgraded if Nigeria's foreign-currency bond ceiling is raised. This would also require no material deterioration in the company's operating and financial performance, market positions and liquidity.

 

The ratings of Seplat could be downgraded in case of a further downgrade of Nigeria's sovereign rating and a lowering of the foreign-currency bond ceiling. In addition, downward rating pressure could arise if there are signs of a deterioration in liquidity or if government-imposed measures were to have an adverse impact on corporate credit quality.

 

DANGOTE

The ratings of Dangote could be upgraded if Nigeria's foreign-currency bond ceiling is raised. This would also require no material deterioration in the company's operating and financial performance, market positions and liquidity.

 

The ratings of Dangote could be downgraded in case of a further downgrade of Nigeria's sovereign rating and a lowering of the foreign-currency bond ceiling. In addition, downward rating pressure could arise if there are signs of a deterioration in liquidity or if government-imposed measures were to have an adverse impact on corporate credit quality.

 

IHS

Moody's would consider an upgrade if the Nigerian sovereign rating is raised or if IHS' revenue and cash flow generation is more significantly diversified outside of Nigeria. An upgrade would also be conditional upon the local currency ceiling, which is currently at B2, not being lowered.

 

A downgrade of the Nigerian sovereign rating would likely lead to a downgrade of IHS' rating, however Moody's will monitor the company's progress in diversifying revenue and cash flow generation outside of Nigeria. A lowering of the local currency ceiling below B3 or a material weakening of the company's liquidity or its ability to receive dividends from Nigeria could lead to a change in outlook or a downgrade. A material deterioration of credit metrics from current levels could also lead to a downgrade.

 

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