Lagos Nigeria, 23 December 2020 — Global Credit Rating Co. Limited (“GCR”) has maintained the long term and short term national scale issuer ratings of BBB+(NG) and A2(NG) respectively accorded to Axxela Limited, with the Outlook accorded as Stable. Concurrently, the national scale rating accorded to Axxela Funding 1 Plc’s Bond Issuance was also maintained at BBB+(NG). The national scale Issuer and Bond ratings are valid until September 2021.
RATING RATIONALE OF THE ISSUER
GCR has accorded the above credit ratings to Axxela Limited (“Axxela” or “the Group”) based on the following key criteria:
The Issuer ratings reflect Axxela Limited’s (“Axxela” or “the Group”) leading position within the Nigerian natural gas distribution market, supported by long term distribution franchise in Lagos and Port-Harcourt granted by Nigerian Gas Marketing Company and the River State Government respectively. Other key strengths countries which have underpinned stability of earnings and cash flows include long term agreements with suppliers and customers as well as license on the West African Gas Pipeline to supply gas to African. The Nigerian gas distribution industry exhibits below average cyclicality as demand for gas is relatively stable even in a changing economic environment. High barriers to entry due to its capital intensive nature (especially for large gas distribution business) further insulate established players, but counterbalanced by its exposure to supply disruptions and regulatory uncertainty. This was evidenced by Axxela’s resilient performance in 3Q FY20 despite the COVID-19 disruptions.
The rating is further supported by strong revenue growth over the review period underpinned by a larger client base, rising volumes, and firmer selling prices. While Axxela expected earnings to increase by 39% in FY20, interim performance had been moderated by a delay in the Benin operations, lost sales caused by a shortage of gas supply and negative impact of COVID-19 on some customers. Nevertheless, future earnings should be supported by take’ or pay’ contracts, rising economic activity and clientele with over 80% customers in the essential business category.
This notwithstanding, cost pressures have seen earnings margins moderated, with EBITDA margin falling below 20% since FY19. While management expects FY20 to reflect FY19 position, GCR expects this to moderate to around 16% due to rising inflationary pressure.
Axxela reported positive but lower operating cash flow in FY19, attributable to high working capital utilisation and finance costs. Accordingly, operating cash flow coverage of total debt was very low at 5% in FY19, before rising marginally to 8% at 3Q FY20. GCR expects the metric to remain below 25%, as working capital pressure persists in view of the expanding business.
Gross debt (including the shareholder loan) increased sharply at 3Q FY20 following a bond issue and an additional bank facility. This saw gross debt to EBITDA spike to 291% at 3Q FY20, albeit after adjusting for the shareholder loan (treating it as equity), gross debt to equity was more moderate at 49%. GCR expects debt to EBITDA to improve, supported both by the expected reduction in debt and rise in EBITDA.
Axxela reflects moderate liquidity coverage with sources of funds estimated to cover uses by 1.0x over 15 months to December 2021. However, much is dependent on Axxela’s ability to generate strong cash flows, as well as the receipt of funding from the intervention fund, bank borrowing and bond issuance, which if not forthcoming will necessitate a pullback in capex spend.
Positive rating action is dependent on maintaining a strong capital structure. Attainment of forecasts, would see improved earnings and debt serviceability over the medium term. Conversely, a delay in rolling out projects and/or reduction in sale volumes would see earnings deteriorate and further cash flow pressure. Excessive debt utilisation would see credit protection deteriorate.
RATING RATIONALE OF THE ISSUE
The Series 1 Bonds constitute direct, irrevocable and senior secured obligations of the Issuer. There has been no change to the structure of the transaction. Any change in the rating assigned to the Sponsor will directly affect the rating of the Series 1 Bonds. The rating accorded to Series 1 Bonds relates to ultimate (as opposed to timely) payment of principal and interest, and is akin to an expected loss rating, which is a function of probability of default and loss severity.
NATIONAL SCALE RATINGS HISTORY
|Issuer- Long term||BBB+(NG)||September 2018||Stable|
|Issuer- Short term||A2(NG)||September 2018||Stable|
|Series 1 Bonds||BBB+(NG)||June 2020||Stable|
|Issuer- Long term||BBB+(NG)||October 2019||Stable|
|Issuer- Short term||A2(NG)||October 2019||Stable|
|Series 1 Bonds||BBB+(NG)||June 2020||Stable|
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