Lagos, 21 September 2018 — Global Credit Ratings has accorded indicative public ratings of BBB+(NG) respectively to the Series 1 Senior Unsecured Bonds (“Series 1 Bonds”) and Series 2 Senior Unsecured Bonds (“Series 2 Bonds”) to be issued by Flour Mills of Nigeria Plc (“FMN” 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 January 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.
The Issuer has filed an application with Securities and Exchange Commission (“SEC”) to issue Bonds into the Nigerian capital market, under a N70bn Bond Issuance Programme (“BIP” or the “Programme”). Under the Programme, Bonds will be issued in series, with an initial N30bn expected to be raised in two tranches of N10bn and N20bn respectively in 2018. (Actual amounts will be confirmed following book building). Net proceeds would be utilised to reduce expensive short term debt and for working capital requirements. The Series 1 Bonds and Series 2 Bonds (“the Bonds”) have tenors of three years and five years respectively with expected maturity in 2021 and 2023. The Bonds will constitute direct, unconditional, senior and unsecured obligations of the Issuer.
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 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.
Although GCR has highlighted its concern over the short term debt concentration, (with around 85% maturing during FY19), FMN has indicated that the bulk of the Series 1 Bonds and Series 2 Bonds Issue proceeds will be utilised to settle short term debt. If achieved, this should improve FMN’s debt maturity 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, 2016-2018;
• Glossary of terms/ratios, February 2018
RATING LIMITATIONS AND DISCLAIMERS
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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 January 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 indicative Bond ratings have been disclosed to Flour Mills of Nigeria Plc with no contestation of the ratings.
The information received from the Issuer, the lead Issuing House and other reliable third parties to accord the Bond rating included: Draft Shelf Prospectus, Draft Series 1 and Series 2 Pricing Supplements, Draft Programme Trust Deed as well as Draft 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.