Lagos, 31 January 2019 — Global Credit Ratings has accorded final public ratings of BBB+(NG) to both the Series 1 Senior Unsecured Bonds (“Series 1 Bonds”) and Series 2 Senior Unsecured Bonds (“Series 2 Bonds”) issued by Flour Mills of Nigeria Plc (“FMN” or “the Company” or “the Issuer”), under the Issuer’s N70bn Bond Issuance Programme; with the Outlooks accorded as Stable. The ratings will expire in September 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to the Issuer’s Series 1 Bonds and Series 2 Bonds based on the following key criteria:
FMN maintains leadership position within the Nigerian flour milling industry, underpinned by its substantial multi-product milling capacity, wide distribution network, strong brands and business diversification. More significantly, its backward integration initiatives are beginning to underpin a more sustainable supply chain, while enhancing margins. GCR affirmed the Issuer’s long-term rating at ‘BBB+(NG)’ with a Stable Outlook in September 2018.
Flour Mills of Nigeria Plc has secured approval from Securities and Exchange Commission to issue Bonds into the Nigerian capital market, under a N70bn Bond Issuance Programme. The Issuer raised an initial N20.1bn in two tranches of N10.1bn and N10bn respectively in November 2018. Net proceeds have been utilised to reduce expensive short term debt. The Series 1 Bonds and Series 2 Bonds (“the Bonds”) have tenors of three years and five years respectively with maturity dates of 30 October 2021 and 30 October 2023. The Bonds constitute direct, unconditional, senior and unsecured obligations of the Issuer. The Series 1 Bonds and Series 2 Bonds bear fixed interest rates of 15.5% and 16% respectively. Interest will accrue on the Bonds from the issue date and is payable semi-annually in arrears.
The Programme Trust Deed does not offer Bondholders any security over assets but does feature a negative pledge and other covenants to protect the interest of Bondholders.
As the Series 1 Bonds are direct, unconditional, senior and unsecured obligations of the Issuer, the Bonds will bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bond rating.
Despite volatile economic environment, FMN has demonstrated earnings resilience, supported by increasing selling prices and volume growth as capacity expanded. Coupled with cost rigour, this has seen profit margins strengthen, with the EBITDA margin widening above 10% in FY17 and FY18. Management plans to further mitigate the high cost of importation of its raw materials by internalising more aspects of its supply chain.
FMN has evidenced volatile cash flows over the review period, attributable to high working capital pressures, particularly in FY17 and FY18. FMN undertook a N40bn rights issue, which, combined with N12bn of cash on hand was utilised to settle short term debt. Nevertheless, despite the decline in gross debt to N103bn at FY18, earning based gearing metrics remain fairly high (above 200%). Debt had climbed to N118bn as at 1Q FY19, almost double the forecast level, but management expects debt to reduce significantly in 2H FY18 and meet its budget. If the expected reduction in debt does not materialise, gearing metrics could rise further and would put pressure on the current rating. FMN will thus need to generate robust cash flows from core operations and maintain adequate liquidity to enable it achieve a substantial reduction in debt and improved gearing metrics, in line with expectations.
The net proceeds from the Series 1 Bonds and Series 2 Bonds Issue were utilised to settle short term debt, and although improved, short term debt still accounted for 65% of total debt at 9M FY19 (6M FY19: 85%). GCR considers this debt concentration to be a major risk factor and constraint to the credit ratings.
The final rating accorded to the each Series relates to ultimate payment of principal and interest (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity).
NATIONAL SCALE RATINGS HISTORY
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
• Global Master Criteria for Rating Corporate Entities (February 2018);
• Flour Mills of Nigeria Plc Issuer rating reports, 2016-2018;
• Glossary of terms/ratios, February 2018
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings expire in September 2019
Flour Mills of Nigeria Plc and the Issuing Houses participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The ratings have been disclosed to Flour Mills of Nigeria Plc.
The information received from the Issuer, the lead Issuing House and other reliable third parties to accord the Bond rating included: Shelf Prospectus, Series 1 and Series 2 Pricing Supplements, Programme Trust Deed as well as Series 1 and Series 2 Trust Deeds.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.