Lagos, 31 October 2019 — Global Credit Rating Co. Limited (“GCR”) has affirmed the national scale ratings assigned to Flour Mills of Nigeria Plc (“FMN” or “the Company”) at BBB+(NG) and A2(NG) in the long term and short term respectively, with the outlook accorded as Stable. Concurrently, the national scale ratings accorded to the Bond Issuances were also affirmed as follows:
• N10.1bn Series 1 Senior Unsecured Bonds: BBB+(NG), Stable Outlook
• N10bn Series 2 Senior Unsecured Bonds: BBB+(NG), Stable Outlook
The national scale Issuer and Bonds ratings are valid until September 2020.
RATING RATIONALE OF THE ISSUER
GCR has accorded the above credit ratings to FMN based on the following key criteria:
FMN occupies a leading position in the Nigerian flour milling industry, driven by its experienced management team, substantial multi-product milling capacity, product diversification and wide distribution network.
Revenue was marginally impacted by a challenging economic landscape, albeit in line with FY19 projections. While GCR notes FMN’s strong revenue baseline, 1Q FY20 results indicated a 10% y/y decline in the top line, with further variability likely to arise from the impact of the tough operating environment. Management projects a lean (4%) growth in FY20, reflecting expectations for increase in competition amid subdued demand. In the long term, top line growth is forecast to be driven by higher volumes and the introduction of higher margin products to the existing portfolio.
Margins narrowed in FY19, primarily attributable to higher commodity prices of key inputs (mainly wheat) and increase in marketing and promotional activities. However, some uptick was seen in 1Q FY20 (relative to FY19, but below 1Q FY19) partly attributable to the exclusion of the agro-allied and fertilizer businesses in FY20. While some respite in commodity prices have recently occurred, FMN’s profits will remain volatile and susceptible to vagaries in the international prices.
In FY19, the gross finance cost reduced by 42%, albeit credit protection remained low with a net interest coverage of 1.5x (FY18: 1.8x), due to weaker operating profits. Management projects a net interest coverage of 4.7x, on the back of enhanced operating income and lower interest payment, but expects a negative net operating cash flow in FY20, with significant improvement thereon only in the medium to long term. GCR is particularly concerned by the persistently negative operating cash flow coverage of debt.
Consistent funding support to subsidiaries has been a major source of working capital pressure to FMN since FY17. This has resulted in negative operating cash coverage of debt in all the review years (save for FY16). While FMN’s intention is for subsidiaries to raise funding independently without recourse to the parent, GCR maintains the view that such funding support will continue over the medium term, until the subsidiaries are expected to have seen substantial improvement in margins and garnered scale.
FMN’s debt position moderated 23% in FY19 as proceeds from bonds and rights Issues were utilised to redeem some short term debts. However, near-term maturities remained high at 72% (FY18: 85%), reflecting elevated refinancing risk, especially when taken in conjunction with negative free cash flows. To mitigate this, FMN is planning to issue a N20bn bond in FY20 and access additional long term concessional facilities to repay existing short term debt. This will see short term maturities moderate to 25% of total debt in the financial year, while net debt to EBITDA is projected to moderate gradually to 100% by FY23 from 272% in FY19 (FY18: 220%).
RATING RATIONALE OF THE ISSUE
In November 2018, FMN issued notes in two tranches of N10.1bn and N10bn respectively, under its N70bn Bond Issuance Programme (“the Programme” or “BIP”). Net proceeds have been utilised to reduce more expensive short term debt. The Series 1 Bonds and Series 2 Bonds (“the Bonds”) have tenors of three years and five years respectively, with maturity dates of 30 October 2021 and 30 October 2023. The Bonds constitute direct, unconditional, senior and unsecured obligations of the Issuer.
GCR has accorded final, public, national scale long term credit rating of ‘BBB+(NG)’, to the Series 1 Bonds and Series 2 Bonds respectively. The ratings accorded to the Series 1 Bonds and Series 2 Bonds relate to ultimate payment of principal and interest (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity).
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. There has been no change to the structure of the transaction.
As the Series 1 and Series 2 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.
NATIONAL SCALE RATINGS HISTORY
Samuel Popoola/Adekemi Adebambo
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Flour Mills of Nigeria Plc Rating Reports (2016-18)
Glossary of Terms/Ratios (February 2018)
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.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/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.COM.NG.
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 2020.
FMN participated in the rating process via 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 Flour Mills of Nigeria Plc.
The information received from Flour Mills of Nigeria Plc, the lead Issuing House, Joint Trustees and other reliable third parties to accord the credit ratings included:
• the audited accounts for the year ended 31 March 2019, and four years audited financial statements;
• information specific to the rate entity and/or industry was also received;
• completed rating questionnaire.
• trustees’ performance report dated 26 August 2019, Payment Account bank statement, Shelf Prospectus, Series 1 and Series 2 Pricing Supplements, Programme Trust Deed as well as 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.