Lagos, 15 July, 2020 – Global Credit Rating Co. Limited has downgraded the long term and short term national scale Issuer ratings of GEL Utility Limited to BBB(NG) and A3(NG) respectively, with a Stable outlook accorded. The ratings are valid until October 2020.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to GEL Utility Limited (“GELUL” or the “Company”) based on the following key criteria:
GEL Utility Limited is faced with the business risk associated with having only a single product/customer, albeit partly mitigated by a long term (20 years) power purchase agreement (subject to mutual review after 10 years of operation). While GCR notes that a number of diversification efforts are in the pipeline, progress has been stalled by bottlenecks at the point of obtaining requisite approvals/agreements. GCR will only consider a positive rating impact upon successful diversification, which translates to meaningful contribution to earnings.
Although, revenue remains stable and relatively predictable due to the high base charge built into the pricing model (preventing the under recovery of income in periods of low power utilisation by the customer), longer term growth prospects are reliant on GELUL securing additional customers and revenue stream.
Although lower than historical (FY16) levels, profitability metrics remain sound, with the EBITDA margin sustained at c.70% in FY19, underpinned by the lean cost base. This has generally translated into strong cash generation, albeit that working capital pressure has been evidenced in most periods. Combined with high interest payments, free cash flow declined by 60% in FY19 (following a decline in FY18), translating to a weak coverage of net debt of 7.7% (FY18: 21%). Over the medium term, GCR expects free cash flows to be impacted by high debt service obligations.
Net interest expense doubled in FY19, due to foreign currency translation effects on GELUL’s USD-denominated obligation. That said, credit protection metrics significantly deteriorated, with net interest coverage lowering to 1.1x in FY19 (FY18: 2.3x). Due to the projected high interest payments over the bond tenor, interest coverage will remain below 2x, hence, constraining the ratings.
GELUL’s gearing profile was strengthened by the issuance of N13bn in guaranteed bonds during FY19. The proceeds were mainly utilised to refinance the long-term foreign loan from General Electric, which has effectively mitigated GELUL’s foreign exchange exposure. Moreover, the maturity profile is weighted even more towards long term debt, with maturities now extending beyond FY30. However, the earnings based gearing metrics remained above 350%, and is expected to be sustained at this level in the medium term. That said, GELUL’s credit quality will be negatively impacted in the absence of meaningful increase in earnings through diversification.
Successful diversification of the customer base is key to improving the business profile and mitigating concentration risk. Sustained stronger cash flow that can be used to maintain more stable gearing ratios will be positively considered. Conversely, higher debt utilisation and/or further erosion of EBITDA will elevate the gearing profile. Significant operational disruption and revenue underperformance will negatively impact the ratings.
NATIONAL SCALE RATINGS HISTORY
|Issuer – Long term||BBB+(NG)||Stable||December 2018|
|Issuer – Short term||A2(NG)||Stable||December 2018|
|Issuer – Long term||BBB(NG)||Stable||July 2020|
|Issuer – Short term||A3(NG)||Stable||July 2020|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2018
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 expire in October 2020.
GELUL participated in the rating process via 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 GEL Utility Limited.
The information received from GELUL to accord the credit rating included;
- 2019 audited annual financial statements (plus four years of comparative numbers),
- Unaudited management accounts as at 31 March 2020
- Long term financial forecasts
- industry comparative data and regulatory framework
- a breakdown of facilities available and related counterparties.
- information specific to the rated entity and/or industry was also received
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.