Lagos, 30 August 2018 — Global Credit Ratings has affirmed the national scale ratings assigned to Forte Oil PLC (“Forte” or “the Group”) at A-(NG) and A1-(NG) in the long term and short term respectively. Concurrently, its Issue rating of A-(NG) was affirmed. The ratings have been placed on a Rating Watch; and are valid until March 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Forte based on the following key criteria:
Forte maintains strong market presence in the Nigerian downstream oil industry, whilst possessing significant assets across the value chain. It leverages close relationships with suppliers, an experienced management team and an extensive distribution and retail network, which has helped it to outperform many peers.
Group earnings were severely impacted by supply shortages during FY17, as the dearth of foreign exchange and currency volatility impacted Forte’s ability to procure oil stocks. This drove material underperformance against budget. However, Forte is now placing greater focus on the downstream operations with the intention of substantially expanding its retail network and adding to its portfolio of oils and lubes (which enjoy wider margins). Whilst the more focussed business strategy is positively considered, cognisance is taken of the likely challenges in expanding the fuels business, particularly in light of the relatively low margins, volatile oil market and general vagaries of the Nigerian environment. Accordingly, Forte will need to demonstrate the ability to ramp up profitability in the short to medium term.
While the power business appears to have contributed substantially to Forte’s earnings, in reality it has placed the group under severe financial pressure as it has not received payments for much of its electricity sales. As the payment problem in the power industry is structural, Forte intends to dispose the business, and has indicated that the bidding process is ongoing. However, the Rating Watch reflects the likely challenges in disposing of the power business, as there is no imminent transaction and Forte remains responsible for cash flow and liabilities of the business, notwithstanding the change in accounting treatment.
Aside from the major debtor challenges, Forte’s working capital cycle necessitates substantial short term debt facilities to cover the cycle. To this end, Forte has standby facilities with four local banks in excess of N30bn (as at end-March 2018), albeit that substantial draw-downs could lead to excessive gearing.
Gross debt reduced by N14.7bn to N34.8bn at FY17 (albeit higher than projections), but as Forte utilised cash reserves to settle obligations, net debt remained largely unchanged. Forte anticipates that total debt will reduce further by FY18, but this is dependent on the attainment of strong earnings and cash flows, as assets sales are unlikely to be concluded by the year-end. Accordingly, the sales of the power business, planned equity issuance, and the receipt of outstanding subsidy claims, are crucial to ensuring that Forte has sufficient funding to complete its restructuring.
The expected contraction in margins due to the exclusion of the power business was already evident in 1Q FY18. The gross margin fell to 8.8% (FY17:18.6%) while the operating margin narrowed to 2.9% (FY17: 10.3%). Thus, future profitability will be highly dependent on the extent to which Forte can increase sales volumes and garner economics of scale.
No ratings uplift can be considered before the successful sale of the power business and other subsidiaries; and/or the receipt of outstanding subsidy receivables. Thereafter, the demonstrated ability to expand the retail network, and steadily improve earnings/profitability and cash flows is critical. The Rating Watch relates primarily to the expected sale of the power business. Failure to reach an agreement on the sales would indicate that working capital pressure is likely to persist and thus lead to negative rating movement. Sustained weak cash and liquidity metrics would also be negatively considered.
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 (July 2017)
Long term: A-(NG)
Short term: A1-(NG)
Series 1 Fixed Rate Bond: A-(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Forte Oil PLC Rating Reports (2016-17)
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 March 2019.
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, and were amended following an appeal.
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 2017 (plus four years of comparative numbers);
• unaudited management accounts to March 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.