Lagos, 28 January 2020 — Global Credit Ratings has accorded indicative public ratings of BBB+(NG) respectively to the Series 3 Senior Unsecured Tranche A Bonds (“Tranche A Bonds”) and Series 3 Senior Unsecured Tranche B Bonds (“Tranche B Bonds”) to be 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 final ratings will be accorded upon receipt of satisfactorily signed and executed final transaction documents. The indicative ratings will expire in April 2020.
Flour Mills of Nigeria Plc registered a N70bn Bond Issuance Programme (“the Programme” or “BIP”) with Securities and Exchange Commission in November 2018. Under the Programme, Bonds will be issued in series, with an initial N20.1bn already raised in two tranches in November 2018; being Series 1 Bonds with a nominal value of N10.1bn and Series 2 Bonds with a nominal value of N10bn. FMN intends to issue up to N20bn in Series 3 Tranche A and B Bonds (“the Bonds”) under the BIP during 1Q 2020. The actual bond principal amounts will be confirmed following book building. The bulk of net proceeds (80%) will be utilised to settle short term debt drawn down from bank loans and for working capital requirements (20%). The Tranche A Bonds and Tranche B Bonds have tenors of three years and five years respectively with expected maturity in 2023 and 2025. Similar to earlier issuances, the Series 3 Tranche A and B Bonds will constitute direct, unconditional, senior and unsecured obligations of the Issuer.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to the Issuer’s Series 3 Tranche A and Tranche B Bonds based on the following key criteria:
FMN maintains a leading position in the Nigerian flour milling industry, driven by its experienced management team, extensive milling capacity, product diversification and a broad distribution network. GCR affirmed the Issuer’s long-term rating at ‘BBB+(NG)’ with a Stable Outlook in October 2019.
The Programme Trust Deed (“PTD”) 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 3 Tranche A and B 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 ratings assigned to the Issuer will directly affect the Bond ratings.
Although FMN has reported progressively reduced external debt, its credit protection metrics remain under pressure due to constrained cash generation and its highly working capital-intensive operations, exacerbated by related party requirements on FMN’s liquidity. As such, net debt to EBITDA rose to 2.7x in FY19 and registered above 2.8x at 1H FY20. Notwithstanding modest improvements, interest coverage is relatively low (1.6x), while operating cash flow coverage of debt is expected to remain weak/negative.
Net proceeds from the Series 1 Bonds and Series 2 Bonds Issue were used to settle certain maturing debt obligations, thus, short term debt declined to 57% of total debt in 1H FY20 (FY19: 72%), albeit still high. Ongoing refinancing and liquidity risk remain elevated, especially given persistent negative free cash flows. In addition to Tranche A and Tranche B Bonds, the Issuer intends to term out certain bank facilities, which would be supportive of a materially enhanced debt maturity profile, with approximately 25% of debt maturing in the first two years. Coupled with more sustainable operating cash flows, this would bode positively for FMN’s funding and liquidity profile.
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, 2016-2019;
• 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 indicative Bond ratings expire in April 2020.
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 indicative Bond 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: Programme Trust Deed, Shelf Prospectus, Draft Series 3 Tranche A Trust Deed, Draft Series 3 Tranche B Trust Deed, Draft Series 3 Tranche A Pricing Supplement, Draft Series 3 Tranche B Pricing Supplement.
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.