Announcements Corporate Rating Alerts

GCR assigns national scale ratings of BBB-(NG)/ A3(NG) to Babban Gona; Stable Outlook.

Lagos, 25 October 2021 – GCR Ratings (“GCR”) has assigned national scale long term and short term Issuer ratings of BBB-(NG) and A3(NG) respectively to Babban Gona Farmer Services Nigeria Limited, with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Babban Gona Farmer Services Nigeria Limited Long Term Issuer National BBB-(NG) Stable
Short Term Issuer National A3(NG)

Rating Rationale

The ratings of Babban Gona Farmer Services Nigeria Limited (“Babban Gona” or “the Company”) balance its strong environmental, social and governance (“ESG”) impact on its host communities and strong liquidity coverage against fast rising debt amid persistently negative operating cash flows (due to huge inventory requirement as it scales operations), which has translated to weak leverage and cash flow metrics.

Babban Gona’s ratings are supported by the strong competitive position, which reflects the underlying positive environmental and social impact/mandate that the Company fulfils through its smallholder farmer partnership (“SHP”) model, which has helped to network cumulative c.250,000 farmers across Nigeria. Services provided to farmers include training, supply of inputs, financial credit, harvest advance loans, storage, and marketing services, which has helped the beneficiaries to achieve significantly higher yield per hectare and net income than the national average. The model has also underpinned ongoing financial support to Babban Gona from reputable global and local partners including, Bill & Mellinda Gates Foundation, KfW, Rippleworks, USAID, Nigeria Sovereign Investment Authority (“NSIA”), and the Central Bank of Nigeria.

Earnings have reported a sound positive trajectory with a 70% 5-year CAGR to FY20. While revenue growth has been slow in recent years due to a fall in price of maize, 1Q FY21 results have shown substantial annualised growth (2.4x), reflecting the doubling of both SHPs engaged (to c.40,000) and hectares cultivated (c.33ha) in 2020. That said, GCR expects strong growth to be sustained for the full year, with subsequent growth to be contingent on an increase in SHPs and hectares grown. The earnings assessment is constrained by the concentration of earnings toward maize, with contributions from rice and other business lines expected to remain relatively small over the medium term.

EBITDA margins have been variable over the cycle, bottoming out in FY19 due to the high sensitivity to volatile commodity prices. While some variability is still expected over the rating horizon, GCR expects the margins to be generally good and to remain above the historical average. Furthermore, GCR expects that Babban Gona will continue to benefit from grant incomes which are targeted towards offsetting rising direct operational expenses.

Leverage and cash flow is the weakest rating factor, due to the persistent rise in gross debt from N3.2bn in FY17 to N13.5bn in FY20. Necessitated by business expansion, debt is expected to rise further to N40.7bn in FY21 and furthermore to N65bn in FY22. However, supported by strong cash holding, net debt to EBITDA has remained moderate (between 1.4x and 2.3x) in most years, barring FY19. GCR expects this to trend around the higher range of 3x-3.5x in FY21-22 if earnings targets are met. Operating cash flows coverage is particularly very weak, due to negative net funds flow since FY17 and likely to persist over the medium term because of the high pressures from the substantial inventory holding requirement (in line with business growth) and harvest advance loans granted to farmers. However, GCR takes cognisance of Babban Gona’s access to a diverse pool of international and local funding, with most facilities obtained on concessional terms. Although 34% of debt is USD denominated, these are hedged through a back-to-back debt arrangement, with USD fund inflows lodged in a foreign currency fixed deposit account with local banks who in turn advance Naira debt to Babban Gona.

The ratings are bolstered by the strong liquidity coverage with uses versus sources of 2.6x over the short term, underpinned by the substantial cash holding of N11.9bn and undrawn committed facilities of N11.6bn (from FCMB and European Development Finance Institution) compared to moderate debt redemption and low capex commitments related to construction of additional storage facilities. However, a negative adjustment has been made to the overall score to reflect the expected negative operating cash flows over the medium term. GCR takes cognisance of the significant headroom against financial covenant thresholds.

Outlook Statement

The Stable Outlook is underpinned by GCR’s expectation that the strong revenue progression will be sustained over the medium term. GCR also anticipates that the positive ESG impact will continue over the medium term, facilitating strong support from international and local counterparties.

Rating Triggers

Positive rating action is contingent on demonstrated stability in earnings over the medium term, better management of cash flows that results in lesser recourse to debt funding and a moderation in the leverage metrics to around the 1.5x-2x range.

Inability to convert debt funded inventories to cash in a timely manner could threaten leverage and liquidity and result in a ratings downgrade. In addition, significant underperformance in earnings and/or material elevation in debt beyond expected levels could further weaken the debt service metrics and trigger a negative rating action.

Analytical Contacts

Primary analyst Samuel Popoola Analyst: Corporate and Public Sector
Lagos, Nigeria Samuel@GCRratings.com +234 1 904 9462
Committee chair Julius Adekeye Head of Ratings, Nigeria
Johannesburg, ZA Adekeye@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Entities, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Nigeria Country Risk Scores, October 2021
GCR Nigeria Corporate Sector Risk Scores, August 2021

Ratings History

Babban Gona Farmer Services Nigeria Limited

Rating class Review Rating scale Rating Outlook Date*
Long Term Issuer Initial/last National BBB-(NG) Stable July 2021
Short Term Issuer Initial/last National A3(NG)

Risk Score Summary

Rating Components & Factors Risk scores
Operating environment 6.00
Country risk score 3.75
Sector risk score 2.25
Business profile 1.00
Competitive position 1.00
Management and governance 0.00
Financial profile (1.00)
Earnings performance 0.25
Leverage and Cash flow (2.25)
Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 6.00

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with because of holding the security or asset. For a company, its exposure may relate to a product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage Regarding corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.

Salient Points 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Babban Gona. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Babban Gona participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Babban Gona and other reliable third parties to accord the credit ratings included:

  • 2020 audited annual financial statement, and prior four years annual financial statements;
  • Unaudited management accounts for the period to 31 March 2021;
  • Internal and/or external management reports;
  • Industry comparative data and a breakdown of facilities available and related counterparties; and
  • Information specific to the rated entity and/or industry was also received.


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2022 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.