Lagos Nigeria, 6 December 2018 — Global Credit Ratings has assigned national scale issuer ratings of BBB+(NG) and A2(NG) in the long term and short term respectively to Axxela Limited, with the outlook accorded as Stable. The ratings are valid until September 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Axxela Limited (“Axxela” or “the Group”) based on the following key criteria:
Axxela is a leading player in the Nigerian natural gas distribution market, with the largest gas distribution capacity. The Group’s competitive position is supported by its Nigerian Gas Marketing Company franchise within the core Lagos and Port Harcourt regions, long term distribution arrangements and strong relationship with technical partners.
Operations are susceptible to supply disruption and regulatory uncertainties, as evidenced by the low revenue in FY16 due to the Niger-Delta unrest. To mitigate this risk, Axxela is embarking on several gas infrastructure developments which should see performance improve in the coming years, as well as hedge against over dependence on a single supplier.
While the gross margin on gas sales remains steady around 23%, overall margin pressure was evidenced over the review period, largely due to variation in service concession revenue and other costs that are not driven by gas volume. Nevertheless, at around 22%, the EBITDA margin has been sufficient to generate strong earnings growth.
Although cash flow for operation has remained positive in all years, this has been reduced by working capital absorptions due to related parties receivables and delays in payment from some large customers. This has necessitated increased debt to fund ongoing capex.
Axxela reports negative tangible equity, although this has been compensated by a N22bn shareholder loan provided in FY16. The loan agreement includes a clause that gives Axxela the option, only at its instance, to convert the loan to preference shares on or before maturity date. Furthermore, upon the occurrence of an event of default and receipt of a demand notice by the lender, all amounts outstanding shall be immediately converted to preference shares. These clauses do imply effective subordination of the shareholder loan, while also mitigating refinancing risk.
Treating the shareholder loan as debt, gearing metrics are elevated, with negative equity based gearing and net debt to EBITDA of 317% at FY17 (FY16: 400%). Moreover, interest on the shareholder loan caused net interest cover to decline to 2x in FY17 and 1H FY18. Excluding the shareholder loan, net interest cover would be 5.4x, and net debt to EBITDA would register below 80%, which is considered moderate, given the relative stability of external debt at around N10bn in recent period.
Axxela plans to restructure its external debt with new debt from the capital market. On the back of new capex, forecasts project a substantial increase in earnings and cash flows over the medium term. However, if budgets are not achieved, Axxela could be burdened with excessive debt service obligations, which would exacerbate the risks in the funding structure.
An upward movement in the rating may follow strengthening of the capital structure through direct equity or other tangible support and attainment of forecasts which translate to an improved earnings and debt serviceability over the medium term. Conversely, delay in rolling out projects and/or reduced sale volumes would see earnings deteriorate and further cash flow pressure. Excessive debt utilisation would see credit protection deteriorate.
NATIONAL SCALE RATINGS HISTORY
Initial/new rating (September 2018)
Rating outlook: Stable
Last rating: n/a
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios, February 2018
RATING LIMITATIONS AND DISCLAIMERS
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; and d.) the ratings are valid till September 2019.
Axxela 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 Axxela Limited.
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.
The information received from Axxela Limited and other reliable third parties to accord the credit ratings included:
– 2017 audited annual financial statement, and four years pro-forma annual financial statements;
– 6-months management accounts to 30 June 2018;
– Internal and/or external management reports;
– A completed rating questionnaire containing additional information on Axxela Limited and its subsidiaries;
– Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties; and
– Information specific to the rated entity and/or industry was also received.