Announcements Corporate Rating Alerts

GCR affirms Lafarge Africa Plc’s Issuer and Bond ratings at A+(NG); Outlook: Rating Watch

Lagos, 30 November 2018 — Global Credit Ratings (“GCR”) has affirmed the national scale Issuer credit ratings assigned to Lafarge Africa Plc of A+(NG) and A1(NG) in the long term and short term respectively; with the ratings placed on Rating Watch. Concurrently, GCR affirmed the ratings of both the Series 1 Bonds and Series 2 Bonds at A+(NG) respectively, with Outlooks accorded as Rating Watch. The ratings expire in June 2019.

RATING RATIONALE

Global Credit Ratings has accorded the above credit ratings on Lafarge Africa Plc (“LAP” or “Issuer” or “the Group”), as well as the Series 1 and Series 2 Bonds based on the following key criteria:

Lafarge Africa Plc’s strong domestic market position is underpinned by an established international brand, and extensive production and distribution network. While the exposure to two large distinct markets (Nigeria and South Africa) does add positive scale and diversity to the operations, LAP’s performance has been hampered by economic challenges in both countries, albeit with signs of a recovery in Nigeria. Nevertheless, the strong credit rating is underpinned by the ongoing technical and financial support provided by Lafarge Holcim, as demonstrated by the restructuring of shareholder loans and support for recent Rights Issue.

In December 2017, LAP completed a N131.7bn Rights Issue. Of this, N93bn was applied to the debt to equity conversion, whereby LAP converted USD261m of the USD571.2m shareholder loans owed to Caricement B.V to equity and repaid USD82m. According to management, LAP’s foreign currency debt exposure has reduced by 50% following the Rights Issue and debt conversion. The shareholders recently approved the restructuring of the outstanding shareholder loans by extending the tenor for USD293m of the outstanding shareholder loan balance by seven and a half years to 2026, with a 2 year moratorium on principal and interest. Shareholders also gave approval for a further N90bn Rights Issue with the proceeds to be used to settle expensive short term debt.

Despite the positive impact of higher pricing in the Nigerian market, the devaluation in Naira and inflation have weighed adversely on production costs and general expenses resulting in constrained margins, while the South Africa operations have suffered production disruptions. Exacerbated by impairment charges and restructuring costs, the EBITDA margin fell to a review period low in FY17, albeit that the improvements implemented led to some recovery for the nine month period to September 2018 (9M FY18).

The ongoing cash requirements have resulted in sustained high debt levels (despite the FY16 restructuring). Combined with the weaker earnings, net gearing increased almost four-fold to 167% at FY17 and a peak of 212% at 9M FY18. Net debt to EBITDA deteriorated further to 878% at FY17, before moderating to 559% in 9M FY18. Net interest cover fell to just 0.2x in FY17 and 0.7x in 9M FY18, levels of credit protection which are well below those characteristic of highly rated entities. GCR has taken cognisance of the debt restructuring and initiatives to support a recovery in earnings, and will continue to monitor progress going forward, but remedial actions taken to date have not been sufficient to alleviate pressure on the ratings.

Debt risk has been reduced as shareholder loans now account for c.50% of total debt and some loan tenors have been extended until 2026. LAP also demonstrates strong access to capital from banks and the capital market. The recently approved N90bn Rights Issue will also be used to reduce debt and improve financial flexibility.

As the Series 1 Bonds and Series 2 Bonds are direct, unconditional, senior and unsecured obligations of the Lafarge Africa Plc, the Bonds bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bonds’ ratings.

A rating upgrade is unlikely until a sustained earnings increase is evident that allows LAP to fund debt service costs and investment requirements through internal cash resources. A reduction in debt level with a concomitant improvement in credit protection metrics could lead to an upgrade over the medium term. Conversely, if the Rights Issue or other restructuring initiatives fail to materialise, debt metrics will likely remain above the acceptable level for highly rated companies and could lead to a downgrade. Further weakness in earnings will also negatively impact credit protection metrics, placing downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Adekemi Adebambo
Senior Credit Analyst
Lagos
+234 1 904 9462
adekemi@globalratings.net

Committee Chairperson
Dave King
king@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Lafarge Africa Plc Rating Reports, 2010-17
Lafarge Africa Plc Bond Rating Report, October 2016
Glossary of terms/ratios, February 2018

SALIENT FEATURES

GCR affirms that a.) no part of the ratings were 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, security or financial instrument; and d.) The Issuer and Bonds ratings expire in June 2019.

Lafarge Africa 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 Lafarge Africa Plc with no contestation of the ratings.

The information received from Lafarge Africa Plc and other reliable third parties to accord the credit rating included:
– the 2017 audited annual financial statements and audited comparative results for the preceding four years,
– medium term budgets for Nigerian operations
– unaudited management accounts to September 2018,
– a completed rating questionnaire containing additional information on Lafarge Africa Plc,
– 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.

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