Lagos Nigeria, 31 December 2018 — Global Credit Ratings has affirmed the long term national scale Issuer rating assigned to Chellarams Plc at BB(NG) and maintained the national scale short term rating at B(NG), with the ratings placed on Negative Outlook. Concurrently, GCR affirmed the Senior Unsecured Series 2 Bond rating at BB(NG), with a Negative Outlook. The ratings expire in November 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Chellarams Plc (“Chellarams” or “the Group”) based on the following key criteria:
The ratings reflect Chellarams’ weakening earnings since FY16 and the financial performance challenges over the review period. Some rating support is considered through its diversified businesses, long operational history (over 90 years), and extensive distribution network.
Chellarams’ operations have been constrained by the difficulty in sourcing foreign currency for imports, which has adversely affected production activities and supplies. Accordingly, revenue contracted for the fourth consecutive year to N8.7bn (from N27.4bn in FY14). More significantly, earnings margins continue to narrow due to persistently high overheads and the loss of volumes and scale. Accordingly, operating income deteriorated substantially in FY18 and 1H FY19, and was not even sufficient to cover the net interest charge. An improving trend in earnings is only expected from FY20 and is premised on a sustained improvement in the domestic economy.
Subdued capacity utilisation and efforts to improve debtors days has seen sizeable working capital releases in recent reporting periods. This helped offset the large negative cash generation in FY18, although a N622m discretionary outflow was still reported. Although capex has been curtailed and dividends withheld, Chellarams required proceeds from the sale of assets to cover debt redemption costs in FY18. Negative retained cash is likely to persist as long as the earnings remain weak, whilst liquidity requirements are expected to rise when there is a recovery in operations.
Credit protection factors weakened further in FY18, from the already low assessment by GCR. Thus, although debt reduced to N6.9bn at FY18, net debt to EBITDA spiked to over 1,000% on the back of moderated EBITDA, while net interest coverage fell to just 0.7x (FY17: 1.7x). This reversed the steady improvement evidenced during FY16 and FY17. Based on forecasts provided and 1H FY19 figures, credit protection metrics are likely to be even weaker by FY19. The low credit rating is a reflection of GCR’s significant concerns as to Chellarams’ financial sustainability.
Chellarams expects additional EUR6.5m from DMK Group Germany before FY19, as the latter increase its stake in Chellarams DMK Limited to 50%. This funding is expected to support working capital funding and strengthen revenue growth.
As the Series 2 Bond is a senior unsecured obligation of the Issuer, the Bonds bear the same long term national scale rating as the Issuer. The final bond redemption payment is expected on 17 February 2019.
Upward migration is dependent on a meaningful reduction in debt and corresponding improvement in credit protection metrics. A sustained earnings improvement should support this outcome. However, amidst the weak earnings and negative cash flows, Chellarams is dependent on asset sales to meet debt service obligations. Thus if asset sales, or other cash injections, do not materialise Chellarams may miss debt repayments, triggering a potential default.
NATIONAL SCALE RATINGS HISTORY
Initial rating – Issuer (August 2010)
Long term: BBB-(NG)
Short term: A3-(NG)
Rating outlook: Stable
Initial rating – Bond (November 2012)
Senior Unsecured Series 1 Bond: BB+(NG)
Senior Unsecured Series 2 Bond: BB+(NG)
Rating outlook: Stable
Last rating – Issuer (November 2017)
Long term: BB(NG)
Short term: B(NG)
Last rating – Bond (November 2017)
Senior Unsecured Series 2 Bond: BB(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Chellarams Plc rating reports 2010-17
Glossary of Terms/Ratios, February 2018
RATING LIMITATIONS AND DISCLAIMERS
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 rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings expire in November 2019.
Chellarams Plc 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 credit ratings have been disclosed to Chellarams Plc.
The information received from Chellarams Plc and other reliable third parties to accord the credit rating included:
– 2018 audited annual financial statements (plus four years of comparative numbers),
– budgeted financial statements for the years 2018 to 2020,
– 6-month unaudited management accounts to September 2018,
– corporate governance and enterprise risk framework,
– industry comparative data
– a breakdown of facilities available and related counterparties.
– a completed rating questionnaire
– Trustees’ report dated 11 December 2018 on Series 2 Senior Unsecured Bonds
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.