Lagos, 25 July 2019 — Global Credit Ratings has affirmed the long term national scale ratings assigned to Forte Oil Plc (“Forte” or “the Company”) at A-(NG). Concurrently, its Issue rating of A-(NG) was affirmed. The outlook was accorded as Stable. However, the short term rating was downgraded to A2(NG), with the outlook accorded as Stable. The ratings are valid until April 2020.
Global Credit Rating Co Limited (“GCR”) has accorded the above credit ratings to Forte based on the following key criteria:
The ratings factor Forte’s strong market presence in the Nigerian downstream oil industry. The Company owns significant assets across the value chain with an extensive distribution and retail network, supported by long-term relationships with suppliers, and an experienced management team.
Forte successfully divested from its power business and other subsidiaries in 1H FY19. Given the persistent cash flow challenges, the subsidiaries were a substantial drain on the core business and were partly responsible for the elevated gearing. Excluding the power business, gross debt from continuing operations fell to N18.7bn in FY18 (FY17: N34.8bn). This translated into a much lower net debt to EBITDA of 423% at FY18, but still well above forecasts. The metrics deteriorated further to 662% in 5M FY19. Without the power business working capital pressure is also expected to ease, which will contribute to lower gearing. In addition, Forte plans to utilise proceeds from the sale to reduce debt. The assigned ratings are thus premised on a sustained reduction in earnings based gearing to below 70% over the medium term and reach a net ungeared position by FY21.
GCR considers Forte’s liquidity position to be relatively weak, which, in conjunction with low debt service coverage and significant budget underperformance contributed to the one-notch downgrade of the short-term rating. The high short-term maturities (70% of total debt), are reflective of the short-term nature of fuel inventories, but cash holdings are very low, offering no buffer against debt maturities. Some comfort is taken from Forte’s strong banking relationships, and the N13bn unutilised credit facilities. The imminent maturity of the Federal Government’s irrevocable unconditional promissory note should also somewhat bolster liquidity.
Excluding the power business (28% of revenue in FY17), Forte still demonstrates strong revenue generating capacity, underpinned by the ongoing retail expansion and aggressive marketing initiatives. However, the remaining business reports an inherently lower profit margin, due to the high cost environment, amid tight regulation of premium motor spirit “PMS” (70% of total revenue). This, coupled with high finance costs, saw net interest coverage narrow to a low 1.6x in FY18 (FY17: 3.1x), which shrank further to 0.5x in 5M FY19. In the medium to long term, Forte plans to strengthen its margins through increased fuel volumes and a focus on higher margin lubes and greases.
A rating uplift is dependent on demonstrated reduction in debt and a significant ramping up of volumes and margins (in line with targets). Conversely, persistently high gearing metrics post the sale, as well as poor interest coverage, could negatively impact the rating.
NATIONAL SCALE RATINGS HISTORY
Long term: A-(NG) (June 2016)
Short term: A1-(NG) (June 2016)
Series 1 Fixed Rate Bond: A-(NG) (December 2016)
Rating outlook: Stable
Last rating (August 2018)
Long term: A-(NG)
Short term: A1-(NG)
Series 1 Fixed Rate Bond: A-(NG)
Rating outlook: Rating Watch
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Corporate Entities, updated February 2018
Forte Oil PLC Rating Reports (2016-18)
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 April 2020.
Forte 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 the Issuer.
The information received from Forte Oil PLC and other reliable third parties to accord the credit rating included;
• the audited accounts for the year ended 31 December 2018 (plus four years of comparative numbers);
• unaudited management accounts to 31 May 2019
• 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.