Lagos, 21 January 2019 — Global Credit Ratings has affirmed the national scale ratings assigned to Aarti Steel Nigeria Limited at BBB-(NG) and A3(NG) in the long term and short term respectively, with the outlook accorded as Stable. The ratings are valid until September 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Aarti Steel Nigeria Limited (“Aarti” or “the Company”) based on the following key criteria:
Aarti maintains a strong market position in the Nigerian steel manufacturing industry, underpinned by its extensive distribution network, product diversity and ongoing investment in additional capacity. The extensive experience of its key shareholders and management is also factored into the rating.
The backward integration through Aarti Rolling Mills has translated to a more stable supply chain (compared to the shortage seen in FY16). Thus, despite the continued weak environment, revenue was stable as budgeted in FY17. Significant annualised growth of 23% in revenue was seen in 1H FY18, reflecting the steady supply of inputs, with further volumes growth expected in the latter half of the year.
Although, profit margins tapered somewhat in FY17 due to higher production and overhead costs, they remain sound and in line with industry dynamics. However, as a result of the substantial increase in the interest charge, NPBT halved. As Aarti achieves greater economies of scale, costs are expected to moderate and support margin enhancement and an improved profitability.
Substantial net operating cash outflows were reported in FY16 and FY17, triggered by weaker EBITDA and large working capital absorptions (owing to significant prepayments and the settlement of trade creditors). While the substantial advance payments are a form of support to the subsidiary and ensure more stability in the supply chain, they do constrain liquidity. In all years, discretionary cash flows have been weak or negative and considered a constraint on the rating.
Gross debt spiked to N6.9bn at FY17 and further to N7.1bn at 1H FY18, as funding was required for investment and working capital. With low cash holdings, net gearing weakened further to 91% in FY17 (FY16: 59%), while net debt to EBITDA spiked to 381% respectively (FY16: 213%). Such credit protection metrics are considered to be moderately weak for the volatile steel industry. More significantly, interest coverage fell to just 1.4x in FY17 (FY16: 2.1x), albeit improving slightly to 1.6x in 1H FY18. The group is also exposed to adverse foreign exchange movement as 77% of its loans are dollar-denominated.
Aarti has indicated that negotiations are ongoing to convert its unsecured loan (65% of total debt) to equity. This notwithstanding, given the ongoing capex expansion programme (spanning over the medium term), debt is projected to increase even further. Accordingly, achieving the aggressive earnings target is critical to ensuring adequate gearing metrics.
Positive ratings consideration is dependent on the completion of the expansion projects and the demonstrated ability to increase volumes and profitability. A significant reduction in debt and gearings will also be positively considered. However, sustained liquidity pressures (whether due to weaker earnings, working capital pressure or investment) may result in higher debt and thus a deterioration in credit protection metrics.
NATIONAL SCALE RATINGS HISTORY
Initial rating (November 2012)
Long term: BBB(NG)
Short term: A3(NG)
Rating outlook: Stable
Last rating (February 2018)
Long term: BBB-(NG)
Short term: A3(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Corporate Entities, updated February 2018
Aarti rating reports (2012-17)
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; d) the ratings are valid until September 2019.
Aarti Steel participated in the rating process via face-to-face management meetings, teleconferences and other written correspondences. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Aarti with no contestation of the ratings
The information received from Aarti Steel Nigeria Limited and other reliable third parties to accord the credit rating included;
• the audited accounts for the year ended 31 December 2017 (plus four years of comparative numbers);
• unaudited management accounts to 30 June 2018
• industry comparative data and regulatory framework
• a breakdown of facilities available and related counterparties
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.