Global Credit Ratings has accorded the above credit rating(s) on Dana Group of Companies Limited based on the following key criteria:
Established as a pharmaceutical manufacturer in the mid 1980s, business operations have expanded significantly to include automotive retail, plastics manufacturing, aviation, steel manufacturing and food processing activities. However, operations have underperformed in recent years, due to a mix of external and internal factors. This has led to the restructuring or closure of certain operations, while Dana Steel was added to the group to shore up performance. On the back of a strong steel performance, operating profit increased to N2bn in F12 and by an annualised 48% as at March 2013 (“YTD13”). This limited the impact of margin pressure in the rice business and exit from unprofitable business lines. Besides steel, Dana Plast and Dana Drugs also reported an improved performance, albeit that group earnings remain well below initial forecasts.
Following the inclusion of Dana Steel and the positive impact of the revaluation of assets, gross and net gearing declined below 200% and was in line with budget. In contrast, earnings based gearing exceeded budget substantially due to the weak earnings, with net debt to EBITDA remaining very high at 576% at FYE12 (FYE11: 608%). Also constraining the rating has been the low net interest coverage of just above 1x over the review period.
Dana initiated a Domestic Medium Term Note Programme in 2010, and subsequently raised N8.01bn in Series 1 bonds as at 1Q F12. The bond includes some structural features, such as a Minimum Reserve Account (“MRA”) funded with 20% of the principal amount outstanding on the Series 1 bonds, and managed by the joint Trustees. However, the recovery rate calculation of 40% was not deemed sufficient to warrant a notching up, particularly in light of Dana’s elevated net debt to EBITDA. Dana plans to raise additional funds through a discrete bond Issue during 2H F13, mainly to finance expansion in the steel business. The additional debt will place further pressure on the Group’s balance sheet and increase the risk profile. Earnings must improve significantly, to contain gearing metrics within acceptable levels.
Positive rating action is dependent on a significant reduction in gearing ratios, and a sustained ability to generate strong profitability. While the inclusion of other subsidiaries into the group structure may increase scale, this would have to be in conjunction with an improved performance from existing operations to warrant a rating upgrade. A further deterioration in performance would likely lead to a downgrade, as would greater recourse to debt than what has been indicated. This would severely impact the group’s ability to honour principal and interest obligations on bonds, from the already weak debt serviceability ratio.
|NATIONAL SCALE RATINGS HISTORY|
|Long term: BBB-(NG);|
|Short term: A3(NG);|
|Last rating (Aug/2012)|
|Long term: BB+(NG);|
|Short term: B(NG);|
|+234 1 462 2545|
|Sector Head: Corporates|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
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.
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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.
Dana Group of Companies Limited 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 rating/s has been disclosed to Dana Group of Companies Limited with no contestation of the rating.
The information received from Dana Group of Companies Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.