Fitch downgrades Dangote Industries from 'AA' to 'B+(nga)'

Fitch Ratings downgraded Dangote Industries Limited (DIL) National Long-Term Rating to ‘B+(nga)’ from ‘AA(nga)’ and senior unsecured debt rating issued by Dangote Industries Funding Plc to ‘B+(nga)’ from ‘AA (nga)’.

In the rating note releases, Fitch said it has simultaneously placed the ratings on Rating Watch Negative (RWN).

According to the rating note, the downgrade reflects significant deterioration in the group’s liquidity position following lower than expected disposal proceeds, operational and financial underperformance compared to prior expectations.

The ratings was affected by local currency devaluation, and lack of contracted backup funding for Dangote Industries Limited to repay its significant debt facilities maturing on 31 August 2024.

“We view the lack of DIL’s audited accounts for 2023 as a corporate governance issue”, Fitch Ratings said in its latest update.

Fitch explained that the RWN reflects uncertainty related to the group’s ability to refinance maturing debt.

It said lack of tangible steps to refinance or repay the maturing debt would lead to further downgrade while analysts do not expect a positive rating action until the company’s liquidity position improves substantially.

Fitch said DIL has immediate debt servicing requirements related to the syndicated loan raised to finance the construction of Dangote Oil Refining Company (DORC).

Further delays in meeting the funding requirements would significantly increase the likelihood of financial restructuring or default and lead to further rating downgrade.

Dangote Oil Refining Company has a nominal production capacity of 650,000 barrels per day (bpd) of refined oil products, which will be sold in both the Nigerian domestic and international markets.

During the first half of 2024 the refinery operated at around 50% capacity and produced between 325,000 bpd to 375,000 bpd, but the earnings before interest tax depreciation and amortization (EBITDA) contribution from DORC has been far below Fitch previous projection as the facility is ramping-up and optimizing production.

“We expect gradual improvement in EBITDA contribution from DORC going forward following the initiation of gasoline production in Q3-2024 this year”, Fitch said.

Major currency devaluation in 2023, caused the group to record a significant FX loss of N2.7 trillion in 2023 as the company faces a mismatch between USD denominated debt and domestic revenues.

Meanwhile, Fitch said it expects devaluation to continue at a higher pace in 2024. The group has senior secured debt raised at subsidiary levels amounting to USD2.7 billion at end-2023 representing 49% of total group debt.

The debt structure also includes an on-demand shareholder loans from its ultimate parent Greenview Plc., amounting to USD2.3 billion representing 43% of total debt, according to Fitch Ratings.

“We view the shareholder loans as subordinated debt. The company has also raised senior unsecured debt amounting to N350 billion with long dated maturities in 2029 and 2032 to finance capital expenditure requirements”.

In 2021, Nigerian National Petroleum Corporation (NNPC) acquired a 7.25% stake in DORC’s project entity for USD1.0 billion, with an option to purchase the remaining 12.75% stake by June 2024.

Since the option has not been exercised, the group plans to divest a 12.75% stake in DORC in 2024. The group intends to service its significant syndicated loan maturing in August 2024 from the equity divestment.

Fitch thinks divestment and meeting the imminent maturity is highly uncertain.

“We expect DIL’s EBITDA margins in cement production to drop further in 2024 following softer retail demand for cement particularly in the Nigerian market as well as limited ability to pass on increased raw material cost to consumers”.

Dangote Cement Plc (DCP), DIL-controlled cement producer with factories spread across 10 African countries. Nigeria remains the major contributor to DCP’s consolidated revenues. In 2023, the group had a 52 million tonne per annum (Mta) capacity and sold 27.2 Mta through various operations in Africa.

The company’s revenues in local currency grew by 36% to N2.2 trillion in 2023 and EBITDA to N886 billion from N708 billion in 2022.

Export sales of clinker to West African markets from Nigeria, stood at NGN12.3bn in 2023 with a 400% increase year-on year.

Fertilizer utilization rate still low:

Dangote Fertilizer (DFL) has a total production capacity of 2.8 million tons per annum (MTPA) of Urea and Ammonia. Chevron and NNPC have committed to supplying gas for 20 years at a rate of 200 million standard cubic feet per day (mscf/day).

Although the project began its first phase of production in 2021, the average utilization rate improved but remains low at just 50% in 2023, up from 32% in 2022. The utilisation rate was hindered by inadequate gas supply which in our view affects operational efficiency.

The company anticipates further improvements in utilization once the ongoing pipeline repairs are completed in August 2024.

DIL, a diversified conglomerate with a leading market share in building materials in Nigeria. Fitch expects the fertilizer and oil refinery segments of the group to contribute 20% and 30% to consolidated EBITDA by 2024 and 2025.