Inside Fitch Ratings’ Report As Dangote Industries Limited Is Downgraded
Fitch Ratings has downgraded Dangote Industries Limited (DIL) National Long-Term Rating to ‘B+(nga)’ from ‘AA(nga)’ and senior unsecured debt rating issued by Dangote Industries Funding Plc to ‘B+(nga)’ from ‘AA(nga)’. Fitch has simultaneously placed the ratings on Rating Watch Negative (RWN). A full list of rating actions is below.
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 31 August 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.
Immediate Refinancing Risk: DIL has immediate debt servicing requirements related to the syndicated loan raised to finance the construction of Dangote Oil Refining Company (DORC). Further delays in meeting the funding requirements would significantly increase the likelihood of financial restructuring or default and lead to further rating downgrade.
Oil Refinery Ramp-up in Progress: DORC has a nominal production capacity of 650,000 barrels per day (bpd) of refined oil products, which will be sold in both the Nigerian domestic and international markets. During the 1H 2024 the refinery operated at around 50% capacity and produced between 325,000 bpd to 375,000 bpd, but the EBITDA contribution from DORC has been far below our previous projection as the facility is ramping-up and optimizing production. We expect gradual improvement in EBITDA contribution from DORC going forward following the initiation of gasoline production in Q3 this year.
FX Mismatch Eroding Liquidity: 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.
Complex Debt Composition: The group has senior secured debt raised at subsidiary levels amounting to USD2.7 billion at end-2023 representing 49% of total group debt. The debt structure also includes an on-demand shareholder loans from its ultimate parent Greenview plc, amounting to USD2.3 billion representing 43% of total debt. We view the shareholder loans as subordinated debt. The company has also raised senior unsecured debt amounting to NGN350 billion with long dated maturities in 2029 and 2032 to finance capex requirements.
DORC Structure Evolving: In 2021, Nigerian National Petroleum Corporation (NNPC) acquired a 7.25% stake in DORC’s project entity for USD1.0 billion, with an option to purchase the remaining 12.75% stake by June 2024. Since the option has not been exercised, the group plans to divest a 12.75% stake in DORC in 2024. The group intends to service its significant syndicated loan maturing in August 2024 from the equity divestment. However, timely divestment and meeting the imminent maturity is highly uncertain in our view.
Reduced Cement Profitability: We expect 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% to NGN2.2 trillion in 2023 and EBITDA to NGN886 billion from NGN708 billion in 2022. Export sales of clinker to West African markets from Nigeria, stood at NGN12.3bn in 2023 with a 400% increase year-on year.
Fertilizer Utilization Rate Still Low:
Dangote Fertilizer (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 utilization rate improved but remains low at just 50% in 2023 (up from 32% in 2022). The utilisation rate was hindered by inadequate gas supply which in our view affects operational efficiency. The company anticipates further improvements in utilization once the ongoing pipeline repairs are completed in August 2024.
