March 26, 2021/Moody’s Investors Service 

Moody’s Investors Service (“Moody’s”) has today assigned a (P)B2 local currency rating and Aa3.ng national scale rating (NSR) to the NGN300 billion domestic medium term note program (DMTN) issued by Dangote Cement Plc (DCP) and assigned a B2 local currency rating and Aa3.ng NSR to the proposed series 1 notes to be issued under the DMTN program.

DCP’s B1 and Aa2.ng corporate family ratings (CFR), B1-PD probability of default rating and B2/Aa3.ng ratings on its existing NGN100 billion senior unsecured bonds due 2025 are unaffected. The negative outlook is unchanged.

The assigned ratings are subject to review of final documentation and assume no material change in the terms and conditions of the transaction as advised to Moody’s.

RATINGS RATIONALE

The (P)B2 and Aa3.ng ratings assigned to the DMTN program and B2/Aa3.ng ratings to the company’s series 1 unsecured notes are one notch lower than the company’s B1 CFR. This reflects their subordination to the company’s secured debt in the capital structure. In addition, the series 1 notes do not benefit from upstream guarantees from operating subsidiaries where the bulk of the secured debt is issued. As a result, the notes effectively rank junior to other operating subsidiary secured liabilities in a default scenario.

This is the second long-term bond that DCP is issuing, highlighting the company’s ongoing commitment to extend its debt maturity profile. Moody’s view this as a positive step to reducing its reliance on short-term debt which, assuming a NGN100 billion bond issuance, will reduce the proportion of short-term debt towards 50% from 67% of DCP’s NGN483 billion debt obligations as of 31 December 2020. However, in Moody’s opinion, DCP’s liquidity remains exposed to ongoing refinancing risks because of its high proportion of short-term debt and sizable annual dividends payments (NGN272 billion recommended by the board for 2020, subject to AGM approval). Dividend payments, which occur in May/June each year, reduce the company’s cash balance (NGN146 billion as of 31 December 2020) that provide a liquidity buffer against any non-rollover of short-term debt liabilities. In Moody’s view, DCP has limited flexibility to reduce its annual dividends because its main shareholder, Dangote Industries Limited which owns 85.75% of DCP, is reliant on these funds to help complete its oil refinery project which Moody’s understands is 80% complete. Moody’s recognizes 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.

The issuance will have a limited impact on leverage given proceeds will be used to repay short-term debt, fund ongoing capital projects and for working capital requirements. Post the bond issuance, Moody’s expects gross debt / EBITDA to remain conservatively positioned around 1.0x for 2021.

DCP’s B1 CFR, which is one notch above the Government of Nigeria’s B2 rating, considers the company’s strong intrinsic credit quality and majority naira debt structure balanced against meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level.

The B1 CFR is supported by the company’s (1) strong market presence in Nigeria and other African markets in which it operates; (2) high gross margins above 60% on a Moody’s adjusted basis; (3) low leverage of 1.0x, as measured by gross debt/EBITDA, and high interest coverage of 7.1x, as measured by EBIT/interest expense, as of the last twelve months to 30 September 2020; (4) funding policies that match debt funding to the local currency cash flow generation; and (5) 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, representing 69.6% of revenues in 2020; (4) high reliance on short-term debt funding exposing the company to liquidity risk; and (5) an aggressive dividend policy.

RATIONALE FOR THE NEGATIVE OUTLOOK

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

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

A rating upgrade is unlikely, given DCP’s B1 CFR is constrained by the Government of Nigeria’s local currency issuer rating of B2. Due to the high revenue contribution from its domestic operations, there is a strong interlinkage between DCP’s rating and the sovereign rating, which prevents DCP to be rated more than one rating level above the sovereign. Even if the sovereign rating were to be upgraded, DCP would need to demonstrate a track record of good liquidity management for an upgrade to be considered.

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 (1) liquidity does not improve; (2) the Nigerian government introduces special taxes, levies or other punitive measures that negatively impact DCP’s profits or cashflow, such that 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; and (3) DCP moves away from its policy of matching the currency of its underlying cash flows with that of its debt.