The business currently faces a possible financial default risk as a result of Nigerian National Petroleum Company Limited’s inability to pay for an additional 12.75% stake in the Dangote refinery.
According to Fitch Ratings, the risk associated with Dangote Industries Limited’s inadequate liquidity has been made worse by the mismatch between foreign currency borrowing and naira revenue.
The decision to downgrade Dangote Industries Limited’s (DIL) senior unsecured loan rating, which was granted by Dangote Industries Funding Plc, was recently disclosed by Fitch.
Also, Fitch simultaneously placed the ratings on Rating Watch Negative, suggesting that the global rating agency may lower the company’s rating further in the near future, perhaps due to lack of positive expectation about existing conditions.
Dangote Industries Limited is cash tight, according to rating note, due to heavy debt load and FX related pressures on its foreign currency liabilities – which Fitch tagged as mismatch since the company generates revenue in local currency.
Fitch analysts noted deterioration in Dangote Industries Limited liquidity position due to lower than expected disposal proceeds relating to its deals with NNPCL and inability to meet expected revenue target from the Refinery.
The company had expected NNPCL payment to offset part of the syndicated loans used to finance the Dangote Refinery project. However, NNPCL backed out from the deal.
“NNPC Limited periodically assesses its investment portfolio to ensure alignment with the company’s strategic goals”, Olufemi Soneye, NNPCL Chief Corporate Communications Officer said in a statement.
The decision to cap its equity participation at the paid-up sum was made and communicated to Dangote Refinery several months ago.
In 2021, Nigerian National Petroleum Corporation (NNPC) acquired a 7.25% stake in Dangote Refinery’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 the Refinery in 2024. The Dangote Industries Limited 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 Fitch Ratings view. Naira devaluation affected Dangote Industries, and lack of contracted backup funding to repay its significant debt facilities maturing on 31 August 2024 is seen as potential risk.
Dangote Industries Limited has not released its audited financial statement, according to Fitch Ratings, which see the development as a corporate governance issue. Fitch spot uncertainty relating 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”.
Dangote Industries Limited 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.
Dangote Refinery has yet to optimise production as of first half of 2024, worked at 50% below expectation amidst teething issues relating to its operations.
Fitch ratings suggest that the company earnings before interest tax and amortisation (EBITDA) contribution from the Refinery came short of expectation as the facility produced at half of its capacity in the first half of 2024.
The refinery operated at around 50% capacity and produced between 325,000 bpd to 375,000 bpd. Fitch analysts expect gradual improvement in EBITDA contribution from DORC going forward following the initiation of gasoline production in Q3 this year.
Devaluation of the Nigerian naira worked against the company’s survival and performance in the year. Naira devaluation caused the group to record a significant FX loss of N2.7 trillion in 2023 as the company faces a mismatch between USD denominated debt and domestic revenues.
Dangote Debts
The Dangote Industries Limited has senior secured debt raised at subsidiary levels amounting to USD2.7 billion at the end financial year 2023 representing 49% of total group debt.
Fitch said 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.
The company has also raised senior unsecured debt amounting to N350 billion with long dated maturities in 2029 and 2032 to finance capex requirements. Fitch said lack of tangible steps to refinance upcoming maturities or steps towards default-like financial restructuring or payment default could lead to further rating downgrade.
Dangote Industries Limited consolidated liquidity profile comprised of N1.4 trillion of readily available cash at the end of financial year 2023 and N400 billion as of 1Q-2024, with no headroom under the revolver facility.
Fitch expect further deterioration in distributable cash due FX swings and capital requirements in 2024 and 2025.
It said the company’s liquidity is insufficient to address upcoming debt maturities. The group plans to finance the substantial syndicated loan maturing in August 2024 through the divestment proceeds of 12.75% stake in Dangote Refinery. However, the successful execution is highly uncertain, in Fitch view.
